A roadside vendor arranges fruits at a stall as pedestrians walk past a ICICI Bank Ltd. branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

ICICI Bank Surges As Corporate-Focused Lenders Catch Up

Shares of ICICI Bank Ltd. jumped to their highest in three months after Morgan Stanley said it expects the stock to double in two years and India’s largest private lender tried to allay concerns about its accounting policies.

That came after the newspaper Mint reported that the lender had masked its bad loans by a change in accounting policy that wasn’t communicated to investors. The bank refuted the report, saying it had made full disclosures on their bad loans and unsecured portion of doubtful assets in financial statements and annual report.

Shares of ICICI Bank, whose Managing Director and Chief Executive Officer Chanda Kochhar faces a probe into allegations of impropriety, rose as much as 8.5 percent, the most in three months, today. The stock has gained more than 13 percent since the lender announced a surprise loss in the first quarter ended June, after it set aside more money to cover for bad loans. The bank’s net stressed assets, however, declined and it improved its provision coverage ratio by 600 basis points quarter-on-quarter to 66 percent.

Bullish Bet

Morgan Stanley, which selected ICICI Bank as its top banking pick in Asia, said the narrative for ICICI Bank can shift from bad loans to growth fairly quickly. It expects the stock to double in two years on the back of growth and sees the risk-reward being favourable for investors at the present valuation of 1.2 times the estimated book value for financial year 2019-20.

The investment bank highlighted that the foreign ownership at 60 percent was close to its lowest in 15 years. “ICICI’s weight in our Asia banks portfolio is 15% – heaviest for a single stock – given the attractive long-term risk-reward”, Anil Agarwal and Sumeet Kariwala, equity analysts at Morgan Stanley, wrote in their note.

Morgan Stanley, while retaining the ‘overweight’ stance, increased the price target for ICICI Bank to Rs 460, the highest among analysts tracked by Bloomberg and implying an upside of about 37 percent.

The investment bank is not alone though. As high as 90 percent of the analysts tracking the stock has a ‘Buy’ rating, according to Bloomberg.

Corporate-Focused Lenders Outperform

Other corporate-lending focussed banks haven’t fared badly either, with their stocks outperforming retail lenders in the past one month. More so after earnings of ICICI Bank, Axis Bank Ltd. and Bank of Baroda Ltd. showed reduced stress and as focus shifts to recoveries.

One-Month Performance

(Source: Bloomberg)
(Source: Bloomberg)

Bank of Baroda, State Bank of India Ltd. and Axis Bank have been the top Nifty Bank gainers in the last one month, while retail-oriented Kotak Mahindra Bank and HDFC Bank declined. Better capitalisation ratios and cheaper valuations also favour larger corporate-heavy banks.

Even Morgan Stanley suggests to. With aggressive recognition and provisioning, net bad loan formation has slowed and should remain low, according to the investment bank. That, it said, will be a catalyst to consider for corporate lenders.