icici, or you don't see, is the question

ICICI posted its latest quarter results. Expectations you can say, and the stock, prior to the announcement, jumped 2.31% to Rs.292.25 per share. What you are going to see on Monday is anyone's guess, after all, the bank has posted its quarterly loss in a very long time. But then it could have done that past quarter or even past year. If you acknowledge bad assets, you gotta throw them into the expenses box, and if you delay doing that, a day will come to force you into it. Didn't I tell ya? That's that; what about it now? There will be a number of opinions on buy or sell. Here's my take.

The results aren't that bad actually. Rs.61 b net interest income was better than the previous quarter and much better than the previous year's same quarter. Fee income of Rs.27 b was good enough. Most banks have had to take the hit on their treasury portfolio due to the interest rate mechanisms. ICICI chose to book them all in this quarter. Last quarter showed robust treasury profits of Rs.26 b; previous year's same quarter had Rs.8 b profits. This quarter's Rs.7 b from treasuries is only modest, because there was Rs.10 b gains from Prudential Life Insurance stake sale; without stake sale, the losses would be higher. The operating profits stood like this: Rs.51.84 b during June 2017 quarter, Rs.75.14 b during March 2018, and Rs.58.08 b during June 2018. But then the bank took almost Rs.60 b in provisioning charges during the quarter leading to its historic quarterly loss on a standalone basis. Is that a bravo moment?

There are enough credits due to the bank and is legacies. It has always been a pioneer in looking at the growth prospects and adopting systems, technology, and procedures to cater to it. Other banks might have wanted to do the same, but well after ICICI embarked on it. As for now though, the bank is facing some tough times. 

For a bank, there are a few important metrics based on which we should deal with them. Return on assets measures how efficiently the bank is run considering its invested capital. Return on equity is how much its shareholders are going to get based on their investment. Both are important, but more important is how large is the debt compared to its equity capital. A disproportionate debt size can lead the bank into bankruptcy even after a small portion of its assets go bad. In this respect, ICICI bank is well positioned. With Tier 1 capital of over 15%, the bank is strong enough to look at credit growth. Its cost of funds and cost to income are acceptable. With average CASA of 46.10%, its costs of funds should remain stable. There is a drop in its net interest margin to 3.19%, and it must hope not to take it down any further. 

Even after heavy provisioning the quarter, the bank has about Rs.258 b in non-performing assets, which is over 4.50% in net NPAs. These are of course the result of making some bad decisions in the past; lending is a serious business. The bank also has some Rs.14 b in restructured assets. If we clean up its balance sheet, and thereby its equity, we get a book value of Rs.129.83. The stock isn't cheap. 

For an investor to make money on this stock, the bank has to show credit growth with a low ratio of bad assets. A 15% growth rate, and a year's time, I don't see much happening with this stock. A two-year wait, and you might get better than risk-free rates. Over three years there is a good chance that the bank will turnaround and the investor will get a fair deal.

But as we know, who has the patience to wait, isn't that a bad virtue?

what can you do in these markets

Let's talk about the Indian markets. The Nifty-50 is on a roll. It is selling for more than 27 times earnings, more than 3.50 times book, and has a very low dividend yield. Despite being volatile, the index is quite pricey. 

As usual the talking-heads have been giving their shit cents. They have to remain active you see, otherwise people will forget them soon. They desperately need attention to survive. It's another story that these people have to talk, write, and then seek money from others to pay their bills. Unfortunately, naive investors (or traders should we say?) don't get it, and fall for them. 

Here's some unsolicited advice for them. It is not difficult to feed your needs; but quite impossible to feed your greed. Learn to differentiate, and you are on to something. 

Investing in stocks is akin to owning businesses. If you started a hardware business in your hometown, would you be looking to exit in a few months or even a few years? Check reasons, and you will find that owning a stock does not mean you should sell in months. There is a business behind each stock. Learn about it, and see if it has good prospects. No one got richer overnight. If overnight is what you like, let me put it this way: You need to put in a lot of years before you can get rich overnight. If you can show patience in your hardware business, you might as well show patience after you buy a Nestle, Maruti, or ICICI bank stock. After all, they are all into some business which takes time to grow in a meaningful way. Participate in that growth story.

The best recommendation I can give to anyone including those self-proclaimed expert stock pickers is that buying the index and getting the market returns is not a bad thing. In fact, it should be a pretty good thing to do. Throw cash each month, irrespective of markets being expensive or cheap, into that index, and keep going for as long as you can. Time will then take care of both returns and risk. Ignore other people's opinions; they need your cash more than you need their advice. Let those shit-heads be. 

Of course if you are a stock picker, you could utilize the volatile times to learn about businesses, how they make money in low and high markets, how they allocate capital, what debt they have, their competitive advantages, and so forth. Then wait for the time when others are in a panic mode to make your buy decisions. There will be plenty of such occasions. But to profit from them, you need to learn to wait. The opposite is true when you want to make sell decisions. The irrational exuberance prevailing in the markets is the time to exit if at all you need to exit. 

Nevertheless, the real money is made thus: Buy quality stocks which have long term competitive advantages at reasonable prices, and hold them for as long as those advantages are sustainable. Stick with them in bad times and good times, stick with them in expensive and cheap markets. In a decade or two, this strategy should make enough money for you. 

And yeah, get rid of that emotion called envy, for it will only make you miserable like my cousin who despite earning well, saving well, and having enough, always finds himself talking about how others are making too much money. For me, he looks like an asshole. My advice to all is, don't be him. Learn to live life because it is fun all the way.

the k-banks story

Kotak bank announced results yesterday, and Karnataka bank did so a few days back. Post results, the Kotak bank stock closed down from Rs.1398.55 to Rs.1347.40 per share; and the Karnataka bank stock closed down from Rs.124.10 to Rs.114.50. A more than 7% fall for the smaller bank and less than 4% for the bigger one. Was it justified?

On 16 July 2018, Kotak bank had hit a high of Rs.1417 from its yearly low of Rs.962; that's a phenomenal performance for the investors. In comparison, Karnataka bank hit a low of Rs.105.10 on 28 June 2018 from its high of Rs.171.60 less than a year ago. 

In terms of financial performance, management, and growth prospects, Kotak bank is way superior. But what about the future returns for the investors? For Rs.2,133 b advances, a 1.95% of bad assets is exceptional. After considering non-performing assets, the book value for Kotak bank stands at Rs.264.86 per share. At the current price of Rs.1347.40, it is trading at more than 5 times the book value. This itself should put investors on caution. Remember, the higher the buy price, the lower the potential return. This applies to all businesses including the high quality ones. Let us assume that it will grow by 15% annually in the next 3 years. Even at the exit book multiple of 4, the investment returns would be less than 6.25% including dividends. At 20% growth, the returns would be just short of 11%; wait, when you reduce the exit book multiple to 3.50, the returns fall to about 6%. 

The Karnataka bank story is un poco diferente. With non-performing assets of almost 5% on Rs.477 b advances, much lower return on assets and equity, much higher debt-to-equity, and much lower regulatory capital, the bank is of course inferior in terms of business quality. Yet, the stock is available for less than its book value, adjusted for bad assets, per share. With a 5% growth, and an exit book multiple of 1, the stock returns should be over 12% in 2 years. A little better growth, and you are off to something. Do you want to take it?

Do you see the game now, how it is diced? Take your growth expectations, take your exit multiples, and play along; a la la la la long.