Analyst corner: ICICI Bank our top idea in banks, revised FV at Rs 600

Dotting the i’s and crossing the t’s. ICICI Bank’s analyst meet gave yet another glimpse of the efforts it is taking to rebuild itself as a bank which would enable it come closer to the current best-in-class peers. Execution is solid and we believe that this would reflect in a higher multiple as post-Covid recovery would differentiate the bank from what it has been stereotyped as in the past. We keep our faith in this transition and it is our top idea in banks. We revise our fair value to Rs 600 (from Rs 500 earlier) on account of rollover and marginal increase in our target multiple.

In its analyst meet, ICICI Bank broadly shared the efforts it has been making to rebuild its banking business and re-establish its dominance across the banking spectrum. Key observations, ICICI Bank’s ‘stack’ is getting undivided attention throughout the bank which we thought is a good approach as deliverables can be monitored, build scale that works for smaller ticket sizes without impairing cost structure, evolve products around the customer’s need, and translating this into a revenue stream that is cost effective, scalable and less risky.

In economics, there is a concept of consumer and producer (shareholder) surplus. The lingering aspect from the analyst meet was our inability to understand when the shareholder gets to see this benefit. ICICI Bank showed prowess in building best-in-class products that would keep it among the best-in-class banks. However, when we look at the overall numbers today, we are still yet to see it in the final frontier: the RoA/RoE normalisation. We admit that it is hard to measure these benefits offered to customers. We should ideally see a combination of better-than-industry: loan growth, diversification or granular loan book, NIM profile, fee income, cost of delivery, ability to scale with non-linear profit curve, asset quality trends.

For most investors, ICICI Bank has still not reached the point where the confidence is similar to the best-in-class banks. Gaining credibility has been a challenge, especially when the economic recovery has been sluggish. While the bank is attempting to shift investor’s focus and gain credibility that eroded in the previous decade, the recent price correction, immediately post the lockdown reflects that investors are yet to firmly back this thesis.

That the bank is synonymous with pro-cyclical underwriting is currently being tested and so far, the results are solid. The commentary and execution gives comfort that we would see the bank coming out well this time. We raise fair value to Rs 600 (from Rs 500 earlier) to reflect a higher multiple to the bank’s business and rollover to December 2022. RoE levers for normalisation are likely to come in play from FY2023 as we have more incoming data on the actual performance on account of Covid.