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The best way to ride the economic growth cycle: Own banks. Even as public-sector lenders struggle with capital issues and stressed assets, private ones are ready to ride the expected pickup in investments. Armed with capital and low-cost deposits, private banks are set to service credit demand. Expecting growth and a rate cut, private lenders have returned 16 per cent over three months versus five per cent by the Sensex.
While most private banks command premium valuations, ICICI Bank, India's largest private bank, has been trading at a 30 per cent discount to peers on a price/book basis, due to its return on equity (RoE) profile. But the bank could report an upturn in its profile, analysts say, leading to an earnings upgrade. Its return on assets (RoA) continues lower than some peers and this has affected its RoE. Since the Lehman Brothers crisis, ICICI Bank has worked to cut costs and improve profits, Morgan Stanley says, yet its core RoA and RoE (15 per cent) are still weak. This stems from lower RoA and less capacity to lever the balance sheet. The brokerage expects the RoE to rise 18 per cent by FY18, driving a re-rating as macroeconomic conditions and liability franchise improve.
Analysts are concerned about the bank's stressed assets. The bank expects the coming year to be better for assets on improving macroeconomic conditions.
Sharekhan said the bank expected the stressed loan formation lesser in FY15 vs FY14, and the credit cost limited to 90 basis points in FY15.
Any recovery in the economy or policy initiatives by the government will result in an improvement in the asset quality by FY16. The brokerage has revised its estimates and valuation multiple upwards (2.1x FY17 book value for ICICI stand-alone) on increasing visibility on the interest rates and a likely pickup in the economy.
