Analysts see 42% upside in ICICI Bank on market share gain, credit growth

ICICI Bank Q4 review: With steady growth delivery, strong asset quality, and low credit costs, the bank can continue to drive steady low-risk returns with consistent earnings per share compounding

ICICI Bank Q4 review: ICICI Bank stock could be eyeing re-rating all through financial year 2022-23 (FY23) as the lender ended FY22 with an all-round performance in March quarter (Q4FY22), analysts said.

While most brokerages have either positively revised their earnings/return-ratio expectations, some have maintained their previous forecast to factor-in economic uncertainty and peaking of margin growth.

Yet, analysts said that with steady growth delivery, strong asset quality, and low credit costs, ICICI Bank can continue to drive steady low-risk returns with consistent earnings per share (EPS) compounding.

“While the stock has done well on a relative basis, current valuations leave ample scope for a re-rating. The stock is well-positioned to undergo a swift re-rating over FY23, generating strong returns for the investors, as ICICI Bank continues with its journey to deliver solid return ratios and growth,” said Motilal Oswal Financial Services.

On Saturday, the Mumbai-based lender reported a 59 per cent year-on-year jump in net profit in January-March quarter of FY22, aided by robust increase in net interest income (NII) and lower provisions.

Net profit totaled to Rs 7,019 crore, while NII grew by 21 per cent to Rs 12,605 crore. Net interest margin expanded by 16 basis points YoY and 4 bps sequentially to 4 per cent in Q4FY22.

Moreover, credit costs were negligible as the management added further to its contingent provisions (0.9 per cent of loans). Overall loan growth (17 per cent YoY/6 per cent QoQ) was largely led by mortgage (up 20 per cent YoY), business banking (43 per cent YoY), and credit cards (45 per cent YoY), while wholesale credit, too, picked up pace (12.5 per cent YoY).

“We opine that ICICI Bank is likely to be better served by maximising its longer-term growth potential and pulling further into the lead through continued investments in ecosystem banking (wholesale banking) and new-to-bank (NTB) customer funnels (retail banking), especially given that the incumbent market leader is making an unscheduled pit stop,” said HDFC Securities.

We raise our FY23E/FY24E earnings estimates by 4 per cent/1.5 per cent to factor in lower credit costs and maintain BUY with target price of Rs 1,006, it added.

Those at Emkay Global, too, said: Factoring in healthy credit growth, better margins, and lower loan-loss provisions, we upgrade FY22-24 EPS by around 3 per cent and return-on-equity (RoE) to around 16-17 per cent.

Sustenance of narrowed valuation gap with HDFC Bank

According to Emkay Global, ICICI Bank, trading at 1.8x FY24E ABV, has narrowed the valuation gap with close peer HDFC Bank (standalone: 2.2x/merged: 2x) at a faster-than-expected pace due to the former's strong core performance, with the latter struggling with management changes, tech issues and now the merger overhang.

“The valuation gap has further room for reduction, as ICICI sustains its core performance and HDFC Bank faces merger drag. ICICI's top management premium has yet to be realized, and HDFC Bank may struggle to reclaim the management premium it had in the past,” it added.

Caution needed

That said, Nomura believes the tailwind of improving NIM, which had helped NII/PPoP growth in FY22, is likely at its peak.

“We think RoE improvement will be gradual from here on, helped by improvement in credit costs. We pencil in 0.1 per cent/0.9 per cent cut in EPS as we pencil in lower NIM in FY23 and FY24 offset by 10bps lower credit costs,” it said.

Those at JPMorgan, meanwhile, said ICICI Bank’s re-rating potential has largely played out with the lender’s valuation gap with HDFC Bank almost nil. It has kept its EPS estimate for FY23/24 unchanged and expects the bank to deliver 1.9 per cent RoA and 16 per cent RoE going ahead.

Back home, Emkay said the resignation of corporate head Vishakha Mulye, who is being replaced by Anup Bagchi (retail head), and the elevation of CFO Rakesh Jha as ED-Retail Banking, is a minor irritant.

On Monday, stock of ICICI Bank ended 0.7 per cent up at Rs 753 per share on the BSE as against a 1 per cent dip in the S&P BSE Sensex index.

Source: Brokerage Reports