Good Monsoon Can Take ICICI Bank Higher

Low inflation likely to translate into more rate cuts, boosting credit growth

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May 25, 2016
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ICICI Bank (IBN, Financial), India’s largest private sector bank, has seen subdued stock performance year to date with the stock declining by 14.0%. However, the worst is over for India’s private banking sector. ICICI Bank is likely to be a performer, and current levels are attractive for fresh exposure to the stock.

India’s public sector banks are struggling with rising NPAs, and bad times will continue for public sector banks. This also implies that investors bullish on the banking sector will reallocate funds from public sector banks to private sector banks where the NPA crisis is not so pronounced.

Coming to other macro levels factors, it is likely that El Nino will give way to La Nina, and this would imply a good monsoon season in India. This is an important positive trigger for ICICI Bank in several ways.

First, good crops will ensure that food inflation remains subdued, and the Indian central bank has the headroom to cut interest rates in the coming quarters. This is likely to be positive for strong credit growth.

Second, there is increasing focus and penetration of ICICI Bank in semirural and rural India. If the monsoon season is good, I expect rural consumption to tick higher, and this will be positive for credit growth. Further, the bank’s CASA has been improving on higher rural deposits, and that trend can accelerate on a good monsoon season. For ICICI Bank, the CASA ratio improved from 29% in March 2009 to 45% in December 2015.

Potential value unlocking from the insurance subsidiary is yet another reason to be bullish on ICICI Bank for the long term.

The bank’s life insurance business market share increased from 7.2% in fiscal year 2014 to 12.1% for the ninth month of 2016. With low insurance penetration in India and strong growth in new insurance premiums, ICICI Bank’s life insurance subsidiary has good times ahead.

The general insurance business is a private sector market leader with overall market share of 9.1% for the ninth month of 2016. In India, the general insurance subsector also has immense growth potential and can translate into a significant growth driver for the bank.

The reason for focus on the insurance business is that ICICI Bank is considering value unlocking through separate listing of the insurance subsidiary. While the timeline is not clear, it will deliver significant stock upside once the transaction is through.

ICICI Bank has been depressed in the last few quarters, and this is a good opportunity to consider exposure to this quality stock. India’s economy is likely to be the fastest growth economy (overtaking China), and there is huge impending growth. With government policies moving in the right direction, there is big upside for the banking sector in terms of consumer and industrial credit growth. Further, lower oil prices have benefited the economy, and the overall outlook remains bright for coming years.

Considering all these near-term as well as long-term factors, ICICI Bank is worth considering at current levels for the long-term portfolio. In a scenario where the outlook for the U.S. banking sector is not that great, ICICI Bank can be a portfolio catalyst in that sector.

Disclosure: No positions in the stock.

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