ICICI Bank still affordable for investors as positive triggers intact

At a time when quality stocks trade at prohibitive valuations, particularly in the financials space, ICICI Bank is an exception which still lends itself affordable for investors. Trading at two times its FY20 estimated book value, despite a sharp rally in three months, the bank’s stock continues to trade at a discount to peers such as Axis Bank and HDFC Bank.

Interestingly, a few factors such as receding concerns on asset quality, well-executed strategy on retail business and best in class liability cost structure work in favour of ICICI Bank. Also, with almost a year of new management taking charge of the bank, it has put to rest certain concerns on corporate governance. Suresh Ganapathy of Macquarie Capital says that under Sandeep Bakhshi (the new CEO), ICICI Bank has revamped its risk appetite and underwriting processes. “It has become more conservative as over 80 per cent of new loans are towards corporates rated A- and above and there’s an absolute cap on group level exposures. Ecosystem return on equity is the pivotal decision metric for any new loans,” he notes.

Confidence on new management is critical to steer the ship towards right execution. For instance, in a quarter where most private banks found it tough to maintain CASA (current account – savings account; low-cost deposits) ratio near about the previous year’s levels, ICICI stood as an exception with FY19’s CASA at about 50 per cent. This contained the increase in cost of funds to 10 basis points (bps) in FY19, as against 40 – 60 bps seen by peers.

Secondly, with a well-laid plan to expand its retail assets, the bank saw a more granular growth in this segment vis-à-vis peers. Even if unsecured loans grew faster than the rest (as is case with industry), nearly 85 per cent of the business comes from relatively sticky segments such as home loans, vehicle loans, rural loans and small business advances.

However, what could possibly still be a dark spot is the asset quality mend. While from a year-ago level of 8.84 per cent gross non-performing assets (NPA) the number glided to 6.7 per cent in FY19, whether the freshly accruing pain in the system would allow for further softening of this number needs to be seen. For now, the Street believes the exposure of the bank to these troubled names may not be significant. But, any slippage on this parameter can derail the party for the ICICI Bank stock.

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