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ICICI: Before becoming a bank

Sep 3, 2001

ICICI has already indicated its plans to become a universal bank in the next 12-18 months. The biggest benefit would be access to low cost funds but in turn the institution will have to follow the norms for CRR and SLR requirements like any other banks. However, ICICIís large number of subsidiaries could slowdown its plans of merging with the bank. The existing Banking Regulation Act specifies that in the process of transition to a bank, the financial institution would have to de-link such activities in which subsidiaries may be engaged, which are not in consonance with activities specified for bank subsidiaries.

As per the annual report of FY01, ICICI has 31 subsidiaries engaged in the areas of insurance, personal finance, software, broking and investment banking. The institution has already pruned its number of subsidiaries to 24 as on July 2001 (by consolidating Infotech subsidiaries). This has facilitated ICICI to enter into non-life insurance business. (Cutting down of subsidiaries was one of the preconditions laid down by the RBI for ICICIís foray into the general insurance along with the lowering of non-performing assets (NPAs)).

Now to convert into a bank, ICICI has decided to further reduce the number of subsidiaries to 12 in a span of 12-18 months. Also, to meet the regulatory requirement for maintaining CRR and SLR norms when it turns into a bank, ICICI is likely to require about Rs 180 bn Ė Rs 200 bn. The other concern is its high level of gross NPAs, Rs 60 bn as on March í01. It is planning to raise Rs 150 bn during the current fiscal to bring down the net NPA ratio as a percentage of total loan assets to below 5% within the next three years (5.1% in 1QFY02). ICICI has already brought in fresh capital to the tune of Rs 30 bn and has provided Rs 1 bn as provision for NPAs in the June quarter of FY02. If the gross NPAs of ICICI accelerates in the current year due to downturn in the industrial activity, it may have to make higher provisions to achieve the target. This in turn would again depress the earnings growth in FY02.

Snapshot of key subsidiaries financials
(Rs m) % Stake Profits Revenues Profits Revenues ICICI's share
in profits
    FY01 Growth
ICICI Bank 46% 1,610 12,421 53.3% 45.6% 741
ICICI Securities 100% 538 3,054 -25.4% 2.0% 538
ICICI Brokerage services 100% 28 166 -39.8% 95.4% 28
ICICI Web Trade 100% (102) 143 - - (102)
ICICI Infotech 92% 279 1,079 165.7% 158.3% 257
ICICI Venture Fund 100% 105 344 -72.8% -80.8% 105
ICICI PFS 100% 31 343 -42.5% 43.1% 31
ICICI Home 100% 15 578 2888.0% 2586.4% 15
ICICI Capital 100% 32 486 55.9% 202.9% 32
ICICI Prudential Life Insurance 74% 2 61 - - 2
Total   2,536 18,676     1,644

While ICICIís banking and personal finance subsidiaries are minting money, its subsidiaries in the capital markets activity have taken a hit in FY01. ICICI Infotech is also one of the fast growing companies on low revenue base. However, the company needs to diversify its client base in order to maintain the growth trajectory in future. ICICIís aggressive investments through ICICI venture fund have already resulted in an 81% fall in earnings in FY01. If the current weakness in the markets continues, the subsidiary is likely to record further drop in profits. These subsidiaries together accounted for about 10% of its earnings (excluding adjustment for accelerate provisions) in FY01. The ratio could however come down in the current year with its investments in insurance business and sluggish capital market activity.

Although, ICICI requires an amount of Rs 200 bn to covert into a bank, it would be a tough task for the institution to raise the money. This is in view of the recent fiasco of IDBI and IFCI. Exercise of call option by IDBI on its flexibonds has already shaken investor confidence. Even considering the fact of higher credit rating of ICICI, raising funds from the retail market at low cost might be difficult (loans to power sector are another concern). This in turn could delay its plans to convert into bank.

At the current market price of Rs 53, ICICI is trading at a P/E of 4x and Price/Book value ratio of 0.5x, FY02 projected earnings.

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