Target: ₹1,520
CMP: ₹1,230.25
In banks, at its core a levered business of providing leverage, an ‘adequate’ cost edge is salient. With HDFC Bank’s CASA as % of NDTL dropping 10 percentage points post-merger, ICICI Bank stands second among large banks on CASA proportion and cost of funds. Coupled with a scaled-up distribution-driven operating cost economies, it is the bank with the cheapest raw material.
This bestows the privilege of dealing with the best credits at mutually-beneficial terms and no pressure to finesse extra pennies by going up the risk curve. In India, where a bulk of banking income is a ‘true’ credit spread, the ‘no need for risk’ benefit is tremendous and, with prudence, self-reinforcing over cycles.
Contrary to current positioning, for 2013-18, we are hard-pressed to think of a major account stress news that did not involve ICICI Bank. The journey from that to a situation where we got predictable positive surprises every quarter till date involved a painful adjustment period of proactive provisioning/write-offs, boosts from capital raise/divestments and asset mix shift via ‘retailisation’.
We think valuation, at 2.8x FY25 core BVPS, does not fully recognise a low-risk 18 per cent steady-state RoE. In recognition of structural de-risking, we upgrade our target multiple to 3x FY26 core BVPS from 2.7x, driving a new TP of ₹1,520.