Investment overview
ICICI Bank Ltd. (IBN, Financial) is India’s largest private sector bank and holds immense potential for the next three to five years.
Recently, ICICI Bank touched a high of $9.7. The stock has subsequently corrected by 2.4% to current levels of $8.5. I see this near-term correction as a good buying opportunity and will discuss some long-term triggers for the company.
While the banking stock has seen near-term correction, I must mention ICICI's stock has gained 24.8% year to date. Overall, I expect the positive long-term momentum to sustain.
The challenges are temporary
While I am bullish on India’s largest private sector banks (HDFC Bank Ltd. (HDB, Financial) and ICICI), I must mention at the onset there are near-term challenges for the Indian economy.
For example, the Indian IIP (index of industrial production) growth for first-quarter 2018 was 2% as compared to IIP growth of 7.1% in first-quarter 2017. Recent demonetization followed by the implementation of a goods and services tax (GST) has impacted economic growth.
However, GST is the way forward and the Indian economy is likely to bounce back in the next four to eight quarters.
According to HSBC, India is likely to become the world's third-largest economy by 2030. The same report says by 2019-20, the short-term disruptions to the economy are likely to be settled.
The point I am trying to make is temporary headwinds to economic growth are not a concern and India is likely to be the fastest-growing economy in the world for the next decade.
This makes Indian banks attractive on any potential correction.
Strong retail penetration
India’s growth story is likely to be driven by a rising middle class with an increase in per capita income, as suggested in a Live Mint article.Â
The point is retail loan penetration in India is still low and is likely to grow at a robust pace in the coming years.With a 53% portfolio mix of retail loans, ICICI Bank is well positioned to benefit.
The strong growth traction is already seen in this segment with retail loans growing at a compound annual rate of 22% in the last 4.5 years. As the chart below illustrates, the share of retail loans has also increased.
With the Indian government’s ambitious plan for “Housing for All,” I see a sustained jump in retail loans. I am specifically mentioning the home loan segment as it comprises 54% of retail loans.
Quality funding profile
The focus on the retail segment has positive implications for ICICI Bank, even from a funding profile.
To put things into perspective, ICICI Bank reported a CASA (current account, savings account) ratio of 29% for the period ended March 2009. As of June, the CASA ratio has jumped to 49%, an 18% CAGR in CASA deposits since March 2009.
With a focus on retail deposits, strong semi-urban and rural penetration and greater efforts toward digital transactions, I believe ICICI Bank will continue to see sustained growth in CASA.
HDFC Bank is a good example here as it has a robust net interest income margin coming from high CASA. In the coming years, I expect this margin to improve for ICICI Bank as well.
The NPA factor
One of the key differentiators for HDFC Bank over ICICI Bank is the level of non-performing assets (NPA). When I wrote on HDFC Bank, I pointed out the bank reported gross and net NPA of 1.05% and 0.33% for March 2017.
For ICICI Bank, the gross NPA as of first-quarter 2018 was 7.99% with a net NPA of 4.86% for the same period. For Indian banks, increasing NPA is a medium-term concern, but the major issue is with public sector banks rather than private sector banks.
With a few exceptions, all public sector banks currently have gross NPAs over 10%. Indian Overseas Bank (BOM:532388, Financial) and IDBI Bank Ltd. (IDBI, Financial) have gross NPA to the tune of 22.5% and 21.3%.
With major issues in public sector banks, I see private sector banks such as ICICI and HDFC witnessing higher investor attention. For ICICI, provisioning remains robust and retail loan NPAs remain low. Importantly, as the economy recovers, I expect NPAs to decline.
Conclusion
ICICI Bank has declined after a relatively flat listing on the Indian exchanges for its general insurance subsidiary. While there are concerns related to the economy, I see short-term headwinds as a good long-term investment opportunity.
ICICI Bank should be considered for investment with a three- to five-year horizon. As the Indian economy witnesses renewed growth, the bank is likely to outperform.
Disclosure: No positions in the stocks discussed.
