ICICI Bank issue: How good is it?

ICICI Bank, post its merger with the parent ICICI, has emerged as the second largest bank in the country after SBI in terms of asset size. The bank is a professionally managed entity and provides a range of corporate and retail banking services. ICICI Bank also prides itself as the first universal bank in the country due to the fact that it provides a wide variety of services.

It is also the first Indian bank to offer Internet banking and also the first to get listed on the NYSE. At the end of FY03, the bank had an ATM network of over 1,500 ATMs and 540 branches spread across the country.

ICICI Bank, post its merger with parent ICICI, is the second largest bank in the country with a strong presence in the retail segment. The full effect of the merger (completed in FY02) was seen in FY03. The bank has been trying to shed its image as a corporate banker and is aggressively targeting the retail segment for growth (more so out of compulsion), at the same time reducing its exposure to the corporate segment.

Post its reverse merger in FY02, ICICI Bank has reoriented its focus towards the fast growing retail sector (36% of advances). In this process, the bank has reduced its exposure to the corporate segment both on the assets as well as the liabilities side.

The bank has aggressively focused on reducing its interest expenses by concentrating on the retail segment in order to raise low cost demand and savings deposits. ICICI Bank has, thus, over the last 2-3 years emerged as one of the largest players in the retail segment.

While the bank has aggressively targeted the retail segment off late, it still has a large exposure to the corporate segment, especially sectors like steel, chemicals and textiles (38% of total advances). This has led to high level of NPAs for the bank. In fact, post its merger with ICICI, ICICI Bank's NPAs have risen further. They currently stand at over 4% and, compared to its peers like HDFC Bank and UTI Bank, this ratio indicates poor performance from ICICI Bank.

Since the process of liberalisation was initiated in early 1990s, no other sector in India has witnessed the kind and pace of reforms as has been taking place in the banking sector. These reforms vindicate the importance of a vibrant banking system that stands as the backbone of a strong and prosperous economy. Banks, apart from being the repository of a nation's savings, are a vital source of capital for industry, commerce and agriculture.

The Indian banking sector is currently in a transition phase. One of the most significant developments in recent times has been the enactment of the Securitisation Act, which aims to tackle the menacing problem of non-performing assets (NPAs).

Another development taking place in the Indian banking industry is the increasing move towards absorption of technology and upgradation of technological infrastructure. This has immensely helped in improving the efficiency of banks in India, especially those of the public sector banks.

While public sector banks are in the process of restructuring, private sector banks are busy consolidating through mergers and acquisitions (the sector has been recently opened up for foreign investments). With increasing competition, and the need to adhere to national and international (Basel) regulations, the need of the hour for Indian banks is to continuously upgrade their existing systems and processes to meet demands of the future.

The government has initiated the process of unlocking the true potential of public sector banks. This, the government is doing by diluting its equity shareholding in these banks. Apart from improving operational efficiencies of these banks, this move is necessary if India hopes to build a first world banking industry. This will also unlock shareholder value for the government, so that the funds generated can be utilised to retire public debt and to invest in the development of the economy.

FY03 was a good year for the banking sector, as the growth in credit off-take from banks was robust. The banks also benefited immensely from the falling interest rates. Going forward, banks might not have this benefit as interest rates are not expected to fall at the same pace as seen before. Hence profit growth may be subdued. In terms of credit growth, as India's core sectors continue to witness a revival, the trend in increased credit-off take is likely to continue. Especially, retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.

ICICI Bank is a professionally managed entity that was created post the merger of the erstwhile ICICI Limited with its subsidiary ICICI Bank. Due to the merger with its parent, the shareholding of ICICI Bank has changed significantly and foreign investors now have over 73% stake in the bank.

Government controlled entities own over 15% stake in ICICI Bank, while other Indian entities hold the rest of the stake. This means that there is no defined promoter entity for ICICI Bank and the functioning of the bank is in the hands of a professional team of managers.

The objects of the issue are to provide capital for

• executing the bank's business strategy, including growth in its retail portfolio,

• international expansion,

• investment in its insurance subsidiaries, and

• other general corporate purposes.

At a price of Rs 275 (average of Rs 255 and Rs 295), the adjusted price to book ratio (based on FY04E NPA figures) of the bank stands at 2.8x. ICICI Bank has emerged as the most aggressive player in the retail segment, being the dominant player in most of the sub segments.

Having said that, the bank's performance continues to be plagued by very large levels of NPAs. Its aggressive retail foray has also led to unprecedented delinquency rates in the same. We believe that, due to these concerns, at Rs 275 the valuation of the stock seems a bit aggressive on a relative basis.

However, investors need to keep in mind the fact that the bank has significant room for improvement, which could justify to an extent the aggressive valuations. Post the capital infusion the aspect to watch out for will be the bank's NPA management strategies.