This will reduce discount to HDFC Bank; performance to improve from FY22 onwards; TP up to Rs 780; Buy retained
SBI Card and ICICI Bank saw an 80-110 basis point (bps) increase in market share in outstanding cards to 19% and 16.8%, respectively, in February 2021 from 18.3% and 15.8%, respectively, in FY20.
An improvement in velocity of ICICI’s operating profit growth & steady credit cost will bring down volatility in earnings, which has been a key reason for 55% discount in valuation vs. HDFC Bank. Lower volatility can reduce Beta & this itself can help bridge the gap in valuation by half. The rest reflects the gap in growth & ROE – this can be partly bridged with improved growth in clients/ Casa. We raise our PT to `780 and hold it among our top-picks in the sector.
Improved velocity of operating profit growth and stable asset quality to make earnings less volatile: ICICI Bank has improved the velocity (pace and direction) of operating profit over the past two years, reflecting improved topline and cost efficiencies. In fact, ICICI’s performance has now become comparable with HDFC Bank’s (industry best) and as comfort on asset quality/ credit-cost improves, this should translate into stable growth in net profits as well.
Lower Beta can help bridge the valuation discount to HDFC Bank by nearly half: ICICI trades at 55% discount to HDFC Bank in terms of valuations – ICICI at 1.9x FY22 adjusted PB and HDFC Bank at 3.4x. With a lower volatility in earnings, HDFC Bank’s Beta is at 1 whereas ICICI’s is around 1.2-1.3. We believe that consistency in earnings growth/asset quality will help ICICI Bank bring down Beta closer to 1. This can lift up the theoretical PB from 1.9x now to 2.5x – closing the gap with HDFC Bank by 30%.
Pick-up in Casa can lift growth: ICICI Bank has seen steady growth in Casa deposits. A higher Casa growth is key to supporting growth in loans without diluting underwriting and/or margins.
Maintain Buy: We see an improvement in earnings & profitability from FY22 onwards as credit costs stabilise alongside steady growth in topline. We raise our PT to Rs 780 (from Rs 700) as we roll forward and also raise our target multiple to 2.4x Mar-23e adjusted PB. Our PT for the Buy-rated ADR is $21, based on fx conversion & ADR factor of local price target.