We wrote our first note on Indian banks with a focus on HDFC Bank. It can be seen here. This will provide good context for this note which is on ICICI Bank.
in the 1990s, one of the new Private Bank licences was given to The Industrial Credit and Investment Corporation of India (ICICI). This was a government institution, established in 1955, as a joint-venture of the World Bank and Indian government -owned financial institutions. It was one of three Development Financial Institutions (DFI) created t provide project finance to Indian industry. The other DFIs were IDBI and IFCI. This was an era of planned soviet style industrial development and the DFIs were needed to financial the building of infrastructure like dams and power plants, Steel mills etc,
ICICI Bank was founded in 1994 as the Industrial Credit and Investment Corporation of India Bank, but the name was (thankfully) changed to ICICI Bank.
The DFI borrowed long term money on the bond markets, and this was lent to industrial enterprises. It also earned fee income by providing project finance consulting and related advisory services.
In the 1990s, ICICI transformed its business from a DFI offering only project finance to a diversified financial services group, offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank.
ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in 1998. In 2001 the two entities merged, and the combined entity was called ICICI Bank.
For the next 7 years, ICICI Bank embarked on a period of strong organic and inorganic growth both in India and abroad.
In 2006-2008, the bank went on an aggressive expansion greatly building the asset base globally including in the UK subsidiary. In India, there was an aggressive expansion in lending including to the personal sector. ICICI Bank was a major lender to both the industrial sector and the Personal Sector
In the UK the branch had invested in US dollar-denominated Collateralised Debt Obligations (CDOs) and other risky debt and made significant losses. During the 2007-08 financial crisis, there were rumours of investors traying to pull their money in a panic. Customers rushed to ICICI ATMs and branches in some locations due to rumours of a failure of the bank. The Reserve Bank of India (RBI) issued a clarification on the financial strength of ICICI Bank to dispel the rumours.
The bank also suffered a wave of bad debts on lending in India.
The Bank had a near depth experience in 2009 and risk management was overhauled and a more risk averse business culture was implemented.
Chanda Kochar was the managing director (MD) and Chief Executive Officer (CEO) of ICICI Bank from 2009 to 2018. She resigned from her positions in 2018 due to a serious case of conflict of interest. Subsequently, she was fired by ICICI Bank, a decision which was later upheld by the Supreme Court of India. Sandeep Bakhshi was appointed as MD & CEO in October 2018. He had been the Managing Director and CEO of ICICI Prudential Life Insurance from August 2010 to June 2018.
In the last ten years there has been a structural improvement in the performance of ICICI Bank both against its own historical performance and also against the performance of HDFC Bank. The credit for this improvement goes to Sandeep Bakshi
ICICI Bank has caught up and overtaken HDFC Bank on a number of metrics. in terms of the P/BV valuation.
Anecdotal evidence including social media comments suggest that the ICICI Bank customer services and consumer facing technology apps are seen as much better than those of HDFC Bank.
ICICI Bank now trades on a higher P/BV valuation than HDFC Bank.
In 2010, HDFC Bank was trading at P/BV of 6x times while ICICI was at 2x.
In 2021, HDFC Bank P/BV fell below 4x for the first time. Today the HDFC Bank P/BV of 2.1 x is lower than ICICI P/BV of 2.9 x for the first time.
Results
On Jan 20 - India's ICICI Bank reported better-than-expected third-quarter profit,
helped by robust loan growth, although its net interest margin (NIM) shrank for the fourth straight quarter. NIM came in at 4.43%, compared to 4.65% last year and 4.53% last quarter.
The bank reported a record high standalone net profit of INR 102.72 bn (US$1.24
billion) for the third quarter ended Dec. 31, compared with analysts' expectations of INR100.25bn.
The bank's total loans grew 18.8% from the previous year, largely led by retail loans, while deposits grew 18.7%.
None Performing Assets (NPA) ratio are low and asset quality and balance sheet strength is high.
ICICI Bank shares rose 5% and hit a record INR 1,059.4 after the results. This performance is in sharp contrast to that of larger rival HDFC Bank whose shares declined nearly14% in the five trading sessions after its results,
Summary
ICICI Bank in the last quarter continued the recent trend of outperforming HDFC Bank. This seems to be a significant justification of its premium valuation.
Valuation
The ICICI Bank stock currently trades at INR 1016 per share or US$ 24.22 in the ADR. (the Ratio is 1 ADR for 2 local shares). Analysts estimate the various subsidiaries involved in Asset Management, Life Insurance, General Insurance are worth about INR 200 per share. This means the “core bank” is at INR 800 per share.
The estimated book value per share (bvps) is INR 348. This means the bank is trading at 2.3 x FY 2025 bvps for the “core” bank.
This is a higher P/BV ratio than HDFC Bank and higher than large international banks.
The growth prospects for India looks good, the banking sector is well capitalised, and the quality of assets looks very good compared with the past. Therefore, the banking sector looks set to grow strongly and ICICI bank as a leading player will benefit from this rising tide.
Conclusion
ICICI Bank has performed very well in recent years and there is unlikely to be much more room for improving metrics like NIMs and ROA from here. We do not currently have a position in the bank.
Ideally, we would like an entry price at below 2X P/BV ratio for the Core bank. However, as we do not currently have a position, We will buy 50% of our desired 5% allocation via the ADR to get an initial exposure. If the price falls, we would hope to buy the balance at 1.8X P/BV ratio later,
Like HDFC Bank, ICICI Bank has some significant strengths and is well placed to perform strongly over the next two decades. The challenge for investors is to acquire additional stock at an attractive price.