ICICI Bank Looking More Attractive As Bad Loan Resolution Improves

ADRs of ICICI Bank Ltd (ADR) IBN rose more than 3 percent after Goldman Sachs upgraded it to Buy from Neutral on attractive valuation as concerns over asset quality wanes.

Further, Goldman believes ICICI Bank’s 12 month fwd PE/PB are close to 1STDEV below mean.

The brokerage said the multiples could re-rate on “(1) deleveraging of select large troubled corporates, (2) buffer against impaired loans on proceeds from the insurance stake sale, and (3) continued diversification of loans toward secured retail.”

“We estimate ICBK could deliver avg ROA/RORWA of 1.5%/1.8% over FY18E-19E; PPOP (ex-cap gains)/EPS growth of 14.5%/23% CAGR over FY17E-19E,” analyst Rahul Jain wrote in a note.

Jain said the balance sheet concerns have been reduced given the gains from the stake sale in insurance and recent deleveraging deal between Essar Oil and Rosneft, which would reduce ICICI Bank’s exposure to Essar Group by 50 percent.

“We assume if the entire insurance stake sale proceeds are utilized to make provisions, it would take the coverage (PCR) on total impaired loans to c.50% and improve the Texas ratio to 23% by Mar’17 from 66% in 1QFY17, thereby strengthening the B/S and freeing up growth capacity,” Jain highlighed.

Further, the analyst noted that RBI’s potential changes to NPL restructuring norms and increased activity by stressed asset buyers would hasten the resolution of bad loans.

ADRs of ICICI Bank rose 3.19 percent to $8.56.