ICICI Bank Rallies As Brokerages Raise Price Targets

ICICI Bank Ltd. reported a sharp spike in bad loans in the July to September quarter, but the stock gained as much as 3.1 percent as brokerages like Deutsche Bank, Bank of America Merrill Lynch and Motilal Oswal raised their price targets on the stock.

The pace of resolution of bad loans and the improvement in the loan mix were reasons for optimism, according to the brokerage firms. Credit Suisse expects the stock to trade at better multiples, even as JP Morgan warned that a re-rating of the stock could be pushed back to financial year 2018-19. Barring Deutsche Bank, the brokerages have all cut their earnings per share estimates for the private lender.

ICICI Bank’s gross non performing loans as a percentage of total assets rose to 6.82 percent at the end of the quarter compared to 5.87 percent in the April to June quarter. But the loans under the bank’s watch list reduced to Rs 32,492 crore from Rs 44,000 crore at the start of the financial year. The resolution of two large non performing accounts will reduce the watch list in the next 6-9 months, the management told reporters at a press conference.

Also Read: ICICI Bank Bad Loan Ratio Holds At A Decade High

Here’s more from what brokerages had to say on ICICI Bank’s earnings and future trajectory:

Deutsche Bank

• Retains ‘Buy’ rating.
• Raised price target to Rs 310 per share from Rs 300 earlier.
• Stress book down to 16 percent from 18 percent in March 2016.
• Core balance sheet traction is healthy.
• Stress gradually being recognized; resolutions will likely result in further decline.
• Weak revenue trend may continue in the near term.
• Stock valuations at 1.3 times financial year 2017-18 price to book value ratio (adjusted for subsidiaries) remain attractive.

Bank of America Merrill Lynch

• Retain ‘Buy’ rating.
• Raises price target to Rs 339 per share from Rs 320 earlier.
• Factors in slippages of Rs 29,000 crore in current financial year as the bank has not given any material asset quality guidance.
• Cuts earnings per share estimates for current fiscal year by 2 percent, and next fiscal year by 4 percent.
• Says bank has the provisioning cushion to deliver around 8 percent EPS growth this fiscal, and 23 percent next year.
• Stress priced in at valuations of 1.2 times FY18 stress adjusted book value.

Motilal Oswal

• Retains ‘Buy’ rating.
• Hikes price target to Rs 337 per share from Rs 307 earlier.
• Movement of non performing accounts from the watch list and outstanding restructured loans to the balance sheet, and the increase in the pace of resolution of bad loans, are reducing uncertainty over the health of the balance sheet.
• Strong capitalisation with Tier I ratio of 13.3 percent, significant improvement in the granularity with retail and small and medium enterprises accounting for around 53 percent of the book, and the sharp improvement in liability profile are reasons for comfort.
• Cuts FY18 earnings estimate by 10 percent, and FY19 estimate by 7 percent to build in higher provisions.

JPMorgan

• Retains ‘Neutral’ rating and keeps price target unchanged at Rs 265 per share.
• Key metrics like slippages and reduction in the watch list along expected lines.
• Cuts earnings per share estimate for the current and next two financial years by between 8 and 10 percent.
• Continues to see value in the stock as the asset quality worries are a legacy issue.
• Warns that the re-rating of the stock may get delayed as retrun on equity normalisation could get pushed back to FY19.

Credit Suisse

• Maintains ‘Outperform’ rating, keeps price target unchanged at Rs 328.
• Operating performance weak, but stress recognition will aid re-rating.
• Management is confident of sharper drop in watch list in second half of the fiscal year on back of recent asset sales by two "House of Debt" groups.
• Total problem assets to continue to trend lower.
• Cut current fiscal's earnings per share estimates by 5 percent, and next year’s by 4 percent, due to bad loan addition and high credit costs.
• Expects the stock to trade at better multiples due to the recognition of the legacy stressed accounts and the shift in loan mix towards retail customers.