ICICI Bank - Contrarian pick

ICICI bank needs no introduction- being the largest private sector lender.

Almost everybody knows what this bank is up to and the negative news surrounding its stock.

Without beating around the bush, let me come straight away to the point as to why this thread.

Let me quote some figures straight from its q3 results-

  1. Q3 NP( Standalone)- Rs 3018cr vs provisioning of Rs 2844cr

  2. TTM NP ( Standalone )- Rs 11980 cr vs provisioning of Rs 6100cr (aprox)

  3. Present value of net NPAs ( as on 31 Dec 15 ) - Rs 10,014 cr

  4. Present value of Restructured loans - Rs 11,294 cr with no major restructuring pipeline.

Some conservative assumptions-

  1. All Net NPAs are written off.

  2. 30% of restructured loans ( experts say 20-25 % ) become Net NPAs.

In such a situation the bank will have to take a hit of - Rs 13000 cr (Aprox)

Compare this to the TTM profit of ICICI bank ie Rs 12000 cr ( Aprox )

That means, if ICICI bank were to part with its one year profits, it would become clean all over again.

Thats about the the over hyped asset quality concerns vis a vis the bank’s cheap valuations.

Post this cleaning ( suppose it were to happen ), the bank has 2-3 options-

Option 1. Start behaving like HDFC or INDUSIND bank. ( unlikely, but possible )
Option 2. Start behaving like Axis Bank atleast. ( Likely )
Option 3. Keep behaving like ICICI bank ( Remember 2008 !!! )

In case of option 1, it will become a super multibagger largecap. ( otherwise a rarity)

In case of option 2, it will still become a multibagger.

In case of option 3, It will still go up 2-3 times from here on when the market cycle turns and some time passes ( 2-3 yrs that is )

Disc: Not invested. Planing to invest.

Objective of the post:

  1. To validate my theory. ( Is it as simple as I am thinking it to be??? )
  2. To stimulate a healthy and informative discussion.

Eagerly waiting for the better informed to throw some light,

Ranvir Dehal


And not to forget- More than Rs 2000cr (aprox) of net profit generated by its major subsidiaries-
ICICI Lombard and ICICI Prudential.

I remember reading ICICI’s last earnings statement in which they had said that in the march qauter, they will further make provision for NPAs. In my opinion market is waiting for that.

The thing to look for would be weather the fresh NPAs that come in from restructured loans or are fresh additions.
In the first case it will be a huge positive in my opinion.

Also, one gets best prices when there is an ELEMENT of uncertainty The TRICK is - to be able to ascertain the rough extent of uncertainty keeping the margin of safety in hand.
That is where most of the money can be made.( Remember…Warren Buffett and american express or fruit of the loom!!! ).

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Few things first which may be applicable on the overall market sentiment, this is necessary before we proceed with ICICI bank -

  • The current grinding down of prices though partly due to the ongoing NPA cleansing is also due to incessant selling by FIIs and short sells. ICICI is the poster whipping boy in each of the past market corrections. The beta is very high.

  • This makes the institutions to ‘sell’ out at any cost and take money back to their own country. Valuations at these times just does not matter.

  • This is the perfect time for long term investors to accumulate in a staggered manner (not only ICICI but other behemoths which get sold at very low market cap)

  • Another 10% correction and ICICI is staring down at BELOW 1 lakh market cap!

  • But with banks such as ICICI the exit is as important as entry otherwise you will get sliced by more than 60% in the next correction.

Specific to ICICI,

  • It is not about the valuations but the attitude of the bank in dealing with its assets. Bank is a very easy business, you just don’t have to do stupid things. When the economy starts growing up again, it will resort to loaning to corporate (risky ones too) and again fall into this NPA trap. Changing this attitude is difficult. This should have been organisational in nature. Changing this needs insurmountable will in the attitude of General Managers, Credit officers, culture etc.

  • Given this background, ICICI will not command high valuations.

  • Having said this, I agree to your post that this would be a multibagger once the tide turns even with its current dynamics, However, if (big if) markets were to further correct 10-15% then ICICI can reach 150-160 thereabouts. However, the risk reward is in favour of reward with some patience added in. Also, without so many such Ifs and buts you would find quality businesses at attractive valuations in the current market, so why ICICI could be a question.

  • ICICI bank will in all probability would come out with its IPOs of general insurance and life insurance during the next bull run and you would be eligible to get those shares (proportional to ICICI’s stake in these businesses) and I think these subsidiaries would be valued quite highly as they are market leaders in the current market, I think even ahead of HDFCs.

Broadly, I quite agree with your post. There could be several negative reasons but all of them are priced in at these low valuations more or less. ICICI would not be left behind in coming to growth as and when economy turns around.


I think among the most beaten down sectors which have potential to outpace the index once the tide turns, banks (especially private banks) would be frontrunners. What other sectors are we looking at? Infra, maybe power and real estate? For instance, between BHEL and PNB, atleast PNB has recognized the elephant in the room and the valuation factors in the big provisioning.

Totally agreed with your post. Even the PSB’s heads have mentioned to monetize their profit earning non-listed arms. I feel once this adds to picture of economic revival, that can turn tide in favor of all banks. But till that time patience coupled with staggered approach holds the key, as all eyes are on Q4 numbers to assess the total damage of NPA on their balance sheets.

I have shares of ICICI Pru life insurance. Hugely profitable business. Had an EPS of Rs 12, Gave out dividends of Rs 9. Very low earnings retention ratio. But the management has indicated that they in no hurry to list as the business doesnot require any capital to grow.

I had written this last month, and already the stock is down 10-15% since then. Agree that ICICI is a high beta play and has extremely high chances of giving outperformance returns if (nowadays it looks like its more a question of “if”, and not “when”) the economy revives.

This link was shared in some other post and am pasting it here as it is very relevant. Net NPA plus Net Restructured Loans divided by Networth is an excellent and very conservative tool to compute the health of the bank. ICICI bank’s position was an eye opener, as I wasnt expecting it to be so bad (the worst of the lot). But they seem to be on a mend, if you believe the sound bytes of Chanda Kochar. I have seen her good work in the bank when I was working there (from 2001-2006) and I believe she has the ability to do an encore this time around. The 2nd tier management is also of decent quality.

One of the comments above, regarding culture, is very important. One possible drawback could be that the top management is largely home grown. Either the existing management needs to learn their own lessons, or someone from outside needs to teach them, which I dont think is possible in ICICI (based on my limited and dated knowledge).

The balance sheet part of the bank (stressed assets) is being addressed gradually, and the P&L part is being taken care of by focusing on growth of retail book and deposit franchise. While this could end up giving good results, it will however test patience.

Discl. - this is not a recommendation. I started investing in ICICI from 230-240 levels (small portion of my PF) and have plans to increase if it continues to fall like this.


Thanks all fellow members for the encouraging and engaging posts.

Since I have already listed all the negatives in my opening post (including the icici culture, which can certainly change (although not by much)), I shall now list some positives-

  1. Hugely profitable subsidaries-
    (a) ICICI general insurance q3 profit of 130 cr.
    (b) ICICI life insurance- q3 profit of 436 cr.
    © ICICI pru asset management- q3 profit of 67 cr.
    (d) ICICI securities- q3 profit of 76 cr.
    (e) ICICI home finance- q3 profit of 40cr.

TOTAL q3 profit of subsidaries- Rs 750 cr. ( NOT BAD :yum: )

Rough estimate of yearly profit of subsidaries- 750*4 = Rs 3000cr ( Rough Aproximation) = EPS of aprox - 5.2


  1. Increase in retail loan book from 41% of total loans to 44%.
  2. Increase in CASA from 44%to 45%.
  3. Total loan growth-15% but retail loan growth was-24%.
  4. Improvement in cost to income from 36 to 32 qoq.

Disc: Not yet invested.

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I am also watching this stock closely but following issues hold me back

  1. As history goes ICICI is as bad as PSU in lending . Any bad company you take ICICI will be lender to them. i guess it is to do with incentives in the bank so my guess is they will not change unless there is cultural change.

  2. Ranvir i think you forgot to mentioned CDR book 11,901 cr in Q2. i guess it woudl have increased in q3 . infact there was lot added in Q3 and similar NPA will be in Q4 as per management.

3.God knows how many bad loans are hidden in overseas branches. USD 600 M bonds in baharian branch was downgraded.

  1. Plus they are selling good subsidiaries just to show profits which is not good sign. why not take to pain of reduced profits or loss like BOB

So not very comfortable with honesty of management who is just fabricating profits and keep growing business in wrong fashion.


  1. I ve mentioned the CDR book in my first post and have even built in a hit of 30% on the CDR book. So that is accounted for.
  2. ICICI banks asset quality is far better than all PSUs…even the best ones like SBI.
  3. Loans/ bad loans in overseas branches are included in the figures mentioned above.
    4.The Bahrain issue is not too alarming. It has happened with HDFC as well. Moreover it is the bond holders who should be worried and not the bank :grin:

Ranvir Dehal

My ballpark Trough Assumptions on ICICI bank. Request boarder’s suggestion on whether my assumptions make sense

ICICI Bank standalone (FY16)

  • Net Profit for Fy16 = 11000 cr
  • Gross NPA = 28500 cr
  • Net NPA = 12500 cr
  • Restructured Loans = 13000 cr
  • Total stressed Loans (Net NPA+ Rest) = 25500
  • Shareholders funds = 89000 cr
  • Shareholders funds after providing for 100% stressed loans = 63500 cr
  • No of shares = 581.2 cr
  • Adj Book value/share = 109 (63500/581.2)
  • Price (Trough valuation of 0.8x Adj Book value) = 87
  • Subsidaries Annual Profit assumption per year (Based on Fy15) = 2300 cr
  • Total Market value of subsidaries with PE of 10= 23000 cr
  • Price per share of subsidaries = 40 (23000/581.2)
  • Consolidated Price = standalone + subsidaries = 87 + 40 = 127
  • Market cap at price of 127 = 73800 cr
  • Low price in previous bear markets = 60 (Mar 2009), 102 (2006), 128 to 136 (Dec 2011), 160 (Aug 2013)

Subsidaries Profit as of Fy15. Request people to cross verify statistics once.

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It is broadly accepted banking principle that 20-25% of restructured loans end up being NPAs.

Even if we say 30% of restructured loans become NPAs, it will be a figure of- 4000cr.

So, the BV as per new calculation would work out to be Rs 150 (Aprox)

So if the Aug 13 trough was 160, the trough this time around should be significantly higher, considering a 30% higher earnings these days.

A small correction…Rs 150 is the 0.8 times BV in the previous post.

“Better to buy around 130 to 160 and then wait for economy to improve and make atleast 3 bagger returns in next 3 to 5 years.”

In last few years, when bull market was on in full flow, some investors/momemtum traders/professors made everyone believe that no price is too high for a good stock and no price is too low for a bad stock. My own learning however has been that price is equally, if not more, important and any decent stock bought in a severe correction makes money.

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“ICICI bank will in all probability would come out with its IPOs of general insurance and life insurance during the next bull run and you would be eligible to get those shares (proportional to ICICI’s stake in these businesses)”

ICICI bank had come out with 2 IPOs in about 2005 if I am correct. The 1st was: 3i infotech, which was priced at around Rs 100/- and the 2nd was Firstsource, priced at around Rs 60/- Imagine the plight of those who subscribed to and held on to the shares. DISCLOSURE: I am an investor in ICICI bank from SCICI days.
I did nor get any shares of these companies either free or under preferential offer. So better forget making any money on the side.

@Yash_Pal… I genuinely did not get the meaning of the second paragraph. Can u please elaborate??

My calculation is also same for ABV 106 . so even with subsidiaries pricing is aggressive but we need to be conservative .

so you will get margin of safety of ICICI bank falls below 127 and then if you hold for 3 to 5 years probably bank will return to its normal course of 1 % Net NPA

Selling its shares of subsidiary to maintain profits was big let down as Banks senior management gets 1% money from profits which they are trying to maintain while selling its winners.