ICICI Bank: Impact on the stock due to CBI implicating former CEO, if any, will be temporary

India’s federal investigating agency -- the Central Bureau of Investigation -- filed a FIR (first investigation report) against former ICICI Bank CEO and MD Chanda Kochhar, husband Deepak Kochhar and Videocon group MD Venugopal Dhoot in connection with alleged cheating and irregularities in loans of Rs 3,250 crore sanctioned by the bank to Videocon group companies in 2012.

This is the latest move in the series of events that have untraveled so far at ICICI Bank after the controversy around Kochhar first surfaced in March last year.

Kochhar has been caught up in allegations of corporate misconduct and quid pro quo in sanctioning of loans to the Videocon group. The board, which initially backed its CEO, acted belatedly but appropriately, constituting a committee headed by former Supreme Court Judge BN Srikrishna to probe the matter. While Kochhar’s term was scheduled to end in March, she went on leave in June last year till the probe into her conduct was completed by an independent agency (Srikrishna committee) but finally resigned in October 2018.

The latest twist of CBI implicating the former CEO & MD of ICICI Bank shouldn’t come as a shock to investors.

The allegations against the former CEO, though unproven, are no casual accusations and are being probed by multiple agencies, including the CBI, Securities and Exchange Board of India (SEBI) and Income Tax authorities, in addition to the internal enquiry instituted by the bank. Possibility of getting an unequivocal clean chit from everywhere is remote.

So, should this deter prospective investors and worry existing shareholders? Not really Kochhar has been accused of cheating ICICI Bank of Rs 1,730 crore, which is already classified as non-performing assets (NPAs) by the bank. By no means is the controversy around the former CEO and MD of ICICI Bank of the nature and scale similar to that of the fraud detected at Punjab National Bank in early 2018. In the case of PNB, fraudulent transactions worth over Rs 14,000 crore significantly weakened the bank’s financials and highlighted flaws in the internal controls and risk management processes of the public sector lender.

The FIR also names current ICICI group officials, including CEO Sandeep Bakshi, who were part of the credit (loan sanctioning) committee. While the same may be a part of investigation process, questioning decision takers on a business call gone wrong gives an impression of witch hunting. As a result, CBI’s action can impact incremental credit decisions in the banking industry.

That said, merely being named in FIR does not debar Bakshi and other key employees from holding their positions. As such, it will not impact bank’s functioning unless any individual named in the FIR is convicted.

The enquiry and CBI’s action is against an individual associated with the bank in the past and not against ICICI Bank or its lending practices. Hence, Kochhar’s resignation allayed investor concerns around corporate governance at ICICI Bank. The positive stock reaction following the announcement of Kochhar’s permanent exit from the bank in October 2018 corroborates this argument.

ICICI Bank’s shares underperformed the Nifty since Kochhar’s troubles began at the end of March and continued till her going on leave around mid-June. After her exit on October 4, 2018, the stock has significantly outperformed the Nifty till date.

Despite the outperformance, ICICI Bank is still the cheapest corporate lender in the private sector, trading at 1.4 times FY20 estimated book. Investors focus should be on the bank’s earnings trajectory, which will be the key driver of the stock price. With a potential improvement in return ratios on receding asset quality issues, the stock can re-rate sharply over a period of time. Implication of the former CEO doesn’t alter the growth path of the bank. Hence, correction in the stock price, if any, following the negative news flow around Kochhar presents a great opportunity to investors to accumulate the stock.

Follow @nehadave01

 For more research articles, visit our Moneycontrol Research page