ICICI Bank Offers Among The Best Risk-Reward Globally, Says Jefferies

ICICI Bank Ltd. is not only well poised to leverage on growth pickup in Indian bank credit but the recent correction, coupled with high return-on-assets, makes it among the best risk-reward ratio across global peers, according to Jefferies.

The private sector lender is set to benefit from an uptick in bank credit growth from 8-9% in early 2022 to 12% year-on-year now, the financial services firm said in a June 24 report. “ICICI Bank’s presence across segments of credit--corporate (working capital, capex), retail (mortgages and others)--its strong deposit franchise position it well on liquidity.”

The bank’s growth, it said, will also continue to be boosted by ramp-up of the SME vertical, where credit grew 39% over the year earlier in FY22. “It could also leverage an uptick in capex cycle given its domain expertise in project financing.”

According to Jefferies, return-on-assets is a better reflection of core profitability than return-on-equity, which can be significantly influenced by leverage. On ROAs, ICICI Bank achieved peer-best levels of 2.1% in Q4 FY22, even as it said the “sustainable level” could be tad lower around 1.8-1.9% as credit costs normalise.

But a comparison of global banks across ROA and PB (in FY23/CY22) shows that ICICI Bank offers among the best risk/reward.

“It trades at 1.1x on PB/ROA, as its one-year forward core banking PB of 2x is well justified by its ROA of 1.8-1.9%, which also has potential upside risk,” the research house said. “Among global banks that are near 1x on PB/ROA, ICICI Bank offers among the highest ROA.”

Among Indian peers too, ICICI Bank remains Jefferies’ top pick. It maintained its ‘buy’ rating on the stock and set a target price of Rs 1,070 apiece, implying a potential upside of 56%.

“We see ICICI Bank delivering 17% CAGR in profit over FY22-24 and ROE of 16%. An area of potential positive surprise is its overseas NIMs, which could expand, as the global liquidity market has tightened up, leading to higher margins in the medium term for lenders.”

Key Catalysts, According To Jefferies

• Easing of Covid-19 restrictions and normalisation of lending activity.

• Unsecured retail portfolio asset quality holding up better than expected.

• Deposit rate cuts and higher CASA as benefits of deposit polarisation come through.

• Early resolution of stressed assets and any recoveries.

Key Risks

• Higher non-performing loans.

• A weak earnings trajectory.

Separately, on June 20, Nirmal Bang maintained ICICI Bank among its top picks in the banking sector, with its target price implying a similar upside as Jefferies’.

ICICI Bank is among the only two constituents in the Nifty Bank that has no ‘hold’ or ‘sell’ calls. The other being State Bank of India. All the 49 analysts tracking ICICI Bank recommend a ‘buy’.

Shares of the private lender gained as much as 2.1% on Friday compared with a 0.7% rise in the Nifty 50. The stock has declined 7% so far this year.