ICICI Bank

Currently, ICICI Ltd holds 46 per cent stake in ICICI Bank. In the case of merger, instead of extinguishing the shares, the company has decided to transfer the stake to a special purpose vehicle (SPV) to be created in the form of a trust. Post merger, this would form about more than 16 per cent of the total capital. This is an intelligent move by the company, as it would solve many purposes. First of all it is not prudent to extinguish capital in a scenario where the cost of raising capital itself is very high. Secondly, by doing so the bank would be able to safe guard its capital adequacy ratio. Thirdly, the plan is to divest the stake to a strategic partner few years down the line, which would fetch the bank considerable amount of cash. The shares would be transferred to the SPV at the price at which ICICI bought the shares i.e. Rs 12 per share.

A major concern in the road ahead to the merger is the reserve requirement that a bank is supposed to maintain. At present these requirements are not applicable to ICICI Ltd. A bank has to maintain a Cash Reserve Ratio of 5.5 per cent with RBI and a Statutory Liquidity Ratio of 25 per cent. ICICI would require a total of Rs 18000 crs to fulfill this requirement. Now this is a huge amount and given the current scenario. It would be much difficult for the institution to raise such an amount. The group plans to raise the required funds partly through ICICI and partly through ICICI Bank. But given the strength of ICICI Bank, substantial portion would have to be brought in by ICICI.

Another issue is of fulfilling the priority sector-lending requirement. This requirement currently stands at 40 per cent i.e. 40 per cent of the lending is to be made to priority sectors.

ICICI Ltd has taken the securitisation route to raise funds and as per reports, it has already securitised corporate loans worth Rs 4000 crs. ICICI Bank on its part is also on a deposit mobilization spree. These deposits would be apart from the deposits, which they would raise for their normal business activities.

In terms of fulfilling the reserve requirement, the FIs have been demanding that it should be applicable only to the incremental deposits, or it be could be applicable in a phased manner over a period of 4-5 years. This would allow the players to put in place the strategy, which would enable them to earn a decent spread even after putting the money in government securities or keeping with RBI.

In the case of priority lending, which is to the extent of 40 per cent, FIs have been demanding that infrastructure advances be treated as priority lending. This has been the demand of the banking industry also. If this is allowed then ICICI would not have any problem in fulfilling the requirement. But we feel that RBI will allow some leeway for the players taking the universal banking route in this area.

ICICI Limited could have a game plan for the scenario where it has to maintain the statutory reserves in the first year itself. In that case it would require to raise an estimated sum of Rs 18000 crs before March ’02. For this is has following options available:

• Reduction of loan portfolio - ICICI could reduce its loan porfolio. This could be done by withholding the proceeds from loan repayment or by way of securitisation of loans. ICICI could offload some of its good loans at discount to other players.
• Through retail deposits of ICICI Bank – ICICI Bank could raise part of the funds requirement through retail deposits. This would bring down the burden on ICICI Ltd and retail deposits could be a good low cost option.
• ICICI Ltd itself could go in for additional borrowing for the funds requirement. This would of course be in addition to the fund requirement in the normal course of the business.

Average cost of borrowing for ICICI ltd for FY01 was 11.71 per cent. Its Gross yield was 13.54 per cent for the same period. Either way ICICI Ltd would have to take a hit in the bottom-line in the initial years. By bringing down its loan portfolio and diverting these funds for the reserve requirement it would have to forego some of the interest spread. CRR would get a return of 6.5 per cent and amount in SLR would generate a return of about 9.5 per cent. Even in the case of fresh funds the cost of borrowing would be higher and the return on those funds would be less.

How the players would be benefited  

• The main objective of adopting the path of universal banking is that financial institutions are finding it increasingly hard to survive in a scenario of high cost of borrowing and decreasing spread with interest rates going down. Cost of borrowing for a financial institution through bonds is much higher than a bank, which can raise current and saving deposits. As per regulations, FIs cannot raise these deposits. Post merger it would be possible for them to do so.
• Also increasing disintermediation has made things increasingly difficult for ICICI Ltd. Triple "A" borrower, customers of ICICI Ltd, can today access funds at much lower cost than from ICICI Ltd. And ICICI Ltd cannot afford to lend at that rate, as its own cost of funds is high. Once it is converted into bank it would have access to cheap funds, which would enable it to lend at competitive rates.
• ICICI Ltd as a combined entity would be better equipped to handle issues arising from potential asset liability mismatches due to more stable deposit base.
• Post merger ICICI Bank would be able to significantly enhance its fee based income based on the strength of its balance sheet. At present ICICI Ltd cannot carry out certain activities as it is not a bank and therefore loses out on the fee based income. ICICI Bank on the other was constrained because of the limited size of its balance sheet. The sheer size of the balance sheet post merger would boost the fee-based income.
• The high margin retail loan portfolio is at present with the various subsidiaries. Post merger this would be transferred to ICICI Bank.

• The assets quality of ICICI Bank, which has been its biggest strength, would be affected post merger. ICICI Ltd has NPAs of 5.2 per cent for FY01 as against ICICI Bank’s NPAs of 1.4 per cent.
• At present ICICI Ltd can claim a deduction of upto 40 per cent of its profits from its long term lending by transferring the amount to special reserve. Post merger, this benefit would stand withdrawn in the case of incremental loans.

The success of this merger would really depend on the fact that how the merged entity is able to raise low cost retail deposits, one to offset the negative impact from fulfilling the reserve requirement and second to replace its high cost wholesale borrowings. It would also depend on how effectively it is able to leverage the corporate relations and the large fund base in bringing in non-fund income.

One concern, which still looms large is whether ICICI Ltd would still require to make any accelerated provisioning to clear its books. The question is to what extent and what would be the magnitude. We expect that ICICI would like to clean up its books before making a new beginning. If no major surprises come, the going for the new entity would be really good.

• Net Profit up by 120 per cent to Rs 66.2 crs.
• Operating Profit up by 66 per cent to Rs 97 crs.
• Total Deposits up by 80 per cent to Rs 17515 crs since September ’00.
• Total customer assets up by 80.4 per cent to Rs 11409 crs.
• Return on Assets up from 1.29 per cent to 1.37 per cent on annualized basis.
• Return on Net Worth up from 11.85 per cent to 19.07 per cent on annualized basis.
• Market share in Deposits up from 0.97 per cent to 1.52 per cent in the first half.
• Market share in customer assets up from 1.26 per cent to 2.01 per cent in first half.
• Cost to Income ratio up from 51.2 per cent to 54.1 per cent in first half.

• Net Profit up by 11 per cent to Rs 282 crs.
• Total assets up by 8.7 per cent to Rs 74371 crs.
• Return on Assets remained stable at 1.8 per cent on an annualized basis in the first half.
• Return on Net Worth up from 13.5 per cent to 14.7 per cent on annualized basis in the first half.
• Overheads / Net Income from Operations down from 18.5 per cent to 14.2 per cent on an annualized basis in the first half.
• Overheads / Average net assets down from 0.6 per cent to 0.5 per cent on an annualized basis in the first half.

* Book value is as of 31^st March 01.

** Annualised

Based on the December 01 quarter EPS as per KRC Earning Estimates, the stock is trading at a PE of 6.6 based on annualized earnings.

ICICI group has pioneered the concept of universal banking in India. And probably no other player has prepared it self for moving towards that, as much as ICICI group. The concept of universal banking has found favour with many global players. Some of the international players, which have realized the benefits of universal banking are ABN-AMRO, Citigroup, HSBC, UBS etc. No doubt in the time to come the benefits of this move will start flowing in.

Last Prices: 83.20

13 Day EMA: 89

15 Day EMA: 95

200 Day EMA: 116

It is below all its three EMAs and is placed near the over sold zone. The Parabolic SAR is currently in sell mode. MACD indicator is in negative zone. Thus a move passed 90, will give bullish triggers. The scrip witnesses an average volume of 50-70 thousand shares. It has a support at 79 while resistance for the short term is at 99.