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

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

The Street’s bullishness on ICICI Bank, at a time of extreme cautiousness around banking stocks, comes as a surprise. This is because analysts are not even sparing frontline names during ratings downgrade.

For one, it hasn’t received any downgrade so far, with all analysts having a positive rating (a couple have hold) on the stock, according to Bloomberg polls.

Second, seen in the larger context of a one-year price correction, ICICI Bank’s 17 per cent decline fares better than HDFC Bank’s or Axis Bank’s 24 per cent and 45 per cent fall, respectively.

That ICICI Bank was the last to face any re-rating in 2019 also positions it favourably during the current wave of correction.

 

 

What seems to be a blessing in hindsight is that ICICI Bank’s growth rate of around 12 per cent over the past four years has been slower than that of HDFC Bank (over 22 per cent) and Axis Bank (over 15 per cent). Therefore, ICICI Bank’s future growth rate may come closer to its past levels, while others may struggle.

In a report, analysts at J M Financial say the Covid-19 disruption is likely to lead to material pressure on multiple fronts for banks. “While growth slowdown and a jump in delinquencies is a given, restoration of normalcy will be long drawn,” they noted.

While advising investors to remain underweight on the sector, the brokerage has only two buy recommendations — ICICI Bank and HDFC Bank — in which they see relatively lower asset quality risks, a high capital base, and market share gains.

Despite moderating growth expectations for FY21, analysts expect ICICI Bank to grow at 10-14 per cent, and peers HDFC Bank and Axis Bank at 6-12 per cent.

The challenge for ICICI Bank lies in the behaviour of its below-investment grade (BB and below) loans in FY21, which form about 3 per cent of its loan book.

 

 

Analysts at Credit Suisse caution that BBB-rated corporate loans (a notch above BB) constituting 27 per cent of its loan book, may attract some stress.

While this aspect may be an overhang, Kotak Institutional Equities says ICICI Bank continues to be its top pick. “The underlying conditions provide a favourable testing ground for the bank to differentiate itself,” it adds. At 1.7x its FY21 estimated earnings, the stock is well positioned for long-term investors.