Large lenders are at the start of a super-normal profit cycle, in our view. Macro is tough but RBI /the government is taking steps that support the system and drive up profits for good lenders. EPS and ROE are set to improve. ICICI is particularly well placed given earnings upside and valuations.
A super-normal profit cycle for large lenders in the making: The loan market share gain has been going on for years. However, deposits are quickly moving to private banks-with a large part of the share gain concentrated in top 3 banks (HDBK, ICBK, Axis). This should help drive >20% asset growth for next 2-3 years. RBI’s steps on liquidity have helped reduce funding cost (and weak competition has helped drive up loan spreads); lower risk weights drive up incremental ROE and tax cuts resulted in >10% EPS uplift.
ICICI is very well placed to benefit: The funding franchise is entrenched and ICICI’s cost of funds is now amongst the lowest in the group, implying low risk of adverse selection (unlike the past); deposit growth is at decadal-high levels and loan spreads and NIMs are strong. This will likely drive ~22% CAGR in core PPoP between F2019 and F2022. Asset quality is improving and credit costs will continue to decline. This should take ROE to >17% by F2022.
Continues to move up the valuation hierarchy: The stock has done well over last 18 months, but at ~7.5xF2021e core PPoP,valuation is still at a deep discount to private peers-and recent policy moves should provide significant boost to multiples. As the stock delivers on earnings, we should see continued strength in performance. Our new one-year target price is Rs 775 (~55% upside) and in two years stock could be worth Rs 1,000 (~100% upside).