We have downgraded our long-term recommendation on
ICICI Bank Ltd.
) to 'Neutral' from 'Outperform' based on the recent ratings and
outlook revisions. Though the company's net earnings for the fiscal
fourth-quarter (ended March 31) improved as a result of higher top
line and a much lower provision for loan loss, a substantial rise
in operating expenses was the dampener.
ICICI BANK LTD (IBN): Free Stock Analysis
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We expect synergies from ICICI Bank's reliance on domestic loans,
stable funding base and leadership position in the insurance
business. However, we remain concerned about the company's highly
competitive operating environment and rising operating expenses.
With domestic loans representing a large part of ICICI Bank's loan
portfolio, the company is less likely to be affected by the
sluggish international economic environment. The company has been
marketing retail deposits on a large scale, mainly to bring down
the cost of funds and create a stable funding base. All these will
enable it to efficiently deal with the challenging economic
Additionally, ICICI Bank is expanding overseas by offering
technology-based banking services and opening additional offshore
branches. Moreover, the company has been improving its services for
offshore banking units via foreign currency deposits.
On the flip-side, ICICI Bank has been expanding its branch network
for quite some time, which is resulting in higher operating costs.
Higher operating expenses will likely drag down its financials over
the near term. In addition, the company is expected to face
higher expenses due to the probable rise in inflation rate as well
as the recent ratings and outlook downgrades by Moody's, a ratings
), S&P and Fitch Ratings.
Though ICICI Bank has been witnessing a continuous improvement in
asset quality, we anticipate near-term pressure on its asset
quality. This is primarily due to the company's increased
proportion of higher margin (and higher risk) unsecured loans in
its portfolio mix.
Currently, ICICI Bank retains its Zacks #3 Rank, which translates
into a short-term Hold rating.