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Home / Markets / Mark To Market /  ICICI Bank needs more than capital to break free from the pandemic curse

CICI Bank Ltd has all the love from analysts, but its shares have hardly broken the curse of the pandemic, like some of its peers have in the past three months.

Despite a 11% gain in the past three months, the company’s shares are down 34% from its pre-covid highs. HDFC Bank Ltd and Kotak Mahindra Bank Ltd shares, on the other hand, are down just 19% and 22% from their highs.

Now that the private sector lender has raised 15,000 crore capital through a qualified institutional placement (QIP), it may be able to break the ice with more investors.

The QIP proceeds will boost the bank’s already strong capital adequacy ratio further, but this is not a differentiating factor. While the bank may have raised money, its peers, too, have done so.

Axis Bank raised 10,000 crore and HDFC Bank is already in line to gather some funds. Kotak Mahindra Bank had done one round much before. So, what will set ICICI Bank apart? To know that, it pays to see what kept the bank from taking advantage of the recent rally in the equity markets.

The lender entered the pandemic with a bad loan pile larger than its peers. In the first round of moratorium, ICICI Bank had a higher portion of its loan book going into moratorium than its peers. Even in the second round of moratorium, which saw levels drop to single digits for most lenders, ICICI Bank had 20% of its loan book getting a repayment holiday.

It showed that the lender has more troubled borrowers than other banks. But what is key now is how much of ICICI Bank’s loan book goes into one-time restructuring. High moratorium levels do not give confidence to investors that the bank can keep restructuring levels low.

Analysts at Jefferies India Pvt. Ltd expect 4-8% of loans to get restructured for the banking system.

ICICI Bank may have to show levels that are lower than the industry to gain investor confidence.

That said, the restructuring exercise and the regulatory forbearance mean that visibility on asset quality for banks, in general, is very low for FY21. Investors will have to contend with suppressed bad loan numbers simply because there is a regulatory forbearance to not label defaulting loans as bad.

The capital raised is surely a shot in the arm for ICICI Bank. Now, all it needs to show is that it will go more towards growth than towards provisioning; this will help attract investors. The bank trades at about 1.7 times its book value for FY21 using Jefferies’ estimates, far lower than HDFC Bank’s 3 times valuation and Kotak Bank’s 4.4 times price-book multiple. Valuations are certainly not a barrier for ICICI Bank investors.

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