S&P votes in favour of ICICI's new initiatives - Views on News from Equitymaster

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S&P votes in favour of ICICI's new initiatives

Sep 9, 1999

According to newspaper reports, Standard & Poor's, a leading credit rating agency, has revised its rating outlook on ICICI Ltd. to 'stable' from 'negative'. S & P has also reaffirmed the financial institution's long term rating of 'BB' and short term foreign currency rating of 'B'. ICICI is India's second largest financial institution, with a major presence in almost all areas of financial services. The company has an asset base of Rs 585 bn.

After this revision, ICICI's rating is at par with the sovereign rating and a grade above the ratings assigned to other Indian financial institutions. S & P has outlined various reasons for this upgradation in rating:

  • Steps taken towards universal banking, including retail franchise, that have helped in the diversification of risk
  • A stronger balance sheet (and the adoption of prudential accounting norms)
  • Lesser probability of significant deterioration in the asset quality
  • Leadership position in innovative and infrastructure financing

The credit rating agency has, however, cautioned against the following:

  • Project finance continued to account for a large chunk of the business
  • A high level of non performing assets by global standards

The revision in the rating outlook is likely to come as a shot in the arm for ICICI, which has just launched domestic public offering. The financial institution will also be launching an American Depository Receipts (ADRs) issue later in the year.

ICICI's operations are being constrained by the relatively lower levels of capital that it presently has. Its capital adequacy ratio (CAR), as on 31st March 1999, was at 8.3%, marginally higher than the minimum stipulated 8%. This has added a sense of urgency to the institution's plans to raise capital from domestic and overseas markets. The revision in the rating outlook will certainly improve the prospects of such exercises.

ICICI has been pursuing aggressively its goal of becoming a 'universal bank'. As a step towards this, the financial institution has acquired domestic retail finance companies, a segment where it did not have a presence till recently, and has also broadened its product portfolio to include loans for durables. ICICI has also been taking measures to rid its books of the high level of gross non-performing loans (FY99 11.4% of total assets). It has adopted the US-GAAP (Generally Accepted Accounting Principles) in order to comply with the global standards.

The revision in the ratings outlook is a reflection of ICICI's commitment in transforming the development finance institution into a universal bank, having a global presence.

Market View:

Analysts have rated the stock as a 'BUY' mainly on account of the improving economic conditions and a recovery in prices of commodities. ICICI has a large amount of non-performing loans on its books, which primarily are owed by companies operating in the commodities markets.

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