India’s central bank once again surprised with a 25 basis points rate cut, which happens to be the second surprise rate cut in 2015. With prospects of further rate cut, this article discusses the reasons to be bullish on ICICI Bank (IBN, Financial), which is India’s largest private sector bank.
The first reason to be bullish on ICICI Bank is the expectation of further interest rate cut over the next 2-3 months. According to the Indian central bank, the disinflation pressure in India is accelerating and the likely action of the central bank is to cut interest rates in order to boost growth. I expect the central bank to cut interest rates by another 50-100 basis points in the coming months and this will further boost the stock, as lower interest rates imply higher credit growth. A 50-100 basis points interest cut is likely considering the fact that India’s inflation is at 5.1%, while the repo rate is still at 7.5%.
The second reason to be bullish on ICICI Bank is India’s budget for 2015-16. Overall, the budget is positive and has emphasis on growth. One of the key points in the budget is housing for all by 2022. If this target has to be met, there is likely to be a big housing boom in the coming years and this will trigger strong growth for ICICI Bank’s housing loan segment. Between the period September 2013 and September 2014, the company’s housing loan credit growth has been 26%, and I expect credit growth in this segment to improve in the coming quarters. Lower interest rates will also support growth in housing loans in the coming quarters.
The third reason to be bullish on ICICI Bank for the coming quarters and also for the long-term is a potential value unlocking that is likely to happen in the company’s insurance segment. The general and life insurance segment is currently a subsidiary of ICICI Bank. However, with big reforms expected in the insurance sector in India in 2015, the insurance arm is likely to list as a separate entity relatively soon. This will translate into significant value unlocking for shareholders.
Besides these upside trigger factors, I must add that ICICI Bank is among the best capitalized bank in India with a capital adequacy ratio of 17.4% and a tier I capital ratio of 12.75%. Further, ICICI Bank has also been increasing its CASA with a high percentage of retail deposits. Higher retail deposits imply a lower cost of funds and will be positive for the bank’s net interest income. Therefore, in the coming quarters, I expect robust margins also with strong credit growth coming from lower interest rates.
Coming to the risk factors, I believe that global oil prices are the single biggest risk for India for the next few years. Geo-political tensions are high globally and if crude oil surges, India’s inflation will again climb, forcing the central bank to increase interest rates. Higher inflation will also impact the consumer disposable income and savings. This will translate into lower demand for housing and automobile loans. While this risk factor remains, I am of the opinion that this risk factor is unlikely to play out in the foreseeable future.
In conclusion, ICICI Bank is certainly an investment worth considering at current levels with a time horizon of 1-2 years. In particular, I believe that 2015 will be a strong year for the bank as India’s GDP growth accelerates through policy reforms in the coming quarters.
