ICICI Bank a Great Buy Right Now
Even before rumour mongering took hold of the Indian equity markets at the beginning of October, ICICI Bank, India’s largest private sector lender had already taken a beating, down some 56% from the start of the year when the Sensex hit its all time highs. Rumours of ICICI Bank’s exposure to Lehman Brothers and the questioning of its financial health began circulating through anonymous emails and text messages. That was enough to prompt a run on a few of the bank’s branches in the southern city of Hyderabad.
ICICI Banks shares lost 25% of their value in just 3 days from October 7th-10th after which, management decided they had enough and filed a complaint with the police in both Mumbai and Coimbatore claiming that the bank was a victim of an orchestrated campaign by short sellers driving down the price of its stock. ICICI bank went on a PR offensive 3 days later, sending emails to all its customers, assuring them that ICICI Bank had “zero exposure to US Subprime” and that it was one of the most well capitalised banks in the country. Both Moody’s and S&P issued statements that said ICICI Bank’s credit fundamentals were sound and the stock shot up 24% in just 2 days.
ICICI does indeed have the greatest exposure to international credit markets of all the Indian banks, both as an issuer and as a lender; to some extent investor apprehension was understandable. 25% of the banks consolidated assets are owned by its international business’s. ICICI bank is also India’s most aggressive lender, though it does face stiff competition for that title on a daily basis. The bank has more than 9 million credit cards outstanding making it the largest credit card issuer in the country and easily the largest unsecured lender.
Torrid Growth in Earnings
ICICI bank has profited from the unprecedented growth in the Indian economy over the last 5 years, which has been averaging close to 9% a year for the last 5 years. ICICI Bank’s net profit in the year ending March 2007 grew by 22% and then grew by a further 37% in the year ending March 2008. Though that kind of pace is unlikely to continue into next year with the Reserve Bank of India (RBI) having been on a tightening cycle for most of the last year, trying to reign in rampant inflation which has been in double digits, hitting 13 year highs.
The financial health of ICICI bank is an important barometer for the rest of India, the bank provides support for Indian companies with global ambitions and in an interview with Business Week, Chanda Kochhar, ICICI Bank Joint Managing Director and CFO said “The majority of our international lending business is to meet the foreign currency needs of Indian corporates.”
ICICI Bank’s aggressiveness overseas is why it is so much more vulnerable to malicious rumours than its peers. Its ownership structure seems to be a cause of concern to the Indian retail investor, since it is neither owned by the Indian Government or part of a larger business group. It is one of the few Indian banks where foreign ownership has reached the legal maximum of 74%. Indeed ICICI bank boasts of some marquee names in finance as being its investors, including Private Equity firm Warburg Pincus and Singapore’s quasi sovereign wealth fund Temasek. Though the credit crisis has caused banking stocks to become pariahs ICICI Bank officials claim that the foreign part of its ownership structure remains intact.
A Safe Bet Regardless
Though some investors remain fearful about ICICI Bank’s exposure to overseas credit markets its capital adequacy ratio, the ratio of the bank’s capital to its risk was a very reassuring 13.2% at the end of June, though lending in overseas markets was in fact increasing rapidly. Year on year loan growth for its British and Canadian operations was 85% compared to just 13% for the bank as a whole, according to Business Week. Some investors also complain that the banks Return on Equity is low in comparison to its peers, in fact its ROE is one of the lowest in the industry, though this can be attributed to recent capital raising exercises. ICICI bank has raised some $5 billion on domestic and international markets over the last two years.
Investor fear in the overall health of ICICI bank is largely unfounded, though it does have exposure to international credit markets that was no excuse for outright paranoia. It is perhaps prudential that the bank does indeed have an overseas business and has diversified away from India to some extent. Should there ever be a recession in India and economic contraction investors would be complaining that its earnings base was not diversified enough. The fact of the matter is that the bank could easily restructure the extent to which it is dependent on overseas earnings and is well positioned as a leader in its domestic market which though has its own liquidity problems, is not suffering from a seizure in interbank lending. Once the corner has been turned, the love affair that FII’s have had with the Indian growth story is sure to return and ICICI bank as the stalwart benchmark banking stock for the Republic of India will be one of the first stocks to benefit from the coming rally.
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