Decoding the Street’s bullishness on ICICI Bank in the time of Covid-19

At a time when there is extreme cautiousness around banking stocks and analysts are downgrading their rating on the sector, not sparing even the frontline names, stands out as an exception. For one, it hasn’t received any downgrade thus far and all analysts have a positive rating (a few have ‘hold’) on the stock, according to Bloomberg polls.

Also, seen in the larger context of one-year price correction, ICICI Bank’s 17 per cent decline fares better than or Axis Bank’s 24 per cent and 45 per cent fall, respectively. That was the last to join 2019’s re-rating party also positions it favourably in the current wave of correction.

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What seems to be blessing in hindsight is that ICICI Bank’s growth rate of around 12 per cent in the past four years, has been slower than that of (over 22 per cent) or (over 15 per cent). Therefore, ICICI Bank’s future growth rate may come closer to past levels, when most others would be grappling to grow closer to their past trends.

In a report, analysts at J M Financial say that the disruption caused by Covid-19 should see material pressure on multiple fronts for Indian banks. “While growth slowdown and jump in delinquencies is a given, restoration of normalcy will be a long-drawn process,” they note. While advising investors to remain underweight on the sector, the brokerage has only two buy recommendations – and HDFC Bank, where they see relatively lower asset quality risks, a strong liabilities defence, high capital base and market share gains once things normalise.

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Despite moderating growth expectations for FY21, analysts expect ICICI Bank to grow between 10-14 per cent, while its immediate peers – and Axis Bank, by 6-12 per cent.

The tricky part for ICICI Bank is how its below-investment grade (BB and below) loans which form about three per cent of its loan book would behave in FY21. Analysts at Credit Suisse also caution that BBB-rated corporate loans (a notch above BB book) forming about 27 per cent of loan book may be vulnerable to rising stress in the system.

While this aspect may be an overhang, Kotak Institutional Equities says that ICICI Bank continues to be its top pick. “The underlying conditions provide a favourable testing ground for the bank to differentiate itself in relation to its key peers,” it adds.

At 1.7x FY21 estimated earnings, ICICI Bank stock is positioned attractively for long-term investors.