Fundamental Analysis of ICICI Bank: Banks are crucial to the functioning of every economy. People and companies place a lot of trust in the banking system and turn to them for their funding needs. When the banking system collapses, the economy collapses. Therefore, banks flourish amidst all political, economic, and natural crises. This makes the banking sector an attractive sector for investment.
As it goes with every investment, we have to analyze stocks on our own before investing in them. However banking stocks are a little different from many other stocks. Investing in banks requires a careful analysis of financial data and not merely ratios.
In this article, we are going to perform a fundamental analysis of ICICI Bank, one of the largest private sector banks in India. We shall go through parameters like Capital Adequacy Ratio, CASA, Slippage, Gross & Net NPA, PCR, and more. Let’s begin!
Indian banks are generally resilient and have withstood global downturns well, according to credit, liquidity, and market risk studies. The sector is sufficiently capitalized and well-regulated, according to the Reserve Bank of India (RBI).
During FY16-FY22, bank credit increased at a CAGR of 0.62%. As of FY22, total credit extended surged to US$ 1,532.31 billion. During FY16-FY22, deposits grew at a CAGR of 10.92% and reached US$ 2.12 trillion by FY22. Bank deposits stood at Rs. 173.70 trillion (US$ 2.12 trillion) as of November 4, 2022.
The government has taken various initiatives that are positive for the banking industry. National Asset Reconstruction Company (NARCL) will take over 15 non-performing loans (NPLs) worth Rs. 50,000 crores (US$ 6.70 billion) from banks.
An increase in the working population and growing disposable income will increase the demand for banking and related services. India’s fintech market is expected to reach ₹ 6.2 trillion (US$ 83.48 billion) by 2025, according to an IBEF report.
The Indian banking industry has recently witnessed the rollout of innovative banking models like payments and small finance banks. The country has also focused on increasing its banking sector reach, through schemes like the Pradhan Mantri Jan Dhan Yojana and Post payment banks.
In addition, major banking sector reforms like digital payments, neo-banking, a rise of Indian NBFCs, and fintech have significantly enhanced India’s financial inclusion and helped fuel the credit cycle in the country.
About the company
ICICI Bank was formed in 1955 at the initiative of the World Bank, the Government of India, and representatives of Indian industry. Their objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s once the financial sector got liberalized, the bank transformed its business from a development financial institution to a bank providing a variety of services.
The bank was originally promoted by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. Today, it is one of the largest private-sector banks in India. It offers a diversified portfolio of financial products and services to retail, SME, and corporate customers. The bank has an extensive network of branches, ATMs, and other touch points.
ICICI Bank – Financial Highlights
The primary business of banks is to accept deposits and give out loans. Deposits are their liabilities and loans are their assets. They pay interest on deposits and collect interest on loans. The difference is their profit. And that’s how banks earn.
|Net Interest Income (₹ in billion)||230.26||270.15||332.67||389.89||474.66|
|Net Interest Margin (in %)||3.23||3.42||3.73||3.69||3.96|
|Casa Ratio (in %)||51.32||48.78||44.84||46.17||48.6|
|Net NPA (in %)||4.8||2.1||1.4||1.1||0.8|
|Provision Coverage Ratio (in %)||47.7||70.6||75.7||77.7||79.2|
Net Interest Income (NII)
The first parameter that we’ll check while doing the fundamental analysis of ICICI Bank is Net Interest Income (NII). It is the difference between the interest earned by a bank on loans that it provides and the interest paid by it on the deposits that it accepts. As indicated in the chart above, ICICI Bank’s NII shows an increasing trend. It grew from ₹ 230.26 billion in 2018 to ₹ 474.66 billion in 2022.
Net Interest Margin (NIM)
Net interest margin is a profitability metric. ICICI Bank’s net profit has grown over a period of five years, indicating that the net benefit of lending funds has increased. Generally, when the CASA Ratio is high, the NIM will be high. A positive NIM suggests that the bank is investing efficiently. ICICI Bank’s net interest margin shows an increasing trend. It grew from 3.23% in 2018 to 3.96% in 2022.
Current Account Saving Account (CASA)
Banks pay interest on deposits. The CASA ratio is the ratio of deposits in current and saving accounts to total deposits. Banks generally do not give any interest on current accounts and give very low interest on savings accounts. Therefore, a high CASA ratio indicates a lower cost of funds. ICICI Bank’s CASA ratio has shown a declining trend over a period of five years. It decreased from 51.32 in 2018 to 48.6 in 2022. However, it is higher than its peers like HDFC Bank (48.13) and State Bank of India (44.52).
Non-Performing Assets (NPA) & Provision Coverage Ratio (PCR)
Let’s say that you have lent ₹ 10,000 to your friend. He promises to repay the amount but fails to do so for more than 3 years. There is no hope of recovering the money as your friend has defaulted. Similarly, if borrowers default on interest or principal payments to a bank, they become non-performing assets (NPA).
A bank’s NPA is a crucial factor to consider while analyzing a banking stock. Too many NPAs adversely affect a bank’s liquidity and growth abilities. This is a big red flag. As the table indicates, ICICI Bank’s Net NPAs have decreased from 4.8% in 2018 to 0.8% of 2022, which is a good sign. In tandem with the NPAs, ICICI Bank’s provision coverage has increased from 47.7% in 2018 to 79.2% in 2022. The higher the provision, the safer a bank is when it faces a stressful situation.
Capital Adequacy Ratio measures the financial risk of banks. It examines the available funds with banks about extended credit weighted by exposure to various risks. In simple words, it ensures credit discipline in a bank and protects the depositors. The RBI has mandated a minimum requirement of Tier-1 capital at 8.875%.
Tier-1 capital absorbs losses without a bank being required to terminate trading. It is easily available to cushion losses sustained by a bank. It consists of equity capital, ordinary share capital, intangible assets, and audited revenue reserves.
Tier-2 capital absorbs losses in the event of bank liquidation. If the bank loses all its tier-1 capital, tier-2 capital is used to absorb losses. It provides a lesser degree of security to depositors. Hence it is observed as less secure than tier-1. It comprises unaudited retained earnings, unaudited reserves, and general loss reserves.
ICICI Bank’s Tier-1 capital is well above RBI’s requirement. This suggests that it is financially strong and has enough capital in the buffer to absorb potential losses. It has less risk of being insolvent and losing depositors’ money.
Total Deposits & Total Advances
ICICI Bank’s total deposits show an increasing trend and grew at a CAGR of 17.37%. Its current account deposits grew by 15.83%, savings account deposits by 15.69%, and term deposits by 19.14%. It is observed that term deposits grew at a higher rate as compared to the current account and savings account deposits. This is one of the major reasons why ICICI bank’s CASA ratio has declined over five years.
It is important to analyze who the bank is issuing loans to. If a bank’s management makes poor decisions, then there is a high chance of non-performing assets. Over the past years, one reason why NPAs of Indian banks increased is because of huge corporate frauds and scams.
The graph indicates that ICICI Bank’s advances are diversified. It is also observed that the percentage of overseas loans and corporate loans has decreased over five years. Retail lending, rural loans, and business banking have increased.
According to news reports, former ICICI Bank CEO and MD Chanda Kochhar and her husband Deepak Kochhar was arrested by the Central Bureau of Investigation (CBI) in December 2022 in connection with alleged cheating and irregularities in loans sanctioned by ICICI Bank to Videocon Group companies. Chanda Kocchar quit ICICI Bank in October 2018.
Mr. Sandeep Bakhshi is the Managing Director and CEO of ICICI Bank since October 15, 2018. He has been with the ICICI Group since 1986 and has handled various assignments across the group in ICICI Limited, ICICI Lombard General Insurance, ICICI Bank, and ICICI Prudential Life Insurance.
Revenue & Profitability
|Total Income (₹ in Crores)||118969.1||131306.5||149786.1||161192.19||157536.32|
|Profit (₹ in Crores)||9099.54||5689.16||11225.47||20219.68||25783.83|
|Net Profit Margin||14.64 %||7.9 %||13.23 %||22.68 %||27.03 %|
ICICI Bank’s total revenue and profitability show an increasing trend over five years. Its revenue grew at a four-year CAGR of 11.3 % and Net profit at 34.33%. In addition, its net profit margin shows an increasing trend, which is a good sign.
ICICI Bank – Key Metrics
|Face Value (₹)||₹2||ROE (%)||15.49|
|Market Cap (₹ in Cr)||6,03,957.13||Stock P/E (TTM)||20.37|
|EPS (₹)||42.49||Dividend Yield (%)||0.68|
ICICI Bank is a large-cap bank with a market capitalization of ₹ 6,03,957.13 crores as of January 16, 2023. It has an ideal return on equity of 15.49% and a dividend yield of 0.68. Its shares were trading at a price-to-earnings ratio of 20.88, which is significantly higher than the industry P/E of 9.79, indicating that the stock might be overvalued as compared to its peers. It could also mean that investors are willing to pay a higher price for the company’s future earnings.
In this article, we did a quick fundamental analysis of ICICI Bank. We took a look at the bank’s business and the industry overview. Then we went through important metrics that are relevant to banking companies and then we looked at the bank’s revenue, profitability, and other key metrics. That’s all for this article, folks. We hope to see you around and happy investing until next time.
Hey, there! Thank you for stopping by 🙂 Simran is a master graduate in commerce from Bangalore University, an NSE-certified Fundamental Analyst and a NISM-certified Research Analyst. She finds interest in investing and personal finance. Outside of work, you can find her painting, reading and going on long walks.
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