ICICI Bank is the largest private sector bank and the second largest bank in the country in terms of assets. It is a pan-Indian player. The company has boosted its overseas operations in the last three years and has now presence in 17 countries either through subsidiaries or extension counters. Total branches excluding the network of recently merged Sangli Bank, stood at 710 branches, 45 extension counters and 3,271 ATMs. Of this, 63% of the branches are in metropolitan and the remaining in semi-urban/rural areas.
Together with its subsidiaries, ICIC Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. ICICI Prudential Life Insurance, the life insurance subsidiary, is the largest private sector insurer in the country with a market share of 10% end March 2007. Similarly, ICICI Lombard General Insurance, the general insurance subsidiary, is the second largest private general insurance company in the country with a market share of 12% end March 2007. Likewise the company through its subsidiaries is one of the top two players in the asset management and private equity (venture fund) businesses.
The Rs 8750-crore follow-on public offering (FPO) with a green-shoe option of Rs 1312.50 crore is part of the bank’s consolidated capital-raising exercise of Rs 20125 crore including a green-shoe option of Rs 2625 crore. The balance Rs 10062.5 crore, including a green-shoe option of Rs 1312.50 crore, is to be raised through an issue of ADRs listed on the New York Stock Exchange (NYSE). The issue will be 100% book built with up to 5% of the issue, or Rs 437.50 crore, reserved for existing retail shareholders of the bank. Retail bidders, including existing retail shareholders, will be allotted shares at a discount of Rs 50 per share to the issue price determined through the book-building process.
The issue also provides retail bidders and non-institutional bidders the part-payment option. Retail investors can pay Rs 250 per share on application, Rs 250 on allotment and the balance amount on call to be issued by the bank within six months from the date of allotment.
The primary object of the issue is to enhance the capital base to meet the future capital requirement that would arise on the implementation of the Basel Norm II from 31 March 2008 and to capitalise on growth opportunities that the Indian financial sector will throw up as it grows at a fast pace. The capital adequacy ratio (CAR) was 11.7% (with Tier 1 CAR of 7.4% and Tier 2 CAR of 4.3%) end March 2007, higher than the Reserve Bank of India (RBI) stipulated 9%. CAR would have been 12.81% end March 2007, but for the exclusion of US$ 750 million raised through foreign currency convertible bonds (FCCBs). These FCCBs purportedly qualify for Upper Tier II capital. The company has, however, indicated they were excluded pending clarification from RBI.
Strengths
- ICIC Bank is at the forefront of building market leadership in the entire spectrum of the financial services business that is driven by robust economy and backed by strong network, savvy technological platforms and aggressive strategies.
- Proposes to reorganise holdings in the life and general insurance and asset management subsidiary companies in favour of ICICI Financial Services (IFSL), a new subsidiary created for this purpose. Subsequently, 5.9% stake in IFSL will be divested to bring in additional capital required for the expansion of business in the three financial services spectrum. The bank has got definite offers for subscribing to equity stake worth Rs 2650 crore, in the process valuing IFSL at Rs 44600 crore.
- In future, more capital will be available for expansion of the core business as subsidiaries are likely to become self-financing after their reorganisation.
Weaknesses
- The net non-performing asset (NPA) ratio stood at 0.98% end March 2007 compared with 0.71% end March 2006. Of the gross NPA of Rs 4850 crore end March 2007, the gross retail non-performing liability (NPL) was Rs 3090 crore. Net NPA was Rs 2019 crore end March 2007, with the share of net retail NPL at Rs 1512 crore (47% non-collateralised). The coverage ratio (total provisions and technical write-offs made against non-performing assets as a percentage of gross NPAs) has come down from 63.72% end FY 2006 to 58.37% end FY 2007. The share of retail finance to gross advance net of write-off stood at 65.2% end March 2007 compared with 62.9% end March 2006 and 60.9% end March 2005. The recent sharp rise in interest rates increases the chances of defaults in the retail segment, and ICICI Bank remains the most vulnerable to this possibility.
- Despite a wide network of branches and extension counters, the deposit base had poor CASA (current account-saving account) ratio of 21.8% end March 2007 compared with 22.7% end March 2006 and 24.3% end March 2005. This coupled with the bank’s penchant for garnering high cost deposits has meant low net interest margin of 2.57%. Most of its deposits are also short term, creating funding mismatch as a large portion of the assets, including the home-loan portfolio, has medium- and long-term maturities. Home loans formed 49.4% of the total retail advances end March 2007.
- This is the third FPO in the last four years, indicating capital guzzling. On the one hand, the bank’s four-year net profit CAGR is only 17%, much below the 30-40% rate at which peers are growing. On the other hand, its equity has increased at a CAGR of 10%, thus depressing the CAGR in EPS to 7%
Valuation
Pre-issue, ICICI Bank’s FY 2007 EPS and Book Value (BV) stand at Rs 34.6 and Rs 270.35, respectively. At the current price of Rs 917.85 (on 18 June 2007, the pre-IPO opening date), P/E and P/BV stand at 26.5 and 3.4, respectively. HDFC Bank’s and UTI Bank’s P/E and P/BV stand at 30.5, 5.4 and 26, 5.1, respectively.
The last three-month high/low and the average share price of works out to Rs 994.3, Rs 791.15 and Rs 890.14, respectively. The offer price band is Rs 885 to Rs 950. Naturally, without the Rs 50 discount, retail response would have been very poor. The ADR price of ICICI Bank closed at US$ 47.39 per ADR (representing two underlying shares) on NYSE, which is equivalent to Rs 970.78 per share at an exchange rate of one US$=Rs 40.97. The ADR issue price is likely to be at a premium to the domestic issue price.
At the upper and lower end of the price band of Rs 885 and Rs 950, ICICI Bank’s FY 2007 EPS on post-issue equity works out to 27.6 and 28. Post-issue BV stands at 394 and 400.
Given the tremendous growth potential in the Indian financial markets and its capacity to capitalise on it, ICICI Bank will remain one of the most fancied stocks of FIIs (current foreign holding is 71.57%). As long as global liquidity conditions remain favourable, there will be no dearth of FII buyers. How else can you explain the ICICI Bank scrip shooting up 74% since its last FPO in December 2005 compared with a 60% gain in the BSE 30-share Sensex, when the bank has managed only a 22% growth in net profit (compared with the Sensex companies’ aggregate growth of 31%) on 22% dilution of equity since its last FPO, effectively showing almost a flat growth in EPS.
Well if you should require any quantitative justification, there are two. BV jumped due to the premium collected in the last FPO. The bank issued shares at Rs 525 per share (at Rs 498.75 for retail investors) when the pre-issue book value was just Rs 185.41. Second is the recent unlocking of value of its insurance and asset management subsidiaries ( their value works out to Rs 495.92 per pre-issue share). After the present FPO too, BV will jump 46%-48% due to the huge premium. Besides boosting BV, the FPO funds will bolster the net interest margin (NIM) also as they will not carry any cost in the profit-and-loss (P&L) account and, possibly, the growth in net profit in FY 2008 could outstrip equity dilution of 24%-25%. For FIIs, post-issue P/BV of only 2.2- 2.4 would remain an attractive carrot.