India's financial sector has continued to be troubled in the second quarter of FY20 that saw thee loan growth drop to demonetisation lows of 6 percent.
However, some private bank heavyweights, such as ICICI Bank, showed signs of improvement across parameters barring a slight miss on credit growth and a marginal uptick in the stress pool.
Consequently, most brokerages have remained bullish on ICICI Bank after the lender released its September quarter scorecard.
In a recent report on November 26, Morgan Stanley says that it sees a 50-100 percent upside in the stock in one to two 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 the past, Morgan Stanley has pointed out, adding that the deposit growth is at decadal-high levels and loan spreads and net interest margins (NIMs) are strong.
The foreign financial firm believes this will likely drive nearly 22 percent CAGR in core pre-provision operating profit (PPoP) between F2019 and F2022.
"The stock has done well over the last 18 months, but at nearly 7.5 times FY21E core PPoP, valuation is still at a deep discount to private peers – and recent policy moves should provide a significant boost to multiples," Morgan Stanley said.
"Our new one-year target price is Rs 775 (about 55 percent upside) and in two years stock could be worth Rs 1,000 (about 100 percent upside). We also raise our ADR target price to $21.50," said Morgan Stanley.
Morgan Stanley has an 'overweight' view on the stock.
Improving asset quality, progress in loan growth, NIM and insurance premium growth are the key value drivers for ICICI Bank. However, a slowdown in the economy, higher-than-expected NPL stress or slower-than-expected loan growth recovery, volatility on news flow around asset quality and moves around top management are the key negatives that will impede the stock's rise.
Recently, Macquarie raised the target price on ICICI Bank stock by 25 percent on a strong return on equity (RoE) going ahead.
While maintaining outperform on ICICI Bank, Macquarie has raised target price to Rs 615 (from Rs 490 earlier) which implies a 25 percent potential upside from the current levels.
"The bank is our marquee idea and the top pick in financial space. It is focussing on operating profit and containing provisions to 20-25 percent of pre-provision operating profit," said Macquarie.
In Calendar 2019, shares of ICICI Bank is up nearly 42 percent as of November 26 close. Benchmark Sensex has gained 13 percent in the same period.
Since 2010, ICICI Bank has outperformed benchmark Sensex six times.
ICICI Bank, on October 26, reported a 28 percent year-on-year (YoY) decline in its September quarter profit at Rs 655 crore due to deferred tax assets adjustment (DTA), but overall earnings (except credit growth and increase in 'BB' and below rated book) were healthy with improvement in asset quality.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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