ICICI Bank. The stock could rally as much as 100 per cent in two years as the narrative shifts to growth from
So goes the thinking at global brokerage firm Morgan Stanley.
But hold on, there will be stock volatility for 2-3 quarters, the brokerage cautioned, saying the risk-reward is favourable with a high m argin of safety at 1.2x FY20 estimate core book value and 5x FY20e core pre-provision operating profit (PPoP).
Morgan Stanley in a report said, “If we are correct on our assessment of that, investors could start to value this stock as a growth stock. The upside to valuations can be fairly material. Right now, it sounds aggressive to build in a possibility of ICICI Bank trading at average retail lender’s multiples. But in our view, if asset quality concerns abate, core PPoP growth picks up and RoE (return on equity) improvement comes through, this will likely happen.”
The stock advanced over 5 per cent to Rs 334.45 in the afternoon trade on Thursday.
The global brokerage house compared ICICI Bank’s “P/core PPoP” and PE multiples — current, 12-month base and potential — doubling in two years with retail lenders. “The reason why we believe this is a justified comparison that once asset quality cycle subsides, investors will likely look at this as a retail lender (given large retail asset and deposit franchise). Also, underlying earnings will likely start growing fairly quickly – we expect FY19-21 core PPoP to grow at a CAGR of 21 per cent,” Morgan Stanley said.
Higher-than-expected loss because of defaults, significant fines by regulators and re-acceleration in impaired loan NPL formation are some the key risks to Morgan Stanley’s analysis.
Morgan Stanley added that ICICI is a stock where the narrative could move from NPL pressure to growth “fairly quickly”.
Its logic: When banks emerge from NPL problems, they often enjoy a strong re-rating. However, this recovery usually fades as PPoP suffers from subsequent risk aversion. ICICI, despite NPL problems, has kept improving its retail franchise. This is driving good underlying earnings progression.
“As we move into FY20, we expect sharply lower credit costs and core PPoP growth at over 20 per cent. We expect RoE of 14-15 per cent in FY20-21. This could imply a substantial re-rating over a relatively short period – FY20e core PPoP is now just 5x,” the brokerage house said.