Sunday, June 1, 2008

ICICI Bank - NYSE - IBN Stock Analysis

Story Slide:
The obvious question that investor's have regarding banking stocks is, what if the story of US banks' asset write downs and earnings losses is repeated in emerging markets such as India.
However, there are a few subtle differences between Indian banks and their US counterparts and that is what makes Indian banks less likely to follow the path of asset write downs.

First, Indian banks have very low exposure to structured finance investments in the US market. The next issue is about home loans and credit card loans that the Indian banks originate in the Indian market. At this point, it is important to understand the difference between a home loan originated by a US bank vs. a home loan originated by an Indian bank.

A home loan issued by a US bank is typically pooled as a MBS and sold to investors which leaves the risk of default with the MBS investors (typically a group of financial institutions) while the bank that originated the loan only services the loan and the loan doesn't show on the originating banks' balance sheet. The originating bank is not liable in case of a home loan default and hence has little to no incentive in checking the ability of the home loan borrower to repay the loan. To make matters worse, the originator bank is paid for originating the loan which means that the banks are incentivized to originate as many loans as possible without checking the credit quality of the borrower.

This is not true for banks in India since the home loans originated by banks are serviced and carried on their balance sheet as well as accounted for in NPA estimation. It is this very subtle difference that makes all the difference in the quality of home loans issued by Indian banks. In this case, the originator (Indian bank) is liable for default and hence has an incentive to check the ability of the borrower to repay the loan. Nationalized banks in India such as SBI, Central Bank of India etc. issue loans to poor credit customers owing to political pressure and also have to write off some debt every year to certain classes of customers as a part of government programs to help those classes, however, private sector banks such as IBN are under no such obligation and hence have better performing loan portfolios compared to their nationalized counterparts.


trisha said...

Hi Ketul,

Thanks for a valuable pick.

I wonder how PE of 10.8 is calculated? If the price is 37 and EPS is 1.51 PE should be around 24.

Also would be interested to know how the target price of $51 is determined as per yahoo finance target price shown is $29

Ketul S said...

PE of 10.88 is calculated based on sum of parts valuation. The valuation of ICICI Bank only is about $8B if we eliminate the value of its subsidiaries from the total market cap of ICICI and based on the $8B valuation and a $735 million earnings in FY 2007 for bank only operations, the PE is about 10.88. This is not the PE for the entire company but just the banking operations.

Telugu dictionary said...

What is the time frame of your target?

Ketul S said...

The time frame for target prices mentioned at this blog is in the 6 to 8 months range.

MV said...

Hi Ketul,
Thanks for the analysis.

I am holding MT from some time. Deutche Bank Analyst said that target price is $130.

In your opinion:
How much more MT can go?
Till what time we should hold?

What will be the expected price, if growth becomes stable?


Ketul S said...

MV, as you can check in the November 07 posting (November price $75), I had set a target of $109 for MT and yesterday MT closed at $104.25. However, in the past 8 months MT has further improved its business performance and added coal and iron ore mines to its holdings; this will continue to provide a sustainable competitive advantage to MT and so I would say MT is a long term buy and still has some price appreciation possibility in the near future. As for an exact target price, I will update MT's target next week.

Vikram said...

Hi Ketul,

After you posted the analysis for IBN lot of things have changed. The oil price jumped, inflation in india crossed 11% so do you think IBN is still a value buy ? Do you see any need to revise your target on IBN ?

Ketul S said...

ICICI Update: At the current price levels of $26, IBN is oversold. The current decline is due to the increase in interest rates announced by the govt. and private sector banks such as IBN. However, IBN's growth has to slip below the 7-8% GDP growth of India's economy to hit a DCF valuation of $26. I believe IBN is oversold due to short term concerns and maintain my price target of $51 for IBN.