ICICI Bank And Bank Of Baroda: Why Morgan Stanley Is ‘Overweight’ On India's Two Second-Placed Lenders

ICICI Bank Ltd., India's second-largest private lender; and Bank of Baroda, the nation's No. 2 public sector bank, continue crucial investments in digitisation to sustain growth, according to Morgan Stanley.

While competitive intensity remains high, investments in technology are critical to improving operating efficiencies, the research firm said following interactions with the managements of the two lenders during the India Financials Trip.

Morgan Stanley maintains it's 'overweight' rating for both banks despite expecting a contraction in margins in the coming quarters.

Here Are Morgan Stanley's Key Takeaways

ICICI Bank

• Maintains an 'overweight' rating with a target price of Rs 1,350 per share, implying a 41% upside to the current market price.

• Despite increased competitive pressure, loan growth remains strong.

• Management reiterated guidance to maintain margins similar to FY23 margins, which were at 4.9% in Q4 FY23.

• Lower rural infrastructure development fund investments, MCLR repricing, and a shift towards higher-margin loans will partially offset rising funding costs.

• Medium-term improvements in cost-to-income ratios are expected due to accelerated branch expansion.

• Asset quality remains stable, with decent performance in the unsecured and MSME segments.

Bank Of Baroda

• Maintains an 'overweight' rating with a target price of Rs 235 per share, suggesting a 21% upside to the prevailing market prices.

• Management reaffirmed loan growth guidance at 14–15% year-on-year for this fiscal, slightly higher than the system's growth estimate.

• Expect outperformance in retail loan growth, driven by non-mortgage retail products.

• Unsecured loans now make up 12% of total retail loans, up from 8% last year.

• Margins will moderate due to the rising cost of funds, but this will be offset by improvements in the loan-to-deposit ratio, MCLR repricing, and a shift to higher-margin assets. Margin guidance remains at 3.3% for FY24.

• Shifting the liability mix towards low-cost deposits will partially offset margin compression over the next two quarters.

• According to projections, credit costs will remain below 1% in FY24 thanks to strong recovery flows. The expected credit loss of about 1% of loans is manageable through internal accruals.

• Management is comfortable with current capital levels, with a CET-1 ratio of 12.4%, and has no plans to raise equity capital in the near term.

• Key risks include a slowdown in economic growth and stress in the retail and MSME segments.