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ICICI, ICICI Bank merger to create powerhouse

Leading Indian term lender, ICICI Ltd and the ICICI Bank, on Thursday agreed to merge to create the country's first universal bank, a one-stop shop for financial services.

With total assets of Rs 950 billion ($19.8 billion), the merged entity will be second only to the state-owned State Bank of India, which has assets of Rs 3.16 trillion.

"The merged entity will be able to compete with any threat from global players I see coming to India or any of the domestic entities," K V Kamath, managing director and chief executive of ICICI, told a press conference.

The merged institution, which will marry ICICI's strength of corporate banking and project finance with the retail reach of ICICI Bank, is set to become a one-stop provider of virtually all types of financial services.

The merger ratio was set at two ICICI shares for every one ICICI Bank share, the banks said in a joint statement.

After the announcement, the shares of the two companies moved to align with the ratio. ICICI Ltd ended down 9.4 per cent at Rs 52.60, while ICICI Bank ended up 8.3 per cent at Rs 106.25.

Although the appointed date of the merger is March 31, the firms said they would await central bank approval.

The new bank will be called ICICI Bank Ltd, and will be headed by Kamath.

The bank will have a capital base of Rs 95 billion, 8,300 employees and a huge nationwide branch network.

ICICI was founded 47 years ago, and ICICI founded ICICI Bank eight years ago, and now owns a 46 per cent stake.

Both companies are listed on the New York Stock Exchange and are based in Bombay, the Indian financial capital.

NEED TO MERGE

ICICI wanted to merge with its banking subsidiary to beat a perceptible slowdown in financing long-term projects, analysts said.

"This is basically a survival move from ICICI, as their core business doesn't look too good and they need become a bank, since only banks have access to low-cost funds," said an analyst with a foreign brokerage.

On the other hand, the merged entity, as a bank, will have to meet reserve requirements, from which ICICI as a financial institution was exempt.

"We will have to raise Rs 180 billion to meet cash reserve ratio and statutory liquidity ratio requirements," Kamath said.

The new bank will also have to lend at reduced rates to the agriculture and small industries, according to government rules, which could hurt growth and profitability in the short term, he said.

Indian banks must maintain a cash reserve ratio of 7.5 per cent and statutory liquidity ratio of 25 per cent, and 40 per cent of their loans should be to the agricultural and the small industry sectors.

The cash reserve ratio is that portion of banks' deposits that it must maintain in cash, while the statutory liquidity ratio is that portion of liabilities the banks must hold in the form of government securities.

CHEAP CASH

Another reason for ICICI to hasten a merger was to access cheaper funds, with the announcement coming just three days after the Reserve Bank of India said it would begin processing applications to create universal banks.

"The move towards a universal bank will be positive for the firm in the long term," said Rajesh Sundaresan, a banking analyst at Credit Suisse First Boston, Hong Kong. "It will give the firm access to low-cost deposits."

Current rules prohibit ICICI and other long-term lenders from raising deposits of less than one-year maturity, which usually pay lower rates of interest. But that restriction is not applicable to commercial banks.

That would enable the new entity to compete more effectively in the retail finance market dominated by banks, to compensate for slowing loan demand from corporations and for big projects.

Loans to corporations and the manufacturing sector accounted for 75 per cent of ICICI's total loan portfolio of Rs 637.87 billion in the past year to March, while infrastructure projects accounted for 21 per cent.

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