ICICI Bank Limited

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

ICICI Bank Limited is a diversified financial services provider, offering a range of banking, insurance, and investment products and services, primarily to customers in India.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

ICICI Bank Limited (IBN) is a prominent financial institution in India, offering a wide array of products and services across various sectors. Here’s a breakdown of their business:

Retail Banking: This segment caters to individual customers and includes deposits, loans (housing, personal, vehicle, education), and credit cards. This is where the bank has the most competition, while also the most sticky customers.
Wholesale Banking: Serving larger corporate entities, this area offers specialized loans, project finance, and trade services. High margin, but high credit risk.
Treasury: This department manages the bank’s investment portfolio, foreign exchange activities, and liquidity. A necessary area for any large bank, with good margins if well run.
Other Banking: includes the bank’s subsidiaries and joint ventures, a huge area which is hard to track, but should be mostly positive for IBN.
Life Insurance: ICICI Prudential Life Insurance Company Limited is their life insurance subsidiary, and it has a reasonable position in the market for that.

Industry Trends:

The Indian banking sector has been experiencing significant growth, fueled by increasing urbanization, a growing middle class, and rising financial literacy.
The Indian insurance sector is also growing, although with more volatility, but growth in this area is a sign of a healthy bank.
Digitalization is a key trend, with banks focusing on online and mobile banking solutions, in order to attract the younger demographic, and reduce employee costs, and provide better service for customers.
Increased regulatory scrutiny and compliance requirements are leading to higher operational costs for banks.
Economic uncertainty is creating volatile financial results for banks, with an increase of defaults and restructurings.

What Makes IBN Different?

Strong Domestic Brand: ICICI Bank has established a strong reputation in India for financial services over several decades, giving it an advantage in attracting and retaining customers.
Large Scale and Diversification: They have a presence in multiple states in India with diverse products and services, offering both commercial and retail banking.
Focus on Technology: They are rapidly moving into digital services for all parts of their banking business.

Financials:

Revenue: IBN’s total revenue was Rs. 1759.88 Billion in fiscal 2023, and Rs. 1276.36 Billion in fiscal 2022. IBN revenue has increased considerably in the last year. While still a large company, they seem to be growing faster than most competitors.
Profit: IBN’s net profit was Rs. 340.2 Billion in fiscal 2023, and was Rs. 251.1 Billion in fiscal 2022. The bank has increased its net profit substantially in the last year, a sign of a well-run company that manages well through different types of situations.
Margins: The company’s net interest margin (NIM) is expected to increase in fiscal 2024 but decrease into FY25 and beyond. This is partly due to an increase in the cost of funds, and partially because the bank is transitioning away from higher interest loans in favor of long term growth and stability. Their cost to income is also expected to come down a bit, also increasing profitability.
Return on Equity (ROE): The ROE is 16.6% in fiscal year 2023, higher than the 14.1% of fiscal year 2022.
Asset Quality: Net nonperforming assets to net advances ratio is 0.48%, down from 0.7% the previous year.
Capital Adequacy: The CET1 ratio was 16.86%, up from the previous year’s 15.92%.
Leverage: The company has increased loans in the recent past, which has led to increased leverage. The loan deposit ratio is approximately 80%.
Provisions: The company is reducing its credit loss provisions as economic prospects have increased in the region.

Moat Rating: 3 / 5 (Narrow Moat)

Brand Recognition and Distribution Network (Supporting Moat): IBN has a powerful and strong domestic brand presence in India, built over many decades, making it a safe choice for many customers. Its reach is wide, and its distribution network is extensive.
Moderate Switching Costs (Mild Moat): Switching costs for individual bank customers can be somewhat high, due to the hassle of moving accounts. Also, many customers use multiple banking services with their main bank, which creates sticky customers.
Regulatory Approvals (Small Moat): While this is a highly regulated industry, and some licenses are hard to obtain, IBN has all the necessary licenses, and isn’t in a position to use this to create a lasting advantage.
Scale and Cost Efficiency (Not a Moat): While they do have decent economies of scale, due to the size of the bank, as well as large amounts of capital, it isn’t enough to give them a sustainable competitive advantage over other players.

The moat is present due to a very strong domestic brand with a great reach in India, along with high switching costs, and the regulatory requirements. Though, the cost advantages, scale of the company, the management team and other things do not contribute towards a moat.

Risks to the Moat & Business Resilience:

Macroeconomic Sensitivity: IBN’s performance is heavily tied to the Indian economy, and it could face challenges during economic downturns or recessions. This has already affected their performance in the past.
Regulatory Risks: As a bank, IBN is subject to many regulations and rules, including those concerning capitalization, asset allocation, and credit risk, any of which could limit their future growth.
Competition: The Indian banking sector is highly competitive, and IBN has several state-owned and large multinational peers that could take market share. With new fintech companies also vying for customers, they need to innovate in order to continue to grow.
Credit Risk: A large portion of their assets are in the form of loans, which means that the bank could be prone to significant credit losses, especially in the consumer loan segment. If there is an increase of defaults, IBN’s profits could significantly take a hit.
Operational Risk: As a large company with multiple business lines, IBN is vulnerable to several issues that can interrupt operations, especially technology issues.

Understandability: 3 / 5

The financial services sector has always been deemed as complicated, and even with IBN’s efforts to be more transparent, there are still a lot of moving parts.
The main elements of their business are straightforward, the nature of financial services creates inherent complexity.
Their diverse set of products across retail, wholesale, insurance, asset management, etc. adds to the complexity.

Balance Sheet Health: 4 / 5

Strong Capitalization: IBN has a very high CET1 ratio, indicating that the company is sufficiently capitalized and can withstand a major financial turmoil.
Low Debt to Equity: They have relatively low levels of long-term debt, reducing financial risks.
Reserves: The company is decreasing credit loss provisions, indicating confidence in the economy. They also have a healthy amount of provisions to hedge against risks.

In summary, IBN is a well-run and profitable company with a good brand, diversified products and a solid balance sheet. While not necessarily a strong moat company, the management is highly skilled, and has shown great progress in the last year. The downside risk is also minimal given IBN’s good performance.