 "Why do FIIs love ICICI Bank?")
The CNX Nifty has gained 180 points over the past three trading sessions and a quarter of this gain has been driven by ICICI Bank. Not only has the share price of the lender risen 10 per cent over three sessions, it also continues to be among the top 10 favoured stocks of foreign institutions. In the December quarter, foreign institutional investors (FIIs) bought ICICI Bank shares worth $166 million and remain over-weight on the stock.
This might seem strange, as the bank has seen a fast build-up in stressed assets in the corporate segment in the recent quarters. Analysts say ICICI Bank is paying the price for aggressively growing its corporate loan book between FY12 and FY13; it has increased its exposure to stressed sectors like steel, power and infrastructure.
If the bank's loan growth is not ahead of the sector and asset quality concerns are increasing, why are investors keen on the stock? There are several reasons. First, the bank is well capitalised and has maintained high provision coverage ratios. This has given it the buffer it needed against asset quality issues.
Ambit Capital says: “Even in a stressed scenario, the buffers in provision coverage, operating performance and capital allow both Axis Bank and ICICI Bank to keep their return on asset above 1.3-1.4 per cent. ICICI Bank has also managed to improve its margins from 2.2 per cent in FY08 to 3.3 per cent in the first nine months of FY14, while Axis Bank has largely retained its net interest margins at 3.5 per cent levels over the past seven years.
Analysts believe the bank is trading below its 10-year historical average of 2.3x its price/book earnings ratio. Standard Chartered Securities says ICICI Bank is currently trading at 1.7x price/book. The bank offers a dividend yield of 1.9 per cent. The stock could see a re-rating if it increases the share of retail loans in its overall loan book in the coming quarters. Given the sharp run-up in the stock, further gains could be capped.
This might seem strange, as the bank has seen a fast build-up in stressed assets in the corporate segment in the recent quarters. Analysts say ICICI Bank is paying the price for aggressively growing its corporate loan book between FY12 and FY13; it has increased its exposure to stressed sectors like steel, power and infrastructure.
If the bank's loan growth is not ahead of the sector and asset quality concerns are increasing, why are investors keen on the stock? There are several reasons. First, the bank is well capitalised and has maintained high provision coverage ratios. This has given it the buffer it needed against asset quality issues.
Ambit Capital says: “Even in a stressed scenario, the buffers in provision coverage, operating performance and capital allow both Axis Bank and ICICI Bank to keep their return on asset above 1.3-1.4 per cent. ICICI Bank has also managed to improve its margins from 2.2 per cent in FY08 to 3.3 per cent in the first nine months of FY14, while Axis Bank has largely retained its net interest margins at 3.5 per cent levels over the past seven years.
Analysts believe the bank is trading below its 10-year historical average of 2.3x its price/book earnings ratio. Standard Chartered Securities says ICICI Bank is currently trading at 1.7x price/book. The bank offers a dividend yield of 1.9 per cent. The stock could see a re-rating if it increases the share of retail loans in its overall loan book in the coming quarters. Given the sharp run-up in the stock, further gains could be capped.