FY2017 saw continued efforts towards de-risking the balance sheet by resolving stressed corporates, building a strong liability franchise and focusing on retail or better rated corporates. We believe that this strategy should eventually help improve the valuations at which it is trading currently. The annual report broadly confirmed the same view. Maintain Buy with TP at Rs 365 , from Rs 350 earlier. ICICI Bank continues to remain our preferred idea. In a clear departure from the past, ICICI is laying a strong foundation for sustainable growth instead of trying to regain lost market share. A critical element of this strategy is to minimise cyclicality while ensuring cross-cycle growth. A key change in the turnaround has been the ‘customer-first’ principle, backed by process adherence and strong execution. This is showing results with profitable leadership demonstrated across various financial services. However, the question that remains alongside strategy is whether RoEs would normalise closer to market leaders. The jury is quite divided as the answer depends on the approach taken by the bank once the business stabilises and focus moves towards RoE and growth.
At this stage, we are concerned that the bank is likely to report RoEs which would be a few percentage points lower than its true potential. We have seen strong outperformance of the stock as compared to the banking sector. The stock is trading at 1.4X book and 9X FY2019 book for medium term RoEs at 13-15%. With corporate deleveraging underway and greater clarity emerging on the impact of these resolutions on earnings, we believe the valuation multiple can eventually move upwards. However, as highlighted, the RoE.
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Progression beyond 15% is currently not clear. The balance sheet is underleveraged (assets to equity) and it would require the bank faster growth to get to higher RoEs, which we don’t see at this point.