ICICI Bank (IBN, Financial) is India’s largest private sector bank. The Indian central bank recently pointed out that there are clear signs of economic recovery in India. The Indian economy is also likely to gain traction in the coming quarters as the government attempts to lure foreign investments by opening up several sectors to foreign direct investment.
Amidst economic positives, there are reasons specific to ICICI Bank that make me bullish on the stock and worth holding for the next three to five years. While I am talking about a long-term horizon, I expect the stock to trend even higher in the near term.
From a stock price perspective, ICICI Bank has seen a difficult year so far with the stock declining by 28% year-to-date. While the Indian central bank has cut interest rates in 2015 to spur credit growth, sluggish growth in the local and global economy has offset the rate cut positives. As I mentioned above, growth is likely to gain traction in the coming quarters and 2016 may be a good year for ICICI Bank.
The first trigger that may unlock value will likely come from the banks insurance sector. ICICI Bank recently sold a stake in its insurance business and it values the company’s subsidiary at $5 billion (ICICI Bank holds a 68% stake). The insurance subsidiary IPO will come soon and that will result in significant value unlocking for existing ICICI Bank shareholders. The insurance business market share has increased from 7.2% in FY14 to 12.4% in 1H16. Therefore, I expect the subsidiary’s valuations to inch higher in the coming quarters.
The second important point to note is that ICICI Bank's loan mix consists of 44% retail loans, 33% domestic corporate and SME loans and 23% overseas branches loan. If the Indian central bank is right on economic recovery, I see strong credit growth in the coming quarters in the retail segment and the domestic corporate segment.Â
Another important factor that will continue to improve the bank’s net interest income margin is the rising current and savings account ratio and continued penetration in semi-urban and rural areas. ICICI Bank’s net interest margin has improved from 2.49% in FY 2010 to 3.53% in 1H16. In the last four to five years, the bank’s CASA deposit has also increased at a CAGR of 17%. I expect the bank’s CASA to improve further, as 52% of the branches are now located in semi-urban and rural areas and this generally provides high retail savings deposit.
From a risk perspective, the prolonged global slowdown can hurt the Indian export sector and several corporate and SME are export-oriented. This can translate into higher non-performing assets from the corporate sector, even if the Indian economy gradually recovers. The positives far outweigh the risk, however, and this is especially true in a scenario where ICICI Bank has already corrected by 28% year-to-date.
From a shareholder value creation perspective, I expect meaningful stock upside in the next 12 to 24 months. In addition ICICI Bank also offers a dividend of 16 cents per share, which is likely to increase steadily. ICICI Bank reported consolidated ROE of 15.2% for 1H16 and the bank expects to increase consolidated ROE to 17% to 18%. I see shareholder value creation on several fronts, making ICICI Bank a quality portfolio stock.
Disclosure: No positions in the stocks mentioned.
