Analyst Corner| ICICI Prudential Life: Maintain ‘buy’ with target price of Rs 700

On the back of improved franchise, these banks have announced 25-50bps cut in their retail term deposit rates and have also cut interest rates on savings deposits by up to 300bps.

Partner banks have simproved deposit franchise & cut deposit rates: ICICI Pru Life’s new bancassurance partners (IIB, AU Bank, IDFC First Bank and RBL) have seen their retail deposits grow by +60% YoY in FY21 and the share of these deposits in total have risen by 900bps YoY to 46%. Even Casa deposits rose by 50% YoY to 41% of total, led by growth in savings deposits. A combination of focus on retailisation of deposits with higher rates than peers (150-200bps premium over larger banks), slower asset growth and client servicing helped improve their deposit profile. On the back of improved franchise, these banks have announced 25-50bps cut in their retail term deposit rates and have also cut interest rates on savings deposits by up to 300bps. Our recent conversations with management indicate scope for more cuts in deposit rates in future as well.

Lower rates can direct flows towards traditional products: Even as the cut in deposit rates primarily reflects the strengthening of their deposit franchise, we believe that it will have a positive rub-off for cross-sell of financial products, especially where returns are guaranteed (like non-par products and annuities) as well as other traditional products like PAR. We understand that these platforms collectively had originated about Rs 6-7bn of annualised new premiums over past year and targets would be to double this in the next 3 years or so, with ICICI Pru Life being a key beneficiary.

Improved growth visibility can drive re-rating; Maintain BUY: Even as Covid wave 2.0 will have some business impact in the shorter-term, we believe that traction on these new partnerships is improving. We see a VNB growing at 19% Cagr over FY21-24 led by uptick in premium growth; operating ROEV of 15% in FY22. Our FY23 VNB can see 15% upside if the management achieves their target. In our view, ICICI Pru Life provides the best risk-reward among life insurers and we raise our target price to Rs 700 (from Rs 640) based on 2.7x Mar-23 P/EV.