I have expressed my opinion on the Indian markets recently, and I have also discussed ICICI Bank (IBN, Financial) as one of the stock picks from the Indian markets.
While India’s long-term growth potential remains intact, the equity markets were not spared from the global meltdown, and the recent correction is an excellent opportunity to buy some quality ETFs or individual stocks. Current valuations are good to buy ICICI Bank.
ICICI Bank is India’s largest private sector bank, and the stock has steeply declined by 30% for YTD16. The stock currently trades at forward PE (March 2017) of 9.9, and the bank’s valuation is the first reason to consider buying at current levels. The broad NIFTY index in India is currently trading at a PE valuation of 18.7, and this provides some insights on the undervaluation for ICICI Bank as compared to the broad markets.
From a macroeconomic perspective, low oil prices and low inflation (except food inflation) in India are the reasons to be bullish on ICICI Bank. The Indian central bank can be expected to cut rates in April, and this will be a positive for banking stock. With anemic economic growth, a rate cut is likely to boost credit growth. More than one rate cut is likely for the remainder of 2016, and this will keep momentum bullish for ICICI Bank.
Value unlocking is the next important reason to be bullish on ICICI Bank with the bank's insurance arm likely to be listed separately in the next 12 to 24 months. This is a long-term upside trigger but can add immense stock upside value. It is important to note here that the Indian insurance sector penetration remains very low, and the growth potential for the subsidiary is huge with the opening up of the sector to foreign investments.
ICICI Bank has also been ramping up focus on digital banking in India (still at a nascent stage), and this focus will deliver higher margins coupled with an increase in the customer base in the coming years. With a rising share of the working-age population and with India having the best demographics in the world, the digital banking initiative is likely to yield positive results. ICICI Bank is the first bank in Asia to launch Facebook (FB, Financial) banking and the second bank globally to launch Twitter (TWTR, Financial) banking.
Besides tapping the urban crowd through the digital banking initiative, ICICI Bank is also focused on the huge untapped potential in semiurban and rural India, and the point is underscored by the fact that the bank has 52% of branches in semiurban and rural areas. Increasing retail deposits from rural India has translated into robust CASA ratio of 45%.
With these positives, ICICI Bank is certainly worth considering for the near term as well as for the long term. Looking at the risks, a prolonged global slowdown would also imply that several export-oriented industries, as well as the services sector, are impacted in India. While a rate cut can provide some relief, there will be an increasing risk of higher NPAs if the slowdown continues. Crude oil prices can shoot higher if geopolitical tensions escalate in the Middle East. This factor can negatively impact monetary policy decisions for the banking sector.
Even with these risks in consideration, ICICI Bank is worth buying after a 30% correction in YTD16. In my view, the stock has bottomed out and investors can expect upside from current levels. As Indian markets surged, ICICI Bank was 5% higher in today’s trade in the Indian exchanges.
Disclosure: No positions in the stock.
