On Jan 6, 2014, we reaffirmed our long-term recommendation on ICICI Bank Ltd. (IBN) at Neutral. Though the company’s fiscal second-quarter 2014 results were impressive, deterioration of credit quality remains a concern.
Justifying the Stance
Domestic loans constitute the major portion (68.8% as of Sep 30, 2013) of ICICI Bank’s overall loan portfolio. Further, the company has been marketing retail deposits on a large scale, primarily to reduce the cost of funds and create a stable funding base.
Additionally, on Oct 25, 2013, ICICI Bank announced robust fiscal second-quarter 2014 results, which marked a 20.2% year-over-year rise in net income. The results were mainly driven by top-line growth, partly offset by an increase in loan loss provisions as well as operating expenses.
However, ICICI Bank has been witnessing deterioration in its asset quality in the last few quarters. We believe that there will be near-term pressure on the asset quality due to the company’s increased proportion of higher margin (and higher risk) unsecured loans in its portfolio mix. Further, mounting operating expenses is another challenge for ICICI Bank, as it is expected to drag the company’s bottom line in the coming quarters.
Moreover, estimates over the past 60 days have been declining, with the Zacks Consensus Estimate for fiscal 2014 going down 2.6% to $2.62 per share. Further, for fiscal 2015, the Zacks Consensus Estimate decreased by a penny to $3.04 per share. Hence, ICICI Bank now has a Zacks Rank #3 (Hold).
Other Foreign Banks Worth Considering
Some better performing foreign banks include Bank of China Limited (BACHY), BBVA Banco Franc (BFR) and Barclays PLC (BCS). While Bank of China and BBVA Banco Franc carry a Zacks Rank #1 (Strong Buy), Barclays has a Zacks Rank #2 (Buy).