Like the rest of the world, India is currently experiencing an economic slowdown. The recent efforts of monetary easing by the Reserve Bank of India will have a positive impact on the Indian economy in general, and its banking system in particular. Therefore, the best way to play a possible Indian economic recovery is to go long the ADRs of ICICI Bank (IBN). The bank has a robust capital base combined with impressive asset quality. The bank is currently valued at a premium when compared to most of its peers in the Indian and U.S. banking industries. However, if the economy starts to recover, ICICI Bank will be a major beneficiary.
Indian Economic Conditions
The Indian economy is slowing down. This we say after comparing the current GDP rate of 5.5% with the 2007 rate, which was at least 3% higher. The economy has been hit by a prolonged high inflation rate and the resultant high interest rates. As a boost to the economy, the Federal Reserve Bank of India introduced easing. Six days ago, the Indian Central Bank introduced certain unexpected measures to stimulate the country's economy. The market was expecting a further policy cut. However, the bank left the repo rate unchanged at 25 basis points. Instead, the bank decided that it would be better to trim the cash reserve ratio (CRR) by 25 basis points to 4.5%. This was done to curb inflation, as the central bank is more focused on reducing inflation in the short term. The Indian central bank's monetary easing comes in the backdrop of monetary easing by the European Central Bank and the Federal Reserve of the U.S. Furthermore, the Indian government is ready to introduce a package to boost Indian real estate markets by easing lending requirements and the provisioning requirement for Indian banks.
Cash Reserve Ratio (CRR) is the amount of money that commercial banks keep with the central bank. The commercial banks don't earn any interest on this money. So far in 2012, the CRR has been sliced by 150 basis points. The slicing will have a direct impact in the form of an injection of INR 170 billion into the Indian banking system, benefiting banks in particular and the economy in general.
ICICI Bank's Recent Quarter's Performance Review
On Friday, the share price of IBN surged by 5.6% on speculation regarding the government's move. The bank, with a market cap of $22.9 billion, will be among the major beneficiaries of the Indian government's easing efforts. At the current price of $39.74 per share, IBN's shares are trading in proximity to their 52-week high of $40.45.
The bank witnessed a significant 36% YoY bottom line surge in the fiscal first quarter of 2013. The improvement was primarily associated to growth in both net interest income and fee-based income. The bank was able to increase its net interest margin by 40 basis points to 3.01% from 2.61% a year ago. However, the operating expenses surged significantly, which resulted in net interest income being dampened.
The bank has a robust capital base, as represented by its strong capital adequacy ratio of 18.54%, and a Tier-1 capital adequacy ratio of 12.78%. Asset quality remained stable, as the bank's non-performing assets ratio of 0.61% was in line with the previous quarter's 0.62%. However, the asset quality was still better than a year ago.
IBN trades at a significant premium to its book value when compared to most of its peers in the U.S. The bank has P/B of 2 times, against 0.45 times for the Bank of America (BAC) and 0.54 times for Citigroup (C). The two American banks have a market cap significantly above ICICI Bank. Its competitor Punjab National Bank is trading at a P/B ratio of 1.08 times. However, IBN's price to core book value multiple is 1.5x.