Yahoo Finance Can ICICI Bank Limited (NSE:ICICIBANK) Survive The Next Financial Crisis?
As a large-cap stock with market capitalization of ₹1.88t, ICICI Bank Limited (NSE:ICICIBANK) falls into the category of a major bank. As these large financial institutions revert back to health after the 2008 Financial Crisis, we are seeing an increase in market confidence in these “too-big-to-fail” banking stocks. The recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks to vulnerabilities. As a large bank in INR, ICICIBANK is exposed to strict regulation which has focused investor attention on the type and level of risks it is subjected to, and higher scrutiny on its risk-taking behaviour. Investors are viewing ICICIBANK with a more cautious lens and analysing these stocks using bank-specific metrics such as liquidity and leverage. Today we’re going to take a look at these metrics to gain more confidence investing in the stock. See our latest analysis for ICICI Bank
Is ICICIBANK’s Leverage Level Appropriate?
Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. Though banks are required to have a certain level of buffer to meet its capital requirements, ICICI Bank’s leverage level of 9.72x is very safe and substantially below the maximum limit of 20x. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
How Should We Measure ICICIBANK’s Liquidity?
Since loans are relatively illiquid, we should know how much of the bank’s total assets are comprised of these loans. Usually, they should not be higher than 70% of total assets, which is the case for ICICI Bank, with a ratio well-below the maximum level at 49.98%. This means less than half of the bank’s total assets are tied up in the form of illiquid loans, leading to high liquidity, perhaps at the expense of generating interest income.
What is ICICIBANK’s Liquidity Discrepancy?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, however, customer deposits are liabilities which must be repaid on-demand and in short notice. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Compared to the appropriate industry loan to deposit level of 90%, ICICI Bank’s ratio of over 96.77% is higher which places the bank in a relatively dangerous territory to go into negative discrepancy in liquidity. Basically, for ₹1 of deposits with the bank, it lends out over ₹ 0.9 which is imprudent.
Next Steps:
The bank’s liquidity and leverage ratios suggest its sensible operational risk management. Its high liquidity and low leverage levels mean it is well-positioned to meet its financial obligations in the case of any adverse and unpredictable macro events. Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three essential aspects you should further examine:
Future Outlook: What are well-informed industry analysts predicting for ICICIBANK’s future growth? Take a look at our free research report of analyst consensus for ICICIBANK’s outlook.
Valuation: What is ICICIBANK worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether ICICIBANK is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
