Small is Beautiful

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ICICI (NYSE: IBN) is the largest private sector bank of India, and it has an ADR listed in the US. It has posted impressive results for the quarter ended December 2012 under the able guidance of Ms. Chanda Kochhar (Managing Director & CEO).

ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended March 31, 2012. The Bank has a network of 2,899 branches and 10,021 ATMs in India, and has a presence in 19 countries, including India.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Its UK subsidiary has established branches in Belgium and Germany.

FIIs love the stock as can be seen from the following table which gives the details of public shareholding which is more than 1% of total number of shares as of 6/2/2013:

<table> <tbody> <tr> <td> <p>Sl No</p> </td> <td> <p>Name of the FII</p> </td> <td> <p>% of holding</p> </td> </tr> <tr> <td> <p>1.</p> </td> <td> <p>Deutcshe Bank Trust Co. Americas</p> </td> <td> <p>29.06%</p> </td> </tr> <tr> <td> <p>2.</p> </td> <td> <p>Government of Singapore</p> </td> <td> <p>1.92%</p> </td> </tr> <tr> <td> <p>3.</p> </td> <td> <p>Europacific Growth Fund</p> </td> <td> <p>1.46%</p> </td> </tr> <tr> <td> <p>4.</p> </td> <td> <p>Aberdeen Global India Equity Fund Mauritius Ltd</p> </td> <td> <p>1.57%</p> </td> </tr> <tr> <td> <p>5.</p> </td> <td> <p>CArmignac Gestion A/C Carmignac Patrimoine</p> </td> <td> <p>1.54%</p> </td> </tr> <tr> <td> <p>6.</p> </td> <td> <p>Merrill Lynch Capital Markets Espana SA SV</p> </td> <td> <p>1.03%</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p>Total FII holding ( as above +others)</p> </td> <td> <p>36.58%</p> </td> </tr> </tbody> </table>

Apart from the above, Mutual Funds hold 8.96% of the total shares and Insurance companies hold 15.79%. Clearly, it is the darling of the institutional investor community.

The results of the last two quarters are as follows (US$:INR:53.58)

<table> <tbody> <tr> <td> <p>IN US$ MILLION</p> </td> <td> <p>DEC 2012 (QUARTER)</p> </td> <td> <p>SEPTEMBER 2012 (QUARTER)</p> </td> </tr> <tr> <td> <p>Revenue</p> </td> <td> <p>US$  1,892.18 Million</p> </td> <td> <p>US$  1,871.28 Million</p> </td> </tr> <tr> <td> <p>Other Income</p> </td> <td> <p>US$     413.33 Million</p> </td> <td> <p>US$    381.29 Million</p> </td> </tr> <tr> <td> <p>Net Profit</p> </td> <td> <p>US$     419.98 Million</p> </td> <td> <p>US$    365.08 Million</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>INR 19.51 OR US$ 0.36</p> </td> <td> <p>INR 16.96 OR US$ 0.32</p> </td> </tr> <tr> <td> <p>CASA(Current A/Cs, Savings A/Cs)</p> </td> <td> <p>40.9%</p> </td> <td> <p>40.7%</p> </td> </tr> <tr> <td> <p>Provisions made</p> </td> <td> <p>US$  68.87 Million</p> </td> <td> <p>US$ 94.81 Million</p> </td> </tr> <tr> <td> <p>Gross NPA Ratio</p> </td> <td> <p>3.31%</p> </td> <td> <p>3.54%</p> </td> </tr> <tr> <td> <p>Net NPA Ratio</p> </td> <td> <p>0.76%</p> </td> <td> <p>0.78%</p> </td> </tr> </tbody> </table>

The Bank is adequately capitalized at a Capital Adequacy ratio of 19.53% and Tier 1 Capital ratio (equity) of 13.25% as of December 2012. It does not require fresh capital under the current scenario. The bank’s MD and CEO said that rise in profits was on account of growth and efficiency parameters. Its retail loans are expected to grow at the rate of 20% and the Net Interest Margin(NIM) of its international business would grow to 1.3%.The bank expanded its loans by 16% on a year-on-year basis to US$53.56 billion and deposits grew by 10% to US$ 53.38 billion.

The NII (Net Interest Income) grew 29% on a Y-O-Y & 3.8% on a Q-O-Q basis.

The bank has sold off a distressed asset (Kingfisher Airlines), and to date has no further plans to sell any stressed portfolio.

On the Indian stock exchanges, as of 6th February 2013, its 52 week high low was INR 1,232/- i.e. US$ 22.99  and INR 767.40 i.e. US$ 14.32 respectively.

It has a P/E of 17.23 whereas the industry P/E in India stands at 12.89.

There is another good private sector bank in India which is HDFC Bank which also has an ADR listed on the American Stock Exchanges (NYSE: HDB). A third bank is Citigroup which is an American bank listed on the American bourses (NYSE: C) and the peer group comparison is as follows for the quarter ended 31st December 2012 for revenue and net income and other details are as of 6th February 2013:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>ICICI BANK ADR</p> </td> <td> <p>HDFC BANK ADR</p> </td> <td> <p>CITIGROUP</p> </td> </tr> <tr> <td> <p>Total Income (Dec 12 Qrtr)</p> </td> <td> <p>US$ 2,305.51 Million</p> </td> <td> <p>US$ 1,960.90 Million</p> </td> <td> <p>US$ 18,659 Million</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>US$ 419.98 Million</p> </td> <td> <p>US$ 346.97 Million</p> </td> <td> <p>US$ 2,150 Million</p> </td> </tr> <tr> <td> <p>Net Income/Ttl Income</p> </td> <td> <p>18.22%</p> </td> <td> <p>17.69%</p> </td> <td> <p>11.52%</p> </td> </tr> <tr> <td> <p>Market Price 6/2/13</p> </td> <td> <p>US$ 45</p> </td> <td> <p>US$ 38.61</p> </td> <td> <p>US$ 43.05</p> </td> </tr> <tr> <td> <p>52 week high/low</p> </td> <td> <p>US$ 48/US$ 27.50</p> </td> <td> <p>US$ 43.02/US$ 27.30</p> </td> <td> <p>US$ 43.34/US$ 24.61</p> </td> </tr> <tr> <td> <p>Market Capitalisation</p> </td> <td> <p>US$ 25.94 Billion</p> </td> <td> <p>US$ 30.20 Billion</p> </td> <td> <p>US$ 126.25 Billion</p> </td> </tr> <tr> <td> <p>P/E Ratio</p> </td> <td> <p>17.79</p> </td> <td> <p>25.74</p> </td> <td> <p>17.72</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>$ 2.53</p> </td> <td> <p>$ 1.50</p> </td> <td> <p>$ 2.43</p> </td> </tr> <tr> <td> <p>Annualized Dividend</p> </td> <td> <p>US$0.4636</p> </td> <td> <p>N/A</p> </td> <td> <p>US$ 0.04</p> </td> </tr> <tr> <td> <p>Beta</p> </td> <td> <p>0.85</p> </td> <td> <p>0.65</p> </td> <td> <p>1.31</p> </td> </tr> <tr> <td> <p>10 year return</p> </td> <td> <p>685.08%</p> </td> <td> <p>1220.53%</p> </td> <td> <p>-87%</p> </td> </tr> </tbody> </table>

I started this blog by saying that “Small is Beautiful” and this clearly stands out from the above table- HDFC Bank has the least profit amongst the three banks on a gross basis but it has given the maximum return to shareholders over a ten year period.

Citigroup is still clearly plagued by the subprime crisis aftermath and is still struggling in spite of the US$ 40 billion bailout funds it received from the US Government.

The face value of ICICI Bank’s common stock is Rs 10 per share (US$ 0.19) and its EPS is Rs 19.51 per share or US$ .36 which means that EPS is nearly two times the face value. Similarly, for HDFC Bank, its face value per share is Rs 2/ per share (US$ 0.04) and its EPS is Rs 7.85 per share i.e. US$ 0.15 per share which means that EPS is nearly 4 times the face value. By this standard also, HDFC Bank is a superior buy when compared to both ICICI Bank & Citigroup.

An American investor who wants greater value addition could look at HDFC Bank even though it is the smallest of the three. The P/E of HDFC’s ADR is the highest of the three so it is clear that there are investors out there in the US who recognize the worth of this gem.

 In case, the retail investors want to follow the route undertaken by the FIIs they could choose ICICI Bank (FII  holding as of 12th  February 2013 was 37.07%) or HDFC Bank where FII holding as of 12th February 2013 was 33.66%. Mutual Funds and Insurance Companies each held more than 4% of the total shares of HDFC Bank.

The subprime crisis has clearly shown that Indian banks are a better and safer investment avenue when compared to Western banks and the average American investor who favours Banking can diversify in ADRs of Indian BAnks.

Some details about HDFC Bank are as follows:


The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995.

HDFC Bank is headquartered in Mumbai. As on March 31, 2012, the Bank has a network of 2,776 branches in 1,568 cities across India. All branches are linked on an online real-time basis. Customers in over 800 locations are also serviced through Telephone Banking.

<table> <tbody> <tr> <td> <p>The Bank also has a network of 10,490 ATMs across India. HDFC Bank's ATM network can be accessed by all domestic and international Visa / MasterCard, Visa Electron / Maestro, Plus / Cirrus and American Express Credit / Charge cardholders.</p> </td> </tr> <tr> <td> </td> </tr> </tbody> </table>

As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore.(US$ 102.65 million). The paid-up capital as on the said date is Rs. 469,33,76,540 (234,66,88,270 equity shares of Rs. 2/- each)(US$ 87.6 million). The HDFC Group holds 23.15% of the Bank's equity and about 17.29 % of the equity is held by the ADS / GDR Depositories (in respect of the bank's American Depository Shares (ADS) and Global Depository Receipts (GDR) Issues). 30.68 % of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has 4,47,924 shareholders.
 As of 31st March 2012, its total assets were US$ 630.66 million and its Net Profit for the year ended 31st March 2012 stood at US$ 9.64 Million.
The snapshot of the last two quarters as far as HDFC Bank is concerned is as follows:

<table> <tbody> <tr> <td> <p>HDFC BANK</p> </td> <td> <p>December 2012 (Quarter)</p> </td> <td> <p>September 2012 (Quarter)</p> </td> </tr> <tr> <td> <p>Revenue</p> </td> <td> <p>US$ 1,625.16 Million</p> </td> <td> <p>US$ 1,591.01 Million</p> </td> </tr> <tr> <td> <p>Total Income</p> </td> <td> <p>US$ 1,960.90 Million</p> </td> <td> <p>US$ 1,842.06 Million</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>US$ 346.97 Million</p> </td> <td> <p>US$ 291.15 Million</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>INR 7.85 i.e. US$ 0.15</p> </td> <td> <p>INR 6.61 i.e. US$ 0.12</p> </td> </tr> </tbody> </table>

The CASA (Current Accounts Savings Accounts) ratio as at December 31, 2012, was 45.4%. Net Interest Margin for the December 2012 quarter was 4.1%. Total net advances grew by 24.3% as compared to December 2011 whereas deposits grew by 22.2% over the same period. Savings deposits grew by 16.5% whereas Current Accounts grew by 10.4% when compared to December 2011.

After providing  for taxation, the Bank earned a net profit of  Rs 1,859.1 crores,(US$ 346.97 Million)  an increase of 30.0% over the quarter ended December 31, 2011.

The Bank’s total Capital Adequacy Ratio (CAR) as at December 31, 2012, (computed as per Basel II guidelines) stood at 17.0 % as against the regulatory minimum of 9.0%. Tier-I CAR was 10.9% as of December 31, 2012.

Gross non-performing assets were at 1.0% of gross advances, and net non-performing assets at 0.2% of net advances as on December 31, 2012. Total restructured loans (including applications received and under process for restructuring) were at 0.3% of gross advances as of December 31, 2012.

In a research paper titled-“Why not diversify internationally with ADRs” by Mahmoud Wahab and Amit Khandwala, it was found that if Americans include just 7 ADRs (50% of the investment portfolio) and the balance is in S&P 500, there was a drop of 43.7% in risk. The authors also report that the investment weights play an opposing role as far as risk and return is concerned. As far as risk is concerned, higher the ADR weight of the investible surplus, greater the risk reduction benefit, with the highest risk reduction appearing at 50% in ADRs and 50% in S&P 500. But as far as return is concerned, highest incremental return happens at 10% of the investible surplus in ADRs.

VibhaJhol has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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