Neha Dave Moneycontrol Research
The ICICI Bank board’s decision to appoint Sandeep Bakhshi to, in effect, run operations while Chanda Kochhar goes off on long leave is a positive step that helps draw the line under the ructions that have held back the lender’s stock price, and ensures some continuity as it places an insider at the helm.
Kochhar has been caught up in allegations of corporate misconduct and quid pro quo in sanctioning of loans to Videocon and the Essar group. The board, which initially backed its CEO, has acted belatedly but appropriately, constituting a committee headed by former Supreme Court judge B N Srikrishna to probe the matter. Kochhar’s term ends in March next year, and it’s unlikely that the internal enquiry and the other investigations will be able to unequivocally clear her name in time for her to return to the helm.
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The Reserve Bank of India has so far refrained from commenting on ICICI Bank’s management problems. However, in the case of Axis Bank, the RBI expressed its displeasure over the Board’s decision to re-appoint CEO Shikha Sharma for next three years. Consequently, her term was reduced to six months. It wouldn’t be a surprise if the RBI steps in with ICICI Bank as well in future to fulfil its supervisory role.
What does this mean for investors?
ICICI Bank shares have underperformed the Nifty bank index since Kochhar’s troubles began at the end of March, gaining 5 percent compared to an 8.8-percent rise in the sectoral benchmark.
The poor performance came in spite of in-line results, a strong guidance and the fact that it is the cheapest corporate lender in the private sector.
Also Read: COMMENT | Like Kochhar, the ICICI Bank board should go on leave, but permanently
Some of the cloud around the shares will now lift, allowing the focus to return to performance.
While there will be speculation on the potential CEO for the term beginning March next year, the managerial changes do help in addressing the succession planning at the bank to some extent. An insider taking over the affairs of the private lender can ensure smooth management transition and will be viewed positively by the street.
ICICI Bank has had a rough run in the past few years with the piling up of bad loans arising out of its corporate exposure. Management articulated in May that it endeavours to deliver consolidated return on equity (RoE) of 15 percent while improving net non-performing assets (NNPA) to 1.5 percent and maintaining provision cover above 70 percent by June 2020. With asset quality issues expected to recede, we don’t see many constraints in delivering these targets.
With a potential improvement in return ratios, the current valuation of its core book at 1.1 times FY19e P/BV looks compelling. In fact, the bank’s stock is trading at significant discount of 30-40 percent relative to its closest corporate lending peer, which is also facing similar asset quality issues and uncertainty over impending management change.
Yesterday’s announcement will help in allaying the investors’ concerns around corporate governance at ICICI Bank. The positive stock reaction in anticipation of the managerial changes is the testimony of the fact that the issue was an overhang for the stock.
Any impact of all this on ICICI Pru Life?
We don’t see any impact of the move on ICICI Prudential Life Insurance’s stock. The recent correction in ICICI Pru Life’s stock after the rally post-Q4 earnings is due to market and technical factors. ICICI Bank sold up to 2% of its stake in its life insurance arm last week, adversely impacting the stock price.
We are positive on the ICICI Pru Life’s stock as it is well-positioned in a structural growth sector with reasonable valuations. We view the stock’s valuation discount of more than 70% compared to the closest peer as more of a perception issue and unwarranted. As such, we expect the gap to narrow in the near to medium term, offering upside to the current stock price.
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