30 Mar , 2021 By : Kanchan Joshi
MUMBAI: Shares of ICICI Bank Ltd have outperformed those of its peers and the sector index since January with good reason. A fast healing corporate loan book and early provisioning against risks from the pandemic have cheered investors. A steady improvement in performance metrics and a robust capital position have been added advantages.
But there are two key reasons behind the lender's steady progress in bridging the valuation gap with rival HDFC Bank. One is the trouble surrounding HDFC Bank’s digital outages that led to the lender being penalised by the regulator. In December, the Reserve Bank of India (RBI) barred HDFC Bank from issuing credit cards to new customers until it fixes its digital issues. This has been weighing on the bank’s shares and limiting gains since then.
Simultaneously, ICICI Bank’s steady improvement amid a more modest valuation has meant that the lender’s shares have been ripe for re-rating. Analysts at Jefferies India Pvt Ltd point out that the lender may show a more stabilised profitability metrics instead of the large volatility seen in the past years. “An improvement in velocity of ICICI's operating profit growth & steady credit cost will bring down volatility in earnings, which has been a key reason for 55% discount in valuation versus HDFC Bank. Lower volatility can reduce Beta and this itself can help bridge the gap in valuation by half," they wrote in a note today. Beta is the measure of an investment security’s volatility in returns relative to the entire market.
ICICI Bank’s operating profit growth has been volatile since FY17 after a sharp rise in bad loans resulted in loss of interest income and necessitated an increase in provisioning. The lender’s corporate loan book has since then shown a decrease in slippages, even after the pandemic struck. Fresh stress has emerged from the retail and small business loan book against which the lender has made adequate provisioning. Ergo, incremental provisioning needs are expected to be low and hence the bank may report healthy growth in quarterly profits and return on equity.
ICICI Bank shares have risen by 21% in the past four months as against the 6% increase in HDFC Bank’s share price. The former’s shares traded at a multiple of 2.6 times its estimated book value for FY22, still modest compared with the multiple of 3.6 times for HDFC Bank.
0 Comment