ICICI Bank rallies on value buying; analysts see up to 40% upside in 12 months

NEW DELHI: ICICI Bank rallied as much as 6.7 per cent in trade on Tuesday to post its best percentage gain in a year on value buying, as analysts across Dalal Street remained positive on the stock despite weak asset quality concerns.

ICICI Bank, the country's largest private sector bank by assets, on Monday posted a 10% rise in March quarter earnings, in the previous session, but a jump in provision for bad loans and a surge in gross non-performing assets spoilt the show for the bank a bit.

Operationally, all parameters are stable, BofA-ML said in a report. They feel that the worst is behind, and the stock has the potential to rally upto Rs 425 in the next 12 months, which translates into an upside of 40 per cent from Monday's closing price of Rs 302.30 on the BSE.

"The stock is down 15% YTD and at 1.7x FY16 adjusted book value (BV), it is the cheapest private bank in India, trading at 30-50% discount to its peers and tad below its 5 year cycle average," said the BofA-ML note.

They think that the stock is pricing in all the asset quality issues and the downside remains very limited. In contrast, BofA-ML which maintains buy rating on the stock expects the bank to deliver over 22% EPS CAGR in FY15-18, making the risk reward amongst the best in the industry.

Although most analysts see weakness in ICICI Bank in the short-term and have advised traders to go short on the stock, because it is still trading below its 200-DMA.

But, ICICI Bank is well placed to capitalise on the expected improvement in the economic cycle as it has leadership position in both retail and corporate banking segments, say experts.

"We expect its valuation to move towards its historical high level over the next two years. We continue to recommend BUY, with a SOTP Target Price of Rs382 wherein the standalone bank has been valued at 2x FY17E Adj. BV of Rs340 and the subsidiaries fetch Rs43/share after deducting holding company discount of 15%," Reliance Securities said in a note.

"Even though management has guided fresh slippages to moderate in FY16E led by the improvement in corporate loan book. But, we continue to maintain our positive stance on the bank," added the note.

NPA concerns to weigh in short-term:

Key concern for the bank continued to be its asset quality given its exposure to stressed sectors. Due to higher slippages from restructured loan, gross NPA increased by 43.7 per cent YoY and 15.4 per cent QoQ to Rs 151 bn.

As a result, gross NPA ratio increased to 3.8% as compared to 3.4% in 3QFY15. The bank also restructured Rs12.5bn of fresh loan in 4QFY15 and management has guided for restructuring pipeline of Rs15bn.

"While 'stress additions' to loans was well within the guidance of the bank, post 3Q, and our estimates. We think that this forms the peak of the cycle," said the BofA-ML note.

The bank also emphatically guided for stressed assets formation in FY16 to be lower as compared to FY15 levels. We, however, think the reduction may be back ended (2H), added the note.