Decoding the bullishness on ICICI Bank as other lenders follow caution

All analysts tracking it are optimistic on the stock, which hasn't seen any downgrade so far

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, ICICI Bank stands out as an exception. For one, it hasn’t received any downgrade thus far and all analysts tracking the stock have a positive rating (a couple have hold) on it according to Bloomberg polls.

Also, seen in the larger context of one-year price correction, ICICI Bank’s 10 per cent decline fares better than HDFC Bank or Axis Bank’s 20 per cent and 41 per cent fall, respectively. That ICICI Bank was the last to join 2019’s rerating party also positions it favourably in the current wave of correction.

What seems to be blessing in hindsight is that, whether out of design or default given how it was battling with bad loans until 2018, ICICI Bank’s growth rate of around 12 per cent in the past four years, has been slower than that of HDFC Bank (over 22 per cent) or Axis Bank (over 15 per cent). Therefore, ICICI Bank’s calibrated growth rate may come handy (closer to past rates) when most others would be grappling to grow closer to their past trends, particularly on its retail side.

In fact, analysts expect the bank to fare relatively better in the near- to medium- tern. In a report on the sector, 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, it is critical to note that restoration of normalcy will be a long-drawn process," they note. While advising investors to remain underweight on the sector, the brokerage has only 2 buy recommendations – ICICI Bank and HDFC Bank, where they see relatively lower asset quality risks, a strong liabilities defence, high capital base and natural accumulation of market share once things turn.

In terms of FY21 loan and earnings growth estimates, ICICI Bank figures high among top large private players.

Also, with nearly 50 per cent of its retail assets being home loans (secured) and ICICI Bank’s unsecured loans at nine per cent, it gives investors comfort that even if there should be a problem on retail asset quality, the pain may not be too harsh.

“ICICI Bank continues to be our top pick as we believe that the underlying conditions provide a favourable testing ground for the bank to differentiate itself in relation to its key peers,” say analysts at Kotak Institutional Equities.  

That said, investors shouldn’t take their eyes of the below-investment grade (BB and below) loans which form about three per cent of ICICI Bank’s loan book. Also, Credit Suisse cautions that the BBB-rated corporate loans (a notch above BB book) forming about 27 per cent of overall loan book may be vulnerable to rising stress in the system. “We expect slippages to rise and increase our FY21 credit cost by 26 basis points on higher provisioning,” they note. ICICI Bank’s credit cost stood at 1.3 per cent in December’19 quarter (Q3).

At 1.8x FY21 estimated earnings, ICICI Bank stock, which is up nearly 5 per cent today, is positioned attractively for long-term investors.