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Profits on ICICI ADR at 40!

ICICI bank new york adrs have been a stellar performer on the NYSE, up 45 per cent as its valuation was rerated on the NYSE. India’s largest private sector bank clearly learnt the lessons of its near death experience during the 2008-09 crisis, when its credit default swap rate was once 2,400 basis points.

A focus on credit risk has accompanied loan growth but stressed assets are now once again almost three per cent of assets as private sector credit distress grows. ICICI Bank now trades at 1.7 times forward book value, expensive in a macro milieu where GDP growth is the lowest in a decade, the external financing requirement is $300 billion.

Like overseas loans, hot money wholesale funding and unsecured Indian retail lending gutted ICICI in 2008-09, it could well become a victim of the credit crunch, stagflation and property crash that is all too possible in India in the next twelve months. Private sector banks in India are exposed to some of the country’s most dangerously leveraged oligarch owned corporate conglomerates.

With assets of $112 billion and a capital adequacy ratio of 19 per cent, ICICI Bank is a systemic/too-big-to-fail bank, as the RBI demonstrated in 2008. Asset quality/NPL drag will only rise as the Indian economy weakens, particularly in power/gas project loans. I believe the bull run in ICICI is now over, with the subsidiaries valued at Rs215 a share. I cannot see the BSE price much above Rs1,100. So I would take profits on the New York ADR at 40 as I believe it is headed lower to 33-34.

Dr Manmohan Singh’s shock-and-awe reforms are now hostage to the political exigencies of Didi Mamta banerjee’s TMC, which has now exited the ruling UPA Coalition. The TMC vehemently opposes the 11 per cent increase in diesel prices and retail FDI. Since the TMC has 19 MPs in the Lok Sabha, the UPA will probably govern with 254 seats and solicit the support of the Samajwadi and Bahujan Samaj Party. Even Congress allies in Tamil Nadu, Karnataka and the UP have an anti-reform agenda. The Sensex and the Nifty are accidents waiting to happen.

Will Dr Singh’s government roll back/dilute its reform package if he cannot generate support from “other Parties”? I doubt it. Could the political limbo in India result in fresh elections? Possibly. Net-net, 1,500 point hit on the Sensex (400 points on Nifty?) is all too possible in October, as the BJP will sabotage the post monsoon season of Parliament irrespective of the coalition political horsetrading.

Offshore funds have bought $14 billion in 2012, the high octane fuel for the 20 per cent rally in the Sensex. The fall in the rupee after the Trinamool Congress Party left the coalition suggest that FII longs are nervous about the imminent twists in Indian politics. As the HSBC China PMI data, Japan’s export decline and the fall in Brent crude demonstrates, the global growth slowdown in all too real and risk aversion could well return to hit the rupee, Sensex and Nifty. It is significant that the three month offshore rupee forward trades at 55. The politics of reform are lethal for both Congress and myriad tribes of offshore investors on Dalal Street. Caveat emptor, Ursa-ji stalks Dalal Street if New Delhi rolls back the reforms!

Researched and written by MR MATEIN KHALID, CIO/Strategist – Fortis Holdings. He can be reached at ktglobalinvesting@gmail.com