In this edition of selecting stocks for the future series, we will look at ICICI bank as a potential stock for the future. It is the cheapest private bank stock in the Nifty index in terms of price to book value and it has just come out of a long period of consolidation. The stock is poised to perform in the future and you can expect absolute returns of over 50% in the stock over a couple of years.
ICICI Bank as of 23rd August 2011
Price : Rs 850
Market Capitalisation: Rs 98,000 crores
Price to book value: 1.8
ICICI Bank suffered post 2008 credit crisis when the markets punished it for it’s over dependence on institutional funds to grow its loan portfolio aggressively. ICICI banks deposit base was skewed towards bulk deposits, which accounted for more than 50% of its total deposits and when the credit crisis hit the liquidity in the markets, the bulk deposit concentration was seen as a major liquidity risk for the bank. The bank had doubled its advances in the 2005-2008 period and the sharp fall in GDP growth by 250bps over a one year period post 2008 crisis cast doubts on the asset quality of the bank.
The markets have not forgiven ICICI Bank for it’s past growth strategy. ICICI Bank has underperformed the Nifty and its closest competitor HDFC Bank in the January 2008 to August 2011 period.
The future is what matters
The ICICI Bank of 2008 and ICICI Bank of 2011 are vastly different. The bank has spent the last three years in improving its act. It has reduced its dependence on bulk deposits and has improved on its sticky deposit base (CASA or Current and Savings Account) as a percentage of total deposits. It has focused on cleaning its books to build foundations for future growth. The banks net NPA’s (non performing assets) has fallen by 100bps over the last couple of years. Its liquidity profile as well as its loan quality has improved substantially over the last three years.
The bank’s strengths have not been diluted. It was the first to embrace technology in banking and it continues to be one of the most technology efficient banks in India. The bank’s brand image is still strong and remains one of the top brands in the country. It runs the largest online broking platform in the country (ICICI direct.com). It runs the largest private sector life insurance firm (ICICI Prudential Life Insurance) and its mutual fund (Prudential ICICI Mutual Fund) is amongst the top five mutual funds in terms of AUM (Assets Under Management) in India.
Stock for the future
Investors are Idiots focus is on companies that can leverage their capabilities to grow in the future. The companies should use the best in class technology, must have innovation capabilities, have the ability to build strong brands and think scale. ICICI Bank has all of the above and the way it has used the past crisis to strengthen itself shows it’s ability to focus on what requires to be done. The bank is poised for future growth, though growth rates may vary with market conditions. This fiscal 2011-12 is expected to see the bank grow by 18%, which will be at par or marginally above industry growth rates, but the bank should start growing aggressively in fiscal 2012-13. The stock price will start reflecting its growth potential by mid 2012.