ICICI Bank (IBN, Financial), which is India’s largest private sector bank, has witnessed strong buying interest from Ken Fisher (Trades, Portfolio). According to Fisher’s latest filing on June 20, 2015, the legendary investor’s holds 10,255,919 shares of ICICI Bank, representing a 27.9% increase in holding as compared to the last filing in March 2015. Investors can track these Guru stock actions in Real Time Alerts by Guru Focus.
In this article, I will discuss the reasons for my bullish view on ICICI Bank for the long term. I believe that ICICI Bank is one of the best investment options in the banking sector at this point in time. However, the investment horizon needs to be for 3-5 years if investors are looking for stellar returns.
I will start with India’s macroeconomic scenario, and that is the first reason to be bullish on ICICI Bank. Due to lower oil prices, India’s inflation (WPI and retail) have trended lower and this leaves ample room for the Indian central bank to cut policy rates in 2015. Interest rate cut is likely to accelerate credit growth and ICICI Bank, being India’s largest private sector bank, is well positioned to benefit. In addition, I must mention that India’s reforms have been slow, but moving in the right direction and investors can expect higher GDP growth numbers in the coming quarters. Strong economic activity will also benefit ICICI Bank’s prospects.
Coming to specific factors that are positive for ICICI Bank, I believe that the bank’s focus on the retail segment and the focus to improve the CASA are critical stock upside triggers. The bank’s average CASA ratio for 1Q16 was 41.1% as compared to 39.5% in 1Q15. As a result of this, the bank’s net interest income margin has been increasing steadily and I expect this trend to continue in the coming quarters.
One of the major reasons to believe that CASA will continue to trend higher is the fact that ICICI Bank has been focused on rural and semi-urban areas where retail deposit growth is robust due to lack of penetration of the banking system in these areas. As of June 2015, ICICI Bank had 892 rural branches as compared to 464 in March 2013. For the same period, the number of semi-urban branches increased from 989 to 1,215. Currently, the semi-urban and rural branches make up for 52% of the bank’s total branches. I believe this focus will continue to deliver positive results for ICICI Bank from a CASA and net interest income margin perspective.
I also believe that interest in ICICI Bank among Gurus is due to the company’s life insurance subsidiary, which can potentially get listed in the next 2-3 years. Besides Fisher, Richard Pzena (Trades, Portfolio) bought ICICI Bank in last report holding.
Coming back to the life insurance subsidiary, it was reported in March 2015 that ICICI Bank is in talks with Temasek Holdings Pte and Carmignac Gestion for 5% stake sale for a consideration of $300 million. While the talks did not translate into stake sale, it gives an idea of the likely valuation ICICI Bank is seeking for its insurance arm. If the insurance arm is indeed valued at $6 billion, there will be significant value unlocking once the subsidiary is separately listed. I believe that this is entirely likely in the next 12-24 months if positive equity market conditions sustain in India.
Another important point to note from the latest quarterly results is that the net NPA ratio for quarter ended June 2015 was 1.4%, the same level as March 2015. It is worth noting that the net NPA was 0.87% for June 2014. In my view, as economic activity improves, NPAs are likely to decline in the coming quarters. Further, it is also important to note that the gross NPA ratio declined to 3.26% as of 1Q16 as compared to 3.29% for 4Q15. Therefore, the worst in terms of non-performing asset might be over for ICICI Bank and this is also positive for stock upside.
In conclusion, ICICI Bank has seen improvement in key parameters such as CASA ratio, net interest income margin, NPAs and retail credit growth. In my view, this is just the beginning of good times for the bank as policy rates decline, GDP growth accelerates and retail disposable income increases on lower oil prices. Monsoon was also a key worry for India and the monsoon so far has been largely normal. All these factors combine to make ICICI Bank an attractive investment option to consider at current levels. The stock can be a potential portfolio catalyst considering an investment horizon of 3-5 years.
