ICICI Bank – Banking On Low Funding Cost

ICICI Bank - Banking On Low Funding Cost

Prospects for private-sector lenders have brightened lately in wake of regulatory activity, especially following the tighter disclosure norms and capital adequacy.

With most public sector lenders facing the ire (PMC Bank is a case in point), there is a gradual shift in customer preference. It is this shift in customer experience which is causing private lenders to gain momentum in deposit mobilization and ICICI Bank emerges as a clear leader.

For ICICI Bank, it’s well-entrenched funding franchise network plays a key differentiator.

Apparently, it enjoys the lowest cost of funds among the group, implying a low risk of adverse selection (unlike the past).

It also enjoys decade-high growth rate in deposit, loan spreads, and NIMs are strong.

This will drive a 22% CAGR in pre-provision operating profits between FY2019 and FY2022.

The lender continues to witness a steady improvement in asset quality and a decline in credit costs.

This should strengthen its earnings potential.

ICICI Bank looks to expand lending and compete with rivals to fill in the void left by shadow lenders after a crisis engulfed the sector.

The unexpected payment defaults by Infrastructure Leasing and Financial Services (IL&FS) last year have squeezed NBFCs out of traditional loan markets.

Banks seized the opportunity here and are reaching out to customers with attractive loan proposals.

During the Q2FY20, the bank’s domestic loan book grew by 16.4% on-year till September 30, driven by a 22% on-year growth in retail loans.

The overall loan growth was at 12.6%. The growth in the domestic corporate portfolio stood at 7.3%, excluding the net NPAs and restructured loans.

The loan market share gain has been going on for years.

However, deposits are quickly moving to private-sector lenders – with a large part of the share gain concentrated in the top 3 banks namely HDFC Bank, ICICI Bank, and Axis Bank.

This should help drive near 20% asset growth for the next two to three years.

The key concern going forward will be a sharp rise in defaults in large sectors (non-bank lenders, real estate, telecom to name some).

However, the recent measures by RBI/government have lowered the risk of an implosion.

Hence ICICI Bank looks well set to benefit from the emerging scenario.