ICICI Bank stock may soon command premium over HDFC Bank, say analysts

Ability to continue reporting above-average earnings a key trigger; discount with Kotak Bank stock also seen narrowing

Even as ICICI Bank delivered its seventh consecutive beat on quarterly earnings, analysts believe the lender’s stock could sustain its premium valuation over HDFC Bank, and narrow its valuation discount with Kotak Mahindra Bank.

The consistent outclassing of peers could also lead to a “bright future for the bank in a gloomy macro environment”, they say.

“ICICI Bank has cemented its stalwart position with a highly efficient large liability franchise, strong capital ratios, strong provision coverage ratio (PCR), steady asset quality, and best-in-class return ratios. We see ICICI Bank delivering strong compounding returns, with valuations set to rerate higher,” says JM Financial.

Currently, ICICI Bank’s price-to-book value (P/BV) ratio multiple is 3.33x, compared to HDFC Bank’s 3.09x — a difference of 0.24x, according to the Capitaline data. Except for a few days in January and in April, ICICI Bank stock has always traded at a discount to HDFC Bank. The premium was 0.26x on July 19 — the highest-ever since 2005 when data is available. The ICICI Bank stock has continuously traded at a premium since July 18.

Brokerages have also increased their valuation multiple targets. Edelweiss Securities, for instance, has increased ICICI Bank’s P/BV multiple to nearly 3x, from 2.5x earlier for 2022-23 (FY23), backed by consistent outperformance over peers.

For 2023-24 (FY24) and 2024-25 (FY25), it has assigned a P/BV multiple of 2.5x and 2.2x, respectively. In comparison, it pegs HDFC Bank’s P/BV multiple at 2.8x for FY23, 2.3x for FY24, and 2x for FY25.

“ICICI’s target multiple is now on a par with HDFC Bank’s — versus a premium valuation for HDFC Bank earlier. If ICICI sustains its above-average earnings delivery over the next two–three quarters, there is a likelihood it could trade at a premium to HDFC Bank and narrow its discount to Kotak,” it says.

Those at Motilal Oswal Financial Services, too, say ICICI’s valuation will expand to its “deserving multiple, thus generating supernormal returns for investors”.

“The bank is seeing strong recovery in business trends across key segments, such as retail, small and medium-sized enterprise, and business banking. Asset quality trends remain steady, while provisioning coverage ratio (PCR) remains one of the best in the industry at 80 per cent. Ahead of this new growth cycle, the bank is already positioned well with superior margins, strong return on equity (RoE)/asset quality, and robust capitalisation levels. The stock return will be a function of earnings growth and rerating over the coming years,” says the brokerage.

Notwithstanding the high probability of slowdown led by global factors, ICICI Bank should be able to weather this impending storm relatively well, believe analysts.

“The bank’s strong liability franchise positions itself in a relatively healthy position without putting the balance sheet at much risk. We see the bank delivering superior growth and risk-adjusted return ratios in the medium term,” observes Kotak Institutional Equities. 

ICICI Bank reported net profit growth of 49.5 per cent year-on-year (YoY) at Rs 6,905 crore, led by strong loan book growth, margin expansion, and lower credit cost. Credit growth was 21.7 per cent YoY, led by 24 per cent YoY growth in retail loans. Overall margin increased 14 basis points (bps) YoY and 11 bps quarter-on-quarter.

“Given the relatively high external benchmark lending rate linkage, we expect the bank to remain a key beneficiary of the current upward rate cycle from a margin expansion standpoint. Credit/deposit (C/D) ratio stood at 83 per cent versus 80 per cent in the fourth quarter of 2021-22 (FY22). Historically, we have seen the bank operate with 90 per cent C/D ratio (2018-19 through 2019-20), which indicates there may still be some room for the C/D ratio to improve, which should have a positive impact on margin. Further, increasing the share of unsecured retail loans would also be margin-accretive,” points out Nirmal Bang.

Analysts at Jefferies have recently raised their earnings estimate by 3-4 per cent and see ICICI Bank delivering 17 per cent compound annual growth rate in profit over FY22-FY25 and RoE of 16 per cent. They maintain a ‘buy’ rating and a price target of Rs 1,080 on attractive valuation.

On the bourses, shares of the two Mumbai-based lenders (ICICI Bank, HDFC Bank) advanced 2.2 per cent in intraday deals, but pared gains to end between 0.11 per cent and 0.23 per cent higher, against a 0.55 per cent dip in the S&P BSE Sensex on Monday.

So far this calendar year, ICICI Bank’s stock has zoomed 8 per cent, against a 4 per cent fall in the Sensex index. HDFC Bank, Kotak Bank, and Axis Bank have given returns of minus 6 per cent, nil, and 7.2 per cent so far this year, respectively, reveals the BSE data.