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  • Why we continue to have a ‘Buy’ rating on ICICI Bank

    Publish date: 19th June, 2018

    For a long time, ICICI Bank has been one of the reigning kings amongst private banks in India. In the last few months, though, many reports have diminished the stock’s value. The price fell 6.2% between Jan 1 and June 19, 2018. The stock also underperformed the benchmark index—BSE Sensex—since the last week of March.

    Reason: The controversy surrounding MD & CEO Chanda Kochhar and corporate governance. (Read: What is corporate governance and why it matters to investors)

    In fact, recent news suggested that 3 foreign investors sold some of their ICICI Bank shares.

    Date Foreign investor ICICI Bank share sale
    9th April Baillie Gifford and Co. 2.94 crore shares at Rs 280 apiece
    May Commonwealth Bank of Australia Entire stockholding in ICICI Bank
    4th June Abu Dhabi Investment Council, Noosa 17.7 lakh shares at Rs 289 per share


    On 18th June, 2018, the private bank announced that Chanda Kochhar will go on indefinite leave until the results of an independent probe. Stocks fell by around 1% after the announcement on a day when the Sensex fell 0.45%. (Click here for live share market updates)

    All this suggests that even domestic investors may be worried about the company.

    However, our recommendation continues to be ‘BUY’. We still consider the stock to be ‘attractive’ at the price levels of Rs 293.

    Here are the two key reasons why:

  • New senior management:

    ICICI Bank has made changes at the senior management level with the appointment of Sandeep Bakhshi as Executive Director (ED) and Chief Operating Officer (COO) of the bank to oversee all operations of the group. He will be responsible for all the businesses and corporate centre functions of the bank and all executive directors and management would report to him. The current Executive Director, N S Kannan, meanwhile will take charge of the life insurance business as MD and CEO. This ends months of uncertainty and speculation at the senior management level and addresses any concerns on business continuity.

    Why this matters: The heart of any good company is its management. As investors, it’s important to not just look at the finances, but even the executives. A strong management will always find ways to manoeuvre the company through turbulent waters. Moreover, the stock price has been affected by this uncertainty. With an appointment in place, such uncertainty is over.

  • Adjustments in loan portfolio:

    Many have been worried about the bank’s slow growth too. However, we believe this could be because of structural changes in the bank’s loan portfolio. This painful adjustment has led to:

         a.     A large recognition of bad loans

         b.     A shift towards better-rated corporates

         c.     Building a granular retail and SME business funded by a solid low-cost liability franchise

    Why this matters: Stock price movements track profit growth. Companies often take hard calls keeping long-term profits in mind. The above changes could help improve the bank’s overall tendency to give better quality loans. During such times, growth often slows. But in the long-term, the chances are high that growth could pick up.

Remember

Before you act upon this recommendation, it’s important to understand if your investment duration matches that of the research forecast. Traders, for example, prefer to ride short-term waves in the market. Investors, in contrast, prefer to be patient and wait—they look for long-term profits. So keep this in mind before you act on this or any other recommendation.
For more details on the recommendation, disclaimers and disclosures, refer to the PDF attached here.