ICICI Bank shares at peak valuations relative to peers, own history; what's ahead?

ICICI Bank shares have delivered flattish return in the past one month. Kotak Institutional Equities, following its conversation with ICICI Bank Ltd investors, said there are concerns that the private lender would underperform when the net interest margin (NIM) contraction is underway. Such a fear appears to be misplaced, at least for now, the brokerage said.

Kotak said most of its conversations with various stakeholders of the bank suggest that the underwriting should be able to meet the best-in-class standard. The brokerage has built in higher credit costs, accounting for the higher growth and nature of loan mix.

"We are at a point in time of the bank’s history where the evidence of weaker underwriting that has been associated with the bank in the past is not visible. In our view, this is probably the most important factor to sustain its current premium to peers," Kotak said.

In the case of NIM, ICICI Bank has had a healthy tailwind from loan mix apart from a strong liability franchise. The asset mix would possibly see some moderation toward lower yields but some of it appears to be offset by better pricing from our channel checks, Kotak said.

"Liability-side re-pricing appears to be complete at this point. Hence, outside of an aggressive rate-cut cycle, there is scope for improvement in our NIM assumptions," Kotak said.

The brokerage maintained its 'Buy' recommendations on the stock with a fair value of Rs 1,400. Kotak called ICICI Bank a top pick and a play on the long-term opportunity in the financial services space. It values the bank at 2.8 times book and 18 times June 2026 EPS for a return on equity (RoE) at 15 per cent level.

"We value the subsidiaries at Rs 200 per share. Our earnings estimates remain fairly conservative. We acknowledge that the investment rationale to keep a positive rating has been challenging. With the bank enjoying best-in-class multiples, the best outcome is a steady compounder as we don’t have too many points to form a differentiated view from the consensus view on the bank," it said.