Short ICICI Bank – I see; do you?

In India, public sector banks’ advances-policies are dictated by the ministry of finance. Every year, the ministry decides where funding is needed and the banks are given targets for specific sectors and the target-chasing begins. I know this first hand because both my parents were branch managers at two different, such public sector banks and ‘Banking’ was a common dinner-time topic. Private sector banks, on the other hand enjoy a much greater autonomy on their advances-portfolios and as a result are much more efficient in designing them. This is fully discounted in the markets: average P/B of public sector banks is 0.5x versus 2.4x for private sector banks.

ICICI Bank Limited (NYSE: IBN) is the largest private sector bank in India and in our view, ICICI’s common stock is a sell for the following reasons:

1. ICICI is priced like a private sector bank but its NPAs are comparable to public sector banks.
2. Heavy exposure to ‘Infrastructure and Energy’ — Rising Non Performing Assets (NPAs).
3. Infrastructure Sector is in limbo due to policy-bottleneck.
4. Revised Reserve Bank of India (RBI) Guidelines — NPA calculation.
5. Sky High EPS Growth Expectations. Over the next 5-years, EPS is expected to grow 22% p.a.

As at the end of FY-2016, ICICI had made provisions for less than half of its total gross NPAs. We think they will be forced to make provisions for the remaining NPAs over the next few years, which will drive their EPS and valuations much lower.

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