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ICICI Bank: The Most Profitable Consensus Trade?

ICICI Bank has been unquestionably one of India’s best performing banking stocks in 2019, with an enviable price rise of over 45%. The lender is a buy in the eyes of 56 out of a total of 57 brokers who cover the stock. That gives you a sense of the consensus optimism that’s riding behind the company.

Sandeep Bakhshi, the current CEO of the bank, took over the bank’s reins after Chanda Kochhar resigned, on account of irregularities in the bank’s lending and corporate governance policies.

The company recently hosted its first analyst day in more than a decade. According to reports, the management’ focus is going to be on ROE, and not on gaining unprofitable market share. Key target for each business is the core operating profit, with a razor sharp focus on costs.

Despite the economic slowdown, asset quality of retail/SME loan portfolio has been holding up due to focus on salaried and affluent self-employment segments. With improving corporate asset quality, stable retail asset quality and steady net interest margins, the bank appears to be in good stead.

Historically, ICICI Bank has been a tech savvy bank with several innovations to its credit. However, asset quality challenges over the past few years have taken the attention away from its digital prowess.

For instance, on the retail banking front, digital now makes up around 53% of all personal loan originations vs. 5% in F18, driving significant cost savings. It is clear that the company is leveraging technology to drive sustained strong earnings and ROE expansion.

The bank has navigated well through a challenging macro environment with limited exposure to newly surfaced stressed names. Even the recent Essar ruling in favour of the Committee of Creditors gives a clearer pathway for the company to deal with stressed accounts.

While the bank has certainly appears to have hit the right notes, keeping a tab on the management’s execution remains key. Furthermore, a volatile macroeconomic environment can again unshackle some of the company’s key loan segments.

If the management continues steadfastly on its promised path, ICICI Bank (at approximately 2.1x FY21 book value), certainly holds the promise of being an outperformer in the banking sector over the next few years.

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