Stock Spotlight: ICICI Bank piques interest of EM managers

It is now enjoying a premium over HDFC bank, which used to be the highest valued bank in India.

However, the ICICI’s stock price has sat relatively flat throughout 2022, and is down 7.4% in the last year, according to data from Bloomberg.

Nevertheless, emerging market managers are still expressing great interest in the bank.

Nick Price, portfolio manager of the Fidelity Emerging Markets trust, argued that ICICI’s plateauing stock price over the year “masks variation”, after it sold off at the start of the year as the macroeconomic outlook darkened, before rising after strong Q1 results in July.

The bank’s stock dropped to a low of $16.58 following the Russian invasion of Ukraine, before steadily rising throughout the second half of the year, hitting an all time high of $23.68 in December, according to data from Bloomberg.

He added: “The bank has performed strongly over the latter half of the year as three consecutive earnings releases have highlighted the beneficial impact of higher rates and the current benign environment for credit costs.”

Andrew Ness, portfolio manager for Templeton Emerging Markets investment trust (TEMIT), also said that 2022 had been a strong year for Indian banks as a whole, leading to “material convergence in performance of strong vs average franchises”, which resulted in investor preference for banks which underperformed in prior years and were perceived as undervalued.

He also said the significant foreign institutional investor outflows throughout the year had further weighed on the bank, as it has a “sizeable group of foreign investors on its share register”.

Gaurav Narain, co-head of equities at Ocean Dial Asset Management, argued that the bank’s stock had plateaued due to doing “exceptionally well” in 2021, having seen stock prices rise by more than 53% across the year.

ICICI stock price ($)

Looking ahead

Fidelity’s Price noted that the bank had reported “an impressive Q3 growth in profits”, which was significantly ahead of the market’s expectations.

The bank’s Q3 profits were up 30.3% year-on-year, while net interest income increased 28.1%.

Price credited this to the passthrough from higher interest rates, but also by an expected change in the bank’s business mix towards higher yielding segments.

He added that deposit costs have been slower to rise for the bank, due to lower starting loan-to-deposit ratios and the fact the bank typically collects a large number of retail deposits (which are typically cheaper) as opposed to few large ones from corporates.

Kristy Fong, senior investment director of Asian equities for abrdn, credited the Q3 profit spike to a 20% uplift in loan growth, along with an increase in its net interest margins.

Fong added that ICICI still outperformed the MSCI India index, which grew 6% last year in local currency terms.

She argued that while the growth had not been as strong as previous years, it was still “commendable” as the bank strengthened its balance sheet and expanded.

Long-term, Price was optimistic on the bank, arguing that it has seen its asset quality improve to rival high-quality peers such as HDFC bank.

He added: “The bank has access to good levers for growth going forward and also has strong margins, all supported by its relatively low market share in some areas and consistently performing liability engine.”

Price also said that ICICI’s valuation was attractive, especially for the level of growth, contrasting the low valuation to Indian consumer stocks.

Ayush Abhijeet, investment director at White Oak Capital Partners and adviser to the Ashoka India Equity Investment trust, argued that the Indian banking sector more broadly offer “a long runway for growth,” given the under-penetration of credit.

He said that well-run private banks such as ICICI, “are gaining market share from poorly run government-owned banks”, which account for two-thirds of the industry.

Abhijeet praised the management team at the bank, arguing that it had been leveraging its wide distribution franchise, a new risk-based pricing approach, and digital offerings to accelerate market share and enhance the return ratios.

TEMIT’s Ness was keen to emphasise that the bank’s subsidiaries were amongst the country’s top three players in the asset management, insurance, and brokerage industries, with a new digital transformation strategy.

He also argued the macroeconomic tailwinds for the bank will further propel growth, as India’s ratio of household debt to GDP at 35% compared favourably to other countries such as China at over 60% and the UK at almost 85%.

Ocean Dial’s Narain added that the long-term outlook of the bank is “steady”, with sustained profitability following the restructuring under the current CEO Sandeep Bakshi.

He explained: “He has built a granular franchise on both sides of the balance sheet and cushioned with strong provision buffer at 1% of loan book, which can even absorb the likely impact of any global recession.”

Fong concluded that she was “optimistic” for the prospects of the bank, especially following the strengthening of the banking sector in India following several crises.

She explained: “India has a long growth runway with low credit penetration and potential for the private sector banks to continue gaining share from the public sector banks. ICICI, being among the leading retail banks in India, is well positioned.”