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Going by brokerage Morgan Stanley (MS), the stock has the potential to double in next two years, as a supernormal profit cycle is about to set in aided by market share gains and lower credit cost.
The stock is ICICI Bank.
Most recent analyst targets for the stock suggests a 15-20 per cent upside in next 12 months, but the MS’ two-year target of 50-100 per cent upside is by far the most optimistic.
The foreign brokerage says a super-normal profit cycle for large lenders is in the making, wherein big players are eating into loan market share and deposits are moving quickly into private banks. “A large part of the share gain is concentrated in top three lenders, including ICICI Bank,” the brokerage said.
This, it said, should help drive over 20 per cent asset growth for the lender in next two to three years.
“The funding franchise is entrenched, and ICICI’s cost of funds is now among the lowest in the group, implying a low risk of adverse selection unlike in the past. Deposit growth is at a decadal high and loan spreads and NIMs are strong. This will likely drive 22 per cent CAGR in core pre-provision operating profit (PPoP) between FY2019 and FY2022,” Morgan Stanley said.
Besides, asset quality is improving for the lender, and credit costs will continue to decline, which should take ICICI’s RoE to over 17 per cent by FY22. “This is not priced in yet,” the foreign brokerage said.
LKP Securities also expects the lender to soon see a big turnaround in the earnings.
Unlike in the past, wherein the bank saw a PAT de-grown at a CAGR of 22 per cent through FY15-19, LKP expects PAT to grow at 141 per cent in FY20, 63 per cent in FY21 and 24 per cent in FY22. This should translate into a 70 per cent expansion CAGR over FY19-22. The brokerage also sees value unlocking opportunities in the subsidiaries.
ICICI Bank holds 90 per cent provision coverage ratio (PCR) in NCLT List 1, and 62 per cent in List 2. Any recoveries from the said lists would aid bottomline.
“The Supreme Court judgment on Essar Steel was a major relief for all the lenders, including ICICI Bank, which has one the largest exposure to the said company. With the turbulent NPA cycle mostly behind, incremental stress is supposed to be meaningfully lower, which should aid profits directly. From 7.7 per cent in FY17, the peak slippage ratio is expected to come down to 2 per cent in FY20. Credit cost is estimated to be at 1.5 per cent against management guidance of 1.2-1.3 per cent for FY20,” it said.
PhillipCapital said factors such as high credit growth, NPA recovery and margin improvement should trigger earnings upgrades for ICICI Bank.
This foreign brokerage expects a solid 244 per cent earnings growth in FY20 and 53 per cent in FY21, translating into RoA of 1.23 per cent and 1.7 per cent, respectively.
In its bull case scenario, Morgan Stanley sees the stock at Rs 1,035 in two years. The scrip traded at Rs 505 on Wednesday.
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