5 reasons why analysts think ICICI Bank could be the next sector leader

A ramp up of digital banking services, sustainable scalability, and inexpensive valuation is all set to power ICICI Bank’s stock, driving the bank towards “sector-leadership valuations”, believe analysts.

They see up to 52 per cent upside in the stock price over the next one year on the back of accelerated business growth, driven by lower customer life cycle costs and higher revenue via cross-selling.

"A focused approach of leveraging existing relationships, structural/cultural changes and digital edge underpin ICICI Bank’s sustainable franchise. We take note of its vast wealth of data and deep franchise moats on liabilities to surmise that if the bank executes its strategies well, its success and therefore a sustained re-rating to sector-leadership valuations are possible," said Prakhar Agarwal and Parth Sanghvi, research analysts at Edelweiss Securities.

On Tuesday, the shares surged 3.8 per cent to Rs 737 on the BSE in the intra-day deals. Over the past six months, the stock has mostly performed in line with the markets by rising 9.5 per cent on the BSE as against a 10.3 per cent gain in the S&P BSE Sensex during this period.

Here’re are the key reasons that make analysts bullish on the stock:

Digital growth: After launching 'iMobile' banking app, the lender has now launched 'i-Lens', a digital lending solution for mortgages and other retail products. Besides, its card partnership with Amazon (nearly 2 million cards issued) has helped it gain market share and has seen higher spend-based fees and lower delinquency.

"ICICI Bank's banktech initiatives such as iMobile, iLens, and FinTech partnerships (AmazonPay, etc.) are now blossoming into perfected B2C NTB customer acquisition engines, leading to a visible improvement in metrics. This gives the bank a wider customer base to cross-sell to, expanding its medium-term growth potential," noted analysts at HDFC Securities.

Partnership with start-ups: ICICI Bank’s aim is to collaborate and co-create innovative products with startups to drive transformation across various business verticals such as Payments, Lending, and Risk Management. The bank is working with more than 130 FinTechs. Over the past two years, it has invested in approximately 15 start-up, which has created a win-win partnership for the bank.

Retail Credit and Collection: The bank’s approach to segregate customers into a pre-approved loans category or Pre-Qualified category, customer segmentation and policy formulation along with monitoring it, has helped to predict 80 per cent of the bounce back rates.

"Contactless collection currently stands at approximately 30 per cent at the early stage of Virtual Customer Service Management and 87 per cent of the total payments are being collection digitally. The banks need to continuously evolve and keep offering and scale up the digital capabilities to compete with the Fin-techs, it will help in gaining the incremental market share," said Bunty Chawla and Melwin Mathew, analysts at IDBI Capital.

Improvement in financial metrics: According to Anand Dama, analyst at Emkay Global Financial Services, ICICI Bank’s transformation into a 'Super BankTech' will accelerate business growth/profitability, driven by lower customer life cycle costs and higher revenue via cross-selling, feeding into sustainably higher return on equity (RoEs). In addition, management credibility and stability relative to peers should provide ground for continued re-rating, he said in a note.

Analysts at Motilal Oswal Financial Services, meanwhile, expect the lender to deliver nearly 25 per cent earnings CAGR over FY22-24E, while return on asset (RoA) and RoE is expected to improve to 2 per cent and 16.6 per cent, respectively, by FY24E.

Valuation: Adjusting for the value of subsidiaries, valuation of the standalone bank is currently at 25-30 per cent discount to HDFC Bank, said analysts at Nirmal Bang.

"The core bank (excluding subsidiaries) trades at 2.5x P/B (on current book value) retracing back from key levels between 2.8-3.0x, almost a repetition last seen in 2009-10 and 2014-15. We think further re-rating i.e. beyond 2.8-3.0x P/B will be contingent upon delivering steady EPS growth over several years. Near- to medium-term, though, we think the bank has all the ingredients and firepower to deliver an EPS CAGR of 28 per cent over FY21-24," said a note by Nomura.

Source: Brokerage Reports
Note: Price in Rs; Upside potential in % from Monday's closing price