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RBI extends MD & CEO term for 2 years; eligible for 2 more full terms

Event: The RBI has approved the extension of MD and CEO Mr. Sandeep Bakhshi’s term for two years to October 3, 2023. Following are our views post discussion with the management:

* The RBI’s term extension for two years, instead of the general practice of a three-year extension, is in line with the valid board/shareholder approval for his appointment for a five-year period from October 15, 2018, to October 23, 2023. Thus, it should not be seen as a short-term extension by the RBI similar to RBL/DCB.

* Mr. Bakhshi's age is 61 years and so he is eligible to hold the MD & CEO position till the age of 70 years, as per the companies’ act/ RBI policies.. Thus, he would be eligible for at least two more term extensions beyond 2023, subject to his consent and board/shareholder approval. These term extensions will also be within the overall term cap of 15 years for non-promoter MD & CEO/WTD.

* Under the leadership of Mr. Bakhshi, the bank has seen a major transformation across business and financial parameters. The bank has steered well through the pandemic, building strong provision/capital buffers and is raring to go for growth with a clear focus on sustainable profitability, in our view.

* We expect the bank to reclaim its decade-best RoEs of ~15%/16% by FY23E/FY24E, led by better growth and strong core profitability. Mr. Bakhshi has brought in long-awaited management credibility/stability. Thus, we believe that his longer association with the bank will be essential for the stock’s rerating hereon.

* We believe that consistent strong financial performance and management stability have been the key factors for HDFCB’s successful rein in the Indian banking industry, which has faded a bit in the recent past. On the other hand, ICICI has emerged as a growth leader and with better return ratios and credible management, it will be able to narrow down the valuation gap with peers like HDFCB.

* ICICI remains our top pick in the sector. Retain Buy/OW in EAP with a TP of Rs825 (2.5x Sep’23E ABV + subs value of Rs170), given its solid growth trajectory, superior core profitability, healthy capital/provision buffers, and management credibility/stability unseen in the past.

* Key risks: Severe third Covid wave affecting macro/consumption recovery and hampering the bank’s growth/asset-quality normalization

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