Analysts Bet On ICICI Bank's Valuations Catching Up With HDFC Bank's

A motorcyclist and passenger travel past branches of ICICI Bank Ltd., HDFC Bank Ltd. and Punjab National Bank on a near-empty street in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Analysts Bet On ICICI Bank's Valuations Catching Up With HDFC Bank's

HDFC Bank Ltd. and ICICI Bank Ltd. have an old rivalry. The former, by virtue of being the steady workhorse of the sector, has always commanded higher valuations than the latter, which has faced more frequent bouts of volatility.

Analysts are now hoping that the gap between the two will narrow as ICICI Bank takes the lead in growing its retail and small business portfolio, while accelerating its technology. HDFC Bank, meanwhile, has been cautious on growth for the last few quarters and remains under restrictions from the Reserve Bank of India.

Jefferies, in a note on Thursday, said it sees better traction on retail loan growth and net interest income for ICICI Bank versus HDFC Bank. Growth in business banking has been supportive and clarity on asset quality would improve visibility on net interest margin for ICICI Bank, the brokerage said.

ICICI Bank's discount to HDFC Bank's valuations has narrowed to 35-40%, said Jefferies, adding this could further narrow to 25-30%. Valuation for ICICI Bank at 2.1 times price-to-book ratio is still attractive, it said.

Jefferies has a price target of Rs 780 on the stock, Shares of ICICI Bank are currently trading at close to Rs 654 apiece.

Bernstein, in a note dated July 17, raised its price target on ICICI Bank to Rs 790 apiece from Rs 610, citing the lender's improved digital capabilities.

"We believe investors should increasingly focus on one metric — customer acquisition growth — reflected in new credit cards issued, app downloads, active app users, InstaBiz app downloads," Bernstein said in its report. Market share and loan growth should follow customer acquisition for select granular retail categories, the research house said.

According to Bernstein, ICICI Bank is well positioned to grow, both due to comfortable levels of capital and its low cost deposit base. The loan portfolio mix is also changing towards retail and SME, away from riskier corporate loans. This is driving an improvement in asset quality.

Bernstein, too, argued that there is a case for a narrowing of the valuation discount with the 'best-in-class'.

We expect the improving asset quality to drive lower credit costs for FY22 and FY23. We estimate the bank will achieve a 1.7% Return on Assets / 15% Return on Equity in FY23.
Bernstein Research

In a report on July 8, Macquarie Securities upgraded its price target on ICICI Bank to Rs 820 per share.

"We believe ICICI is well on track to improve its return on assets levels to one of the best in the industry over the next few years. We expect a focus on loan growth, margins and keeping a tight leash on credit costs will drive earnings growth," said Macquarie, forecasting 24% earnings per share growth on a compounded annual basis over the next three years.

According to Macquarie, ICICI Bank has been gaining market share across a number of segment — credit cards, NEFT (National Electronic Fund Transfer), RTGS (real time gross settlement system) transfers.

In particular, its ICICI Bank-Amazon credit card has been a success. "Almost 50% of the incremental addition in credit cards in the last 10 months has been driven by its Amazon co-branded credit cards."

Balance sheet growth, Macquarie said, is being pursued with a focus on maintaining margins at higher levels. "We strongly believe that the quality of growth is good this time around," the report said.

We increase FY22-24 estimated earnings by 13-17% primarily on account of better margins. A tight focus on cost of funds and discipline on pricing has helped ICICI Bank to maintain margins at higher levels.
Macquarie Securities
Analysts Bet On ICICI Bank's Valuations Catching Up With HDFC Bank's

All the 50 analysts tracking ICICI Bank have a 'buy' rating on the stock, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 11.2%.

On the other hand, 44 of the 50 analysts tracking HDFC Bank have a 'buy' rating on the stock, while five recommend a 'hold' and one suggests a 'sell'. The 12-month return potential is 21.1%.

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