Most Mutual Funds have ICICI Bank on their SELL list

To begin with, there looks to be nothing wrong with the stock of ICICI Bank. It has been one of the most preferred stocks in Indian banking space in the last 2 years. It is not just the price appreciation that the stock seen, pipping SBI to become the second most valuable bank in India after HDFC Bank. ICICI Bank has also seen a sharp improvement in its financials. For instance, its operating margins had become more robust, gross NPAs were down sharply and also substantially provided for and NIMs had finally touched the magical 4% mark. But above all that, it was corporate governance that impressed investors.

Just about 4-5 years ago, the stock of ICICI Bank had come under a major question mark. Its CEO Chanda Kochhar had been indicted in a Videocon kickback scandal and the image of the bank had touched a low. With Sandeep Bakshi taking over as the CEO of ICICI Bank, the changes were rapid and immediate. The corporate governance system was ramped up sharply, there was a focus on bring down cost of capital and a sharp focus on growth, retail assets and a focus back on valuation and value creation. The results are visible and that change had led the bank to become a favourite among institutional investors.

Is it true that ICICI Bank has seen aggressive selling by the mutual funds. Let us just look at the September data for Indian mutual funds. In September, SBI MF was the only large fund to add ICICI Bank to its portfolio. ICICI Pru MF cut its exposure to ICICI Bank by 1% from 20.43 crore shares to 20.17 crore shares. HDFC MF reduced its stake in ICICI Bank by just 2 lakh shares but Nippon AMC cut its stake in ICICI Bank by 1% to 9.07 crore shares. Among others Aditya Birla Sun Life AMC cut its stake in ICICI Bank by 2% to 9.79 crore shares and Axis cut its stake in the bank by 3% to 1.62 crore shares. 

In addition, Kotak MF by 3% to 1.62 crore shares and DSP MF by 5% to 3.97 crore shares in the month of September. If you just go back to the month of August, ICICI Prudential MF, Nippon AMC, Aditya Birla Mutual Fund and Axis Mutual Fund were net sellers in ICICI Bank. Mirae MF and DSP MF reduced their stake in ICICI Bank in the month of August 2022 by 8-10%. In short, the selling in the ICICI Bank counter by Indian mutual funds has been quite heavy in the last few months. However, the consensus among analysts is that ICICI bank will emerge as the best-in-class lender in both retail and corporate loan categories.

Most analysts continue to be a big fan of this bank and its performance in the last couple of years. For example, all the 54 analysts who track ICICI Bank currently are having a Buy rating on ICICI Bank, with zero neutral or sell ratings on the stock. The stock is already up by 22% in the year 2022 till date and the stock has nearly doubled in the last 2-3 years. In FY22, ICICI Bank overtook HDFC Bank to become the most owned stock in the portfolio of mutual funds, accounting for nearly 6% of the overall holdings of the mutual fund AUM. Investors are still happy about the corporate loan cycle and comfortable on corporate governance.

If the story is so good, then why is the selling so relentless. To be fair, this selling could be more an outcome of portfolio reallocation by the major funds that are already overallocated to the stock of ICICI Bank. In the last 3 months, domestic mutual funds have been net sellers in the shares of ICICI Bank to the tune of Rs2,350 crore; which is a substantial amount. Most of the mutual funds exiting the bank today are the ones who had entered the stock around the start of the turnaround in the year 2020. Since ICICI Bank has given consistently positive returns, the selling could be portfolio reallocation and also respecting the 10% limit.

With HDFC Bank likely to be under pressure over the next 2 years till it consolidates its merger with HDFC Ltd, the road is clear for ICICI Bank to assume the pivotal role. Most mutual funds are of the view that ICICI Bank should emerge as a premium lender in terms of its digital footprint and margin profile. Most analysts feel that the stock of ICICI Bank may still be substantially under-owned. That still leaves a lot of headroom for ICICI Bank to ingratiate itself better with the mutual funds. More than anything, the gap that HDFC Bank leave with its merger preoccupation, opens the doors wide for ICICI Bank. Mutual funds are very likely to come flocking back to the stock once again.