Apr 30, 2012 12:38 PM IST | Source: CNBC-TV18

ICICI top pick in banking space, target at Rs 1200: IIFL

ICICI Bank declared its fourth quarter results. Rajiv Mehta, IT analyst of IIFL India says, there is a case for urgent re-rating of ICICI Bank. "It remains our top pick in the sector. Our target price is Rs 1,200," he adds.

ICICI Bank declared its fourth quarter results. The bank's net profit stands at Rs 1,902 Cr versus Rs 1,452 crore on quarter-on-quarter (QoQ) basis. It net interest income (NII) is at Rs 3,104 crore versus Rs 2,509.7 crore on QoQ basis.

In an interview to CNBC-TV18, Rajiv Mehta, IT analyst of IIFL India says, there is a case for urgent re-rating of ICICI Bank, given the fact that it's trading at significant discount to HDFC Bank and even a peer like Axis Bank. "It remains our top pick in the sector. Our target price is Rs 1,200," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying video.

Q: Analysts on the street believe that there is now enough justification to the numbers to deserve a re-rating on ICICI Bank. What is your target price on ICICI Bank and how did you read into the numbers after they came out?

A: Absolutely. I agree with most of my colleagues that there is a case for urgent re-rating of the stock, given the fact that it’s trading at significant discount to HDFC Bank and even a peer like Axis Bank. The kind of performance the bank has been consistently delivering over the last three-four quarters is heartening.

This quarter was special in the sense that they beat everybody’s estimate. Two things stood out. One, a significant net interest margin (NIM) expansion sequentially which is more structural in nature, there is no one-off in that. That should continue overall in the next year. Second, asset quality continues to behave very well. So, even I agree that in the near-term, the valuation should re-rate. It remains our top pick in the sector. Our target price is Rs 1,200.

Q: It's not the first quarter though. For three quarters now, there has been a lead and lag kind of relationship between what analysts expect of ICICI Bank and what they actually go onto deliver. What do you think is a more reasonable valuation on a price-to-book basis that should be accorded to the bank now?

A: I think on a price-to-book basis a justifiable band could be between two to two-and-a-half one year forward rolling price-to-book. Currently, it is at significant discount to it. I think to a large part what has been dampening the valuation is that at the macro level we are not seeing the kind of improvement which we thought before.

As compared to HDFC Bank, it is slightly high-beta stock. So, if we see some improvements happening in terms of reforms with respect to infra, power or any other sectors then I think ICICI Bank should run up much more faster as compared to HDFC Bank.

Q: What about Axis Bank? What did you read into those numbers?

A: Yes, pretty good numbers. No major negatives into that. Again the asset quality was the key highlight because everybody was watching asset quality of these two banks, Axis and ICICI. They have been beating estimates on that.

What is more important is that they are not even reporting stable asset quality, but they are rather improving ratios. That is why both the banks have guided for a more or less stable credit cost for the next year. So, if one tries to factor in then obviously your earnings will go more upwards for the next couple of years.


Q: The numbers that Axis Bank posted were quite good, but the argument is that at about 1.8 times forward price-to-book, the valuations do not justify a further upside and do not even justify a margin of comfort from hereon. If someone were to hold onto Axis Bank, would you expect to see more upside based on the numbers?

A: We do see significant price upside from hereon in Axis Bank. Our target price is Rs 1,400 because it currently trades below its historic mean valuations. We do see a scope for re-rating. Like ICICI Bank, it is a slightly high-beta stock. So, if there is an improvement at the macro level in terms of reforms before then even this stock should run up faster in line with ICICI Bank.

Q: There are many coming out in the broader space. The likes of Vijaya Bank and Bank of India report their numbers today. But then there is Bank of Baroda (BoB) as well. That’s now moved into the index that reports its numbers this week. Which one would you put your money on?

A: Amongst the PSU Bank, we are much more cautious on that space, given the fact that the asset quality there has deteriorated significantly over the past three quarters. But this quarter could be relatively benign in terms of slippages. Even for SBI, even for Bank of India and Bank of Baroda, we think slippages should be lower sequentially.

If you look at BoB, BoB has stood out amongst the PSU banks in terms of reporting more stable asset quality. So, we have been liking BoB more because it provides more comfort on asset quality and also the valuations are not demanding.

Q: The dark horse for many people this time seems to be SBI where perhaps provisioning will not be as onerous as people expect it to. How are you approaching this heavyweight?

A: I agree that slippages in this quarter could be much lower than the average of the past three quarters for SBI because more or less the worst is behind in terms of asset quality of SBI. But then there are additional concerns with respect to capital adequacy and overall income pressure going into the interest rate down cycle. So, I think currently valuations are more or less in a very fair band. We don’t see a significant upside or a significant downside to the current price.

Q: Do you track any of the non banking finance corporations (NBFCs)? Any expectations there in terms of what do you think could be the big hit this time around?

A: We do track one space within NBFCs which is gold loan companies. We think this quarter could be a bit of a mixed quarter, given the fact that funding cost really went up. NBFCs typically are more vulnerable to wholesale funding cost, moreso gold loan companies, given the fact that few regulations have come in which are totally having a cascading impact on their business. So, I think gold loan companies could report sequentially weaker numbers. The outlook also remains bleak till we see a full adjustment happening to the 60% loan-to-value (LTV) cap on the lending.

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