India’s #1 Banking Play Revisited

This week’s Global Bull Market Alert revisits an earlier pick, Indian retail banking giant ICICI Bank Ltd. (IBN), in my view, the #1 play on India’s booming stock market.

Since we first recommended ICICI last year, the world has gone gaga over Chinese banks. And that makes the Indian banking sector look like a better value every day. The market capitalization of the entire Indian banking sector stands at $70 billion. The largest Chinese bank, ICBC, alone has a market capitalization of around $250 billion. ICICI’s own market cap is currently about $20 billion. That’s a whopping 12.5x difference. And ICICI (IBN) trades at a forward P/E of just over 22, while ICBC trades at a P/E of around 60. And that’s after extensive (and expensive) financial cosmetic surgery on the Chinese bank.

In contrast, as India’s largest private bank with a 40% market share, ICICI is a natural beauty. With 614 branches and 2,200 ATMs across India, ICICI’s doing an impressive job at bringing modern retail banking to India. Savings deposits grew by 86% last year and retail loans grew by 57%. That’s almost double the industry’s growth rate of 30%. And ICICI isn’t just about growth in upscale Mumbai or New Delhi. Rural credit also grew by 75%.

And unlike its Chinese counterparts, ICICI has a diverse portfolio of high quality, high margin mortgage, consumer and auto loans. And it is busy adding new financial products such as life and general insurance to sell to this customer base. Success begets success as earnings in its life insurance venture grew by 61% last year and general insurance grew by 50%. All this means a healthy, and expanding, bottom line. ICICI’s earnings expectations going forward are $1.54 a share for the financial year ending March 2007, $2.04 a share for March 2008, and $2.48 a share for March 2009. Any surprises will come on the upside.

ICICI is also turning into a true global bank. The bank already operates in 14 countries through branches, representative offices and subsidiaries. Indeed, you now see ICICI’s bank featured as the mortgage lender of choice in personal finance pages in London newspapers. Closer to India, ICICI has already opened offices in Kuala Lumpur (Malaysia), Jakarta (Indonesia) and Bangkok (Thailand). No wonder its international loan portfolio grew 56.25% over the past year.

[More good news: The Indian government approved a plan on Thursday that will allow the central bank complete freedom in setting the statutory liquidity ratio (SLR), the percentage of deposits that commercial banks are required to use to buy government securities. With the ratio currently set at 25%, ICICI’s earnings could rise by 5% if the SLR were cut to 20%.]

The biggest risk in owning ICICI is not that the bank’s relentless pace will falter. It’s the volatility of the stock and the Indian stock market. It’s possible that ICICI could drop 20% from its peak at any time, as it did during the emerging market hiccup in May and June of last year. But history shows it’s worth holding on during these corrections. One Indian hedge fund manager is so bullish on ICICI that he put all of his fund’s money into ICICI bank for the next three years and then retired to a beach. A risky strategy, perhaps, but one that may turn out to be the best strategy of all.

So buy ICICI (IBN) at market today. Given the volatility in the market, and our fundamental belief in the long-term prospects of ICICI bank, let’s give this stock more room to breathe and set an unusually wide stop at $34.10. For potentially greater gains, buy the June $45 call options (IBNFI.X).

PORTFOLIO UPDATE

Millicom International (MICC) hit record highs on Friday and is now up just under 60% since our initial recommendation. Like the energizer bunny, this one just keeps on going and going. The trend is our friend on this one until it turns.

We were stopped out of China Life (LFC) last week for a 48% gain. We made some terrific gains on this pick. The sharp correction in the Chinese market means that the market is approaching technically oversold levels not seen since early September. We’ll be looking to re-enter the Chinese market as soon as volatility ebbs from its current levels.

Vodafone offered last week’s pick, Hutchinson Telecom (HTX), $16.5 billion for Indian cell phone play Hutchison Essar during an initial round of non-binding bids. Final bids may reach $20 billion. All this is bullish for our pick.

We were also stopped out of the Austrian ETF (EWO) last week for a small loss because of intra-day volatility.