ICICI's Q3 Earnings Dip Confirms Margin and Credit Cost Pressures Amid Crowded Optimism

What happened

ICICI Bank reported a 4% decline in Q3 FY26 earnings, driven by higher provisions for bad loans, increased operating expenses, and a treasury loss. This drop occurred despite solid year-over-year growth in net interest income, fee income, and loans, highlighting a divergence between revenue strength and profit erosion. The results align with the DeepValue report's warnings about margin compression, as NIM has already fallen 12 bps YoY to 4.41% due to rising funding costs and external benchmark loan repricing. Moreover, provisions increased 32.1% YoY in FY2025, signaling that credit costs are normalizing from trough levels, which threatens sustainable profitability. With the stock trading at a premium ~3.0x P/B and ~19x P/E amid crowded sentiment, this earnings dip underscores the vulnerability to further deceleration in returns.

Implication

The higher provisions and expenses indicate that credit costs are rising more than expected, potentially eroding ROE from current mid-teens levels and validating the bear case of a de-rating. Margin pressure from deposit competition and rate cuts is now evident in quarterly results, threatening the bull scenario of sustained high NIM and ROE. Despite solid loan growth, the profit dip suggests waning operational leverage, aligning with the base case of gradual normalization to 13-15% ROE. Crowded market sentiment means any further earnings disappointments could trigger sharp price corrections, as seen in past reactions to modest growth. Investors should adhere to the DeepValue report's guidance, waiting for entries below $27 where valuation better accounts for these risks, rather than chasing the current premium.

Thesis delta

The news reinforces the existing 'WAIT' thesis by validating key concerns about margin compression and rising credit costs, which were highlighted as early warning indicators. It slightly increases the probability of the bear case, where NIM falls further and ROE dips below 13%, but does not introduce new thesis breakers. Overall, the investment framework remains unchanged, with heightened focus on monitoring NIM trends and provision coverage in upcoming quarters.