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Why I Am Bullish on ICICI Bank

Expect improved CASA ratio and increase in digital banking to benefit ICICI

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Dec 12, 2016
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ICICI Bank (

IBN, Financial), India’s largest private sector bank, has surged by 54% from year-to-date lows to current levels of $7.98. Even after the big rally, I remain bullish on ICICI Bank for more upside in the next 12 to 24 months.

Before talking about the company’s fundamental triggers, I must start with the point that the Indian government recently announced the demonetization of 500 and 1,000 value currencies in an attempt to curb black money. This has several implications for the banking system and one of the implications is that retail deposits have surged since the government announcement. I see this as a positive for ICICI Bank and other banks as an increase in retail deposits improves the CASA ratio.

For ICICI Bank, the CASA ratio has already been improving steadily from 38% in fiscal 2013 to 41.6% for the first half of 2017. As the CASA continues to improve, the bank’s net interest income margin is also likely to witness growth.

The second important point related to demonetization is that the government aims to encourage digital payments, which would also curb black money. From this perspective, ICICI Bank is well positioned with a good mobile banking interface, comprehensive digital wallet and being the first bank in the country to roll out a software robotics system. I therefore expect ICICI Bank to hold an edge over other banks (public sector banks, in particular) when it comes to digital banking solutions.

The economic survey of India for 2016-17 shows that only 58% of the population in the country have access to basic banking service, and this is another important factor to consider. In particular, banking access is weak in rural India and as the government pushes more for adoption of banking and digital payments than cash transactions, I expect basic banking access to surge in the coming years.

Even on this front, ICICI Bank is well positioned with 52% of the bank’s branches in semiurban and rural areas. India’s largest private sector bank is therefore well positioned to capitalize on the current scenario and penetrate further in rural areas that hold robust long-term potential in terms of deposits, credit growth as well as insurance.

The reason for specifically mentioning insurance is the fact that ICICI Bank recently listed its insurance subsidiary in the Indian exchange and the insurance business holds immense potential; in India. Just to put things into perspective, the insurance business in India has grown at a CAGR of 16% in the last 15 years and there is significant room for penetration. As the insurance business for the subsidiary grows and shares trend higher, ICICI Bank will also move higher. I would like to mention here that ICICI Lombard is India’s largest private sector insurer since 2004 and is well positioned for sustained growth.

Coming back to ICICI Bank, amid the positives, I see the following risk in the near term, but I would use this as an opportunity to accumulate the stock. As mentioned earlier, demonetization of higher value currency in India has been done with the aim to curb black money. However, with 80% of cash sucked out of the economic system, there are unintended consequences. In particular, there will be a significant economic slowdown for the next three to six months, and it also implies weak credit growth for the banking system.

However, when considering the stock from a 12- to 24-month perspective, the risk does not seem significant, and I would advise buying the stock on any potential correction of 10% to 15%. Once new currency is in the economic system, normal economic activity is likely and with India’s interest rate trajectory being lower, I expect strong credit growth driven stock upside in the long term.

Disclosure: No positions in the stock.

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