An improvement in velocity of ICICI Bank's operating profit growth & steady credit cost will bring down volatility in earnings, which has been a key reason for 55% discount in valuation vs. HDFC Bank. Lower volatility can reduce Beta & this itself can help bridge the gap in valuation by half. The rest reflects the gap in growth & ROE - this can be partly bridged with improved growth in clients/ CASA. Jefferies raise their price target to Rs 780 and hold it among our top-picks in the sector.

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Improved velocity of operating profit growth and stable asset quality to make earnings less volatile:

ICICI Bank has improved the velocity (pace and direction) of operating profit over the past two years reflecting improved topline and cost efficiencies. This is markedly different from the past few years when the pace was slower and volatility was higher. In fact, ICICI Bank's performance has now become comparable with HDFC Bank's (industry best) and as comfort on asset quality/ credit-cost improves, this should translate into stable growth in net profits as well.

Lower Beta can help bridge the valuation discount to HDFC Bank by nearly half:

ICICI Bank trades at 55% discount to HDFC Bank in terms of valuations - ICICI Bank at 1.9x FY22 adjusted PB and HDFC Bank at 3.4x. This reflects a combination of HDFC Bank's better growth, ROE and lower Beta. With a lower volatility in earnings, HDFC Bank's Beta is at 1 whereas ICICI's is around 1.2-1.3. We believe that consistency in earnings growth/ asset quality will help ICICI Bank bring down Beta closer to 1. This can lift-up the theoretical PB from 1.9x now to 2.5x - closing the gap with HDFC Bank by 30%.

Pick-up in CASA can lift growth in ICICI Bank:

 ICICI Bank has seen steady growth in CASA deposits, still it's interesting to see the extent of pick-up that HDFC Bank has seen. During Q3, ICICI Banks saw average CASA growth of 19% YoY whereas HDFC Bank saw 30% YoY growth (end-of-period). A higher CASA growth is key to supporting growth in loans without diluting underwriting and/or margins.

Jefferies sees an improvement in earnings & profitability from FY22 onwards as credit costs stabilise alongside steady growth in topline. Jefferies raise their price target on the bank to Rs 780 (from Rs 700) as we roll forward and also raise our target multiple to 2.4x Mar-23E adjusted PB. Jefferies price target for the Buy-rated ADR is US $21, based on forex conversion & ADR factor of local price target.