ICICI Bank: Boring Business, Compelling Valuation 17 comments
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Srinath Vasan is a leading analyst at an asset management company in India who specializes in banking stocks. His commentary and conclusions are rooted in his extensive knowledge of accounting practices (and accounting shenanigans), coupled with fundamental analysis and a good dose of common-sense.
This following is a very interesting case study, in which he asks: What differentiates the boys from the men when it comes to banks?
When a bank is able to perform, even when the external environment is not too conducive for business, you are looking at a potential man. ICICI Bank (NYSE: IBN) (Bombay: 532174.BO) was the first private (non-nationalized) bank to tap into the liberalization of credit in India. Soon, any Tom, Dick or Harish could sign up for a loan at low rates.
This led to a growth in the bank’s retail book - of 39% in FY07. As the central bank started raising rates, ICICI Bank started huffing and puffing, trying to catch up to their prior heady rate of growth, but the retail loan book grew at a mere 4.2% in FY08.
This is substantially better than what ICICI’s peers (including the nationalized banks) have been able to achieve in a difficult FY08 - which is why he had me look at Wells Fargo (WFC) (as WFC is the lone performer in what is now a "nucular" [sic] wasteland of banking stocks).
Now, ICICI Bank is looking at the international market to propel their growth, and this is where the company needs to be careful - since the subsidiaries are highly levered. Their numbers look like:
| Rupees Billion | Net Worth | Balance Sheet Size |
|---|---|---|
| ICICI Bank UK PLC | 18.0 | 354.0 |
| ICICI Bank Canada | 12.0 | 115.0 |
Conclusion: The company trades at 1.3x book value - which is at a discount to its 52-week high valuation of 3.5 times book, and has a current dividend yield of 2%. (Calculations done using share price data from Bombay: 532174.BO.)
Srinath likes this company , as they are in a boring business, while their valuation is compelling.
Disclaimer: All numbers have been taken from annual reports of FY08 and FY07, Srinath and Bapcha do not hold the stock but Srinath’s family, friends, clients may hold the stock.
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This article has 17 comments:
ICICI is targeting home loans [both Rupee and Dollar denominated loans] - with 20% down - for Desis [Indians] who want to own a home in India in addition to what they have here in the US.
Bapcha bapcha.com
indiaplay.blogspot.com...
..and (till yesterday) took pride in bringing home to Indians, the benefits of US Banking sectors visionary growth.
I think that is what every investor, at least in the US, has in mind now.
D
valuestockinvestors.bl.../
They already have reported their subprime and Lehman exposure, so that news is baked into the stock.
The upside is that India is planning to stop any rate hikes going forward and might actually cut rates which should be beneficial for IBN.
Also, the cash reserve ratio is being reduced for more liquidity.
If the markets stabilize, I see IBN around $30 by Oct end, a good 10-15% bump.
This is a time bomb waiting to implode. My 2p.
1) They can leverage their low cost Indian operations to their advantage
2) The cost of raising deposits is low compared to the interest rates that they have to pay in India
3) There is a Huge Demand for Foreign Currency Loans in India and rasing these deposits allows them to cater to that demand.
4) They wish to tap into the Huge Indian Disaporia living in these countries who will hopefully also use their services in India. In fact I believe Indian Abroad can link their Foreign Accounts with their Indian Accounts and freely transfer money etc. One can also transfer money to relatives.
5) Attractive rates for Internet banking allows them to scale their operations easily without having to open expensive branches
I would also like to add that I am not so positive on ICICI bank as this analyst. While he is correct in saying that they are the largest private bank etc etc and their loan book is one of the largest i feel that the ground level realities show a different picture.
India does not have a robust credit rating system like the US ( The banks have just started a rating system a few years ago) and so there is no easy way to meausre an individual's credit worthiness. Thus defaults are far far more difficult to deal with that in America or UK.
ICICI bank has been super aggressive in expanding its loan protfolio. They realized on Direct Selling Agents (Brokers) to sell loans for all kinds and there has been substansial amounts of misselling, loans qualification parameters ignored , mis representation of documents and even outright fraud.The entire system was geared towards meeting and beating the targets.
This is now catching up with them. Defaults are rising. Their system could not and did not keep up with their growth and is strained to the point of bursting.
To be fair most financial institutions operating in the same space are suffering the same fate. GE & Citibank (Via GE Money & Citi Financial) are both bleeding money and have curtailed their operations drastically. ICICI bank was even more agressive than them !!
Indian for the most part still prefer the Public Sector Banks (owned by the Government) and consider them to be safer than private sector banks. These Public Sector banks were considered written off has beens and every body predicted that the superior service from private banks wipe them out. But suprisingly these PSU banks have brushed off the dust they had been accumulating and risen to the challenge. They have a formidable advantage over the new private banks, they have detailed histories of their customers accounts and thus have a better understanding of their finances.
I have based my comments on my experiences with ICICI bank and from what I have heard around town. I personally do not have any relationship with ICICI ( had taken an Auto Loan once).
Any way long story short. I would be hesitant to put money into this stock.
I like ICICI bank, but only below Rs 550. My 2 cents.
The author has put the book as 1.3 X to wonder why is that the case.
In yesterdays notes ICICI bank came up with Indian government backing up that they are well capitalized. I see some thing fishy, other wise why they want the Indian govt want to back them up.
To say that I do not have any relationship to ICICI bank not do I own any stock.
On a more positive note, ICICI does have an excellent Life Insurance business [growing at an over 40% clip].
Bapcha
1. Financials speak for themselves...PEG for ICICI is 0.6 compared to HDFC 0.8; Price to book for ICICI 1.9 vs. HDFC 3.8
2. Markets around the world are over-reacting based on sentiments and less on information like someone said "Buy on rumors, sell on news" - The reason why the Indian govt had to back ICICI is because ICICI has more business/exposure to North American markets than any other private Indian bank - Indian markets are known for their knee-jerk reaction to happenings in US markets resulting in 3-mile long lines outside ICICI branches to get money
3. Cash is the king in current environment, both banks have been sitting on pretty similar amounts of cash (much better than JPM or the likes)
---Enough data to decide for yourself which bank is undervalued
"Srinath Vasan is a leading analyst at an asset management company in India who specializes in banking stocks."
Quote:
"What differentiates the boys from the men when it comes to banks?"
..looks like he's get separated from the men somewhat,eh?