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An EM Stock Story: ICICI Bank

The Fundamental Growth and Core Equity (FGC) team’s research process focuses on five attributes of a company that are likely to lead to sustainable growth. These attributes are qualitative and forward-looking; our assessment is based on the expertise and judgment of our analysts and is therefore unique to the FGC team.

Figure 1 : Fundamental Growth and Core Equity’s Framework for Assessing Company Quality

Let’s look at India’s ICICI Bank through the lens of the CQ process.

The Indian Banking Landscape

In our view, a combination of strong real GDP growth and low banking penetration are likely to continue to propel attractive growth in India’s banking industry. India’s real GDP growth rate, which averaged about 7% for the ten-year period ending in 2019 (i.e., pre-pandemic), is expected to average well over 7% for the next five years.1 Low banking penetration shows up prominently in the retail banking space, where retail loans as a percentage of GDP stand at levels in the low teens.2

In this landscape, we believe that private banks are very well placed to continue gaining market share from Public Sector Banks (PSBs). Market share gains for private banks have accelerated meaningfully over the past five years. Private banks accounted for 36% of loans at the end of 2020, up from 21% in 2015. Similarly, private banks increased their market share of deposits to 30% in 2020 from 19% in 2015. The pace of market-share gain in loans and deposits over the past five years is five times higher than that experienced during the five-year period ending in 2015.3

We expect that private banks will continue to gain market share, as acute capital shortages are likely to challenge the PSBs (with a few exceptions, like State Bank of India). The Common Equity Tier 1 (CET1) capital ratio of most PSBs sits at mid-single-digit levels. By contrast, the bigger private banks in India have CET1 levels in the mid-teens.4

Private banks are also rapidly expanding their footprint into smaller towns and non-urban areas, as their more efficient, technology-driven, lower-cost platforms allow them to establish a meaningful presence without hurting risk-adjusted profitability. In our CQ framework, the Financial Condition CQ and Market Position CQ scores are much higher for India’s private banks than for PSBs for this reason. PSBs also face a chronic challenge in attracting and retaining top talent, due to relatively unattractive remuneration and structural rigidities that hinder productivity, efficiency, and innovation. The problem exists at top management levels, too, where leadership changes occur often due to the short tenures of government appointments. This leads private banks to score higher on Management CQ compared with PSBs.


ICICI Bank is one of the leading private banks in India. Over the past fifteen years, ICICI has transformed itself into a highly balanced financial institution that is leading the charge for private banks in India.

One of ICICI’s most important transformations has been its evolution from a predominantly wholesale funded bank to one of the best-in-class retail liability franchises in the country. The bank’s current account and savings account (CASA) deposits now make up about 45% of overall deposits (compared with a little over 20% of overall deposits 15 years ago).5 This ensures that ICICI Bank has one of the lowest funding costs in the country, enabling the bank to be profitable even in low-risk, low-yield asset classes.

ICICI Bank is also in the forefront of digital offerings. It considers its digital stack a core strategic pillar; the bank’s digital experience and its mobile app feature, Insta Solutions, shape and smooth customer journeys. Digital leadership is essential in India’s banking industry, as both barriers to entry and the cost of acquiring customers have fallen. Results for ICICI so far are encouraging, as over 90% of savings transactions are now happening through digital channels. Recently, ICICI’s customer product sourcing via digital channels has been among highest in the Indian banking industry. In the context of our CQ analysis – which asks questions such as “What is the bank’s market position?” and “How strong and visible is the business model?” – ICICI’s digital performance factors stack up nicely.

ICICI Bank has also been successful in retaining its top-tier management. The management team has been relatively stable, and the firm has relied on strong internal talent to fill key high-level positions. This helps to ensure that the firm’s core strategy – having a balanced book and calibrating asset growth in line with low-cost deposit growth – will carry forward.

Potential Risks

The COVID-19 pandemic represents a major challenge to India’s economy. As the country makes its way through the current wave, it is too early to draw conclusions on the ultimate economic impact of the pandemic. However, earlier waves of the pandemic did serve to highlight the inherent resilience of stronger, higher-quality banks. Quality banks such as ICICI have managed to grow meaningfully ahead of the system, while successfully managing asset quality.

ICICI Bank currently has a large cushion of excess provisions for impaired assets built-in. Although ICICI and other private banks are prepared for potential asset quality issues, we still need to see through the pandemic completely to assess whether provisions for impaired assets are sufficient. We continually evaluate these developments with respect to the Street’s expectations in order to fine-tune our CQ score for Fundamental Momentum, the FGC metric that represents “current business trends.”

And while the pandemic attracts most of our attention currently, there are always other risks that may impact the company’s fundamentals. Some of the most notable ones include shocks to India’s economic growth, regulatory changes that may significantly impact the banking sector, technological disruptions, and digital security challenges.

Closing Thoughts

The pandemic is currently challenging India’s strong economic recovery. At the same time, we believe that investors should recognize that India’s long-term growth potential remains among the highest in the world. In an environment where long-term positives are being tested by near-term challenges, it is crucial to stick to quality companies.

When evaluated through the lens of our CQ process, ICICI stands out as the right player in the right industry in the right country – likely able to not only weather current difficulties, but also to grow faster than its peers. This assessment, coupled with attractive relative valuation, makes a good case for ICICI Bank as a long-term value creator.

This information should not be considered a recommendation to invest in a particular security or to buy or sell any security shown. It is not known whether the securities shown will be profitable in the future.