ICICI Bank: Boring Business, Compelling Valuation

| About: ICICI Bank (IBN)
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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 (NYSE: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.