Investors in ICICI Bank subsidiaries can look forward to better days

Sentiment is upbeat for ICICI Bank; overall valuations will hinge on performance of other businesses

Sandeep Bakshi’s elevation to the head office has done a great deal of good to the ICICI Bank stock. For one, sentiment has improved, as uncertainty about the top management following the Chanda Kochhar controversy has subsided. The stock is now not far away from its all-time high. After Bakshi took over as MD and CEO, the bank's financials began looking up, thanks to the various measures taken by its management. Yet, investors would hope that with a new chief in the driver's seat and the bad loan mess largely behind, things would improve further from here on, both for the bank and its subsidiaries.

The September quarter (Q2) results provide a glimpse of the road ahead. The banks' standalone results were the best in the past 12-quarters across metrics -- net interest income growth, net interest margin or loan growth. Retail loan mix at over 55 per cent and the share of low-cost current account–savings account (CASA) deposits at 51 per cent are the best in the industry. With this, Suresh Ganapathy of Macquarie Capital feels the bank could be valued at twice its book in the next two years. The catch-up could happen faster if ICICI Bank’s subsidiaries contribute more to the overall pie. They currently add up to 38–42 per cent of the bank’s overall valuations; up from 25 per cent in FY16. 

Despite the value accretion, analysts say more could have been achieved, had listings received better acceptance among investors. Even as its life insurance, general insurance and securities businesses are either market leaders or enjoy dominant positions in their respective domains, their stock prices don’t reflect the full potential of the underlying businesses. After two years of listing, ICICI Prudential Life Insurance (I-Pru Life), is still trading close to its IPO price. ICICI Securities (I-Sec) has lost over 50 per cent of its value since listing. ICICI Lombard is the lone outperformer, though the post-listing gains are tapering, down 15 per cent from the September 2018 peak.

Even as sentiment is gradually improving, concerns raised at the time of initial public offering (IPO) remain. For I-Pru Life, despite a strong 16 per cent year-on-year increase in gross written premiums, the Street is risk-averse to the stock mainly for the company's huge (over 80 per cent) exposure to equity market-dependent unit-linked insurance policies. Likewise, the current market volatility is eating into I-Sec’s growth potential. The Street’s scepticism also stems from the timing of its listing. For ICICI Lombard, the 44 per cent net profit growth in Q2 was largely supported by a 19 per cent increase in investment income. Ironically, though the entire general insurance sector relies on investment gains for lofty profits, the Street isn’t pleased with ICICI Lombard’s valuation, as it draws a higher proportion of profits from its investment book.

As these apprehensions remain, some experts question the timing of ICICI Bank’s decision to go to market. They feel the bank should have waited for an opportune time to list its businesses. Saurabh Mukherjea, Founder, Marcellus Investment Managers, though, explains that the bank wasn’t left with options. “Considering the pressure the bank was facing on its Tier-1 capital, it couldn’t have waited longer to list its subsidiaries,” Mukherjea says. Save for the Rs 113 billion garnered from stake sales since FY17, providing for bad loan without taking a deeper cut on its financials and on its capital adequacy would have been challenging. Investors may recall how the bank posted its first loss in many years as its provisioning buffer dried up in June 2018 quarter.

There’s also a chicken-and-egg like situation with respect to the subsidiaries’ valuations. Until recently, ICICI Bank’s price-to-book was at a six-year low, oscillating between the 1–1.5x one-year forward earnings band. On the other hand, if HDFC's subsidiaries are faring well in the Street, Mukherjea says that it is largely the halo effect of the parent company aiding them. Partly, their financials are also superior.

But, with sentiments for the bank’s stock reviving now, and its financial performance expected to improve, experts urge investors to be patient with the subsidiaries as well. Importantly, the growth prospects of subsidiaries remains good too. “Give it some time,” Nilesh Shah, MD & CEO, Envision Capital tells investors. “The stocks need to come out of the shadows of its parent and be looked at independently,” he adds. Investors, though, hope the wait isn’t too long.