ICICI corners 23% of derivatives mart

ICICI Bank has made inroads into the complex world of financial derivatives, which till not long ago was the exclusive domain of foreign banks.

In about three years, the bank says it has captured a 23 per cent market share in the derivative business, helped by its relationships with Indian companies which are growing their operations globally.

The largest private sector bank began gradually building up its derivatives capabilities, in terms of people and technology in 2004 and now has a fairly large treasury team.

As the bank tastes success in derivatives business, the country’s largest lender, State Bank of India (SBI), is taking the initial steps to acquire derivatives capabilities. The public sector banks has also deployed marketing staff across cities to source business for its core treasury team.

As it considers whether to organically build its own capabilities or acquire a derivatives house in Europe for a price as high as $200-300 million, the public sector bank has in the meanwhile entered into arrangements with foreign banks JP Morgan Chase and DSP Merrill Lynch to source products that would meet the requirements of its corporate clients.

Foreign banks had near monopoly in offering complex foreign exchange and interest rate derivative products to Indian companies, as they could also import any product required from their global experts.

Indian banks in the first place did not have the necessary expertise, but have not begun to feel the need to built such expertise. ICICI Bank has reached quite a distance and SBI has made serious beginnings towards acquiring the necessary expertise for offering full range of derivatives products.

Chanda Kochhar, ICICI Bank’s Deputy Managing Director, said “So far, banks like us had the capability in lending but we did not have access to the structured market business. Now that we have built these capabilities, we have a larger pie of the fee. Large part of the fee income comes from advisory, syndication, transaction banking fee, derivatives and others. A very small part of the fee income comes from lending.’’

In fact, treasury operations helped ICICI Bank report a good increase in profit in 2006-07. The bank’s profit before tax from retail and corporate banking had fallen by 12 per cent to Rs 2,338.38 crore but from treasury operations it nearly tripled to Rs 1,348.06 crore, ensuring a good 22 per cent rise in net profit to Rs 3,110.22 crore from a year earlier.

SBI is also reaping the fruits of seriously getting into the treasury business having earned a total income of over Rs 100 crore in the first quarter of 2007-08, against Rs 44 crore in the whole of 2006-07. For foreign banks like Citibank, Standard Chartered Bank and HSBC, the contribution to profits from corporate banking in 2006-07 ranged from 70 per cent close to 100 per cent.

Kochhar said “We have set up a dedicated foreign exchange derivatives business team of 100 people. The volumes and transaction sizes have also increased.”

ICICI Bank’s trading volumes in currency derivatives increased by 70 per cent to Rs 73,093.16 crore in 2006-07 from a year earlier and in interest rate derivatives by 28 per cent to Rs 2,79,474.31 crore from a year earlier.

Shilpa Kumar, joint general manager-global markets group at ICICI Bank , said ``We set up the treasury team after the merger in 2004. From 15 members, we have ramped up our team. Our model has always been to garner market share which would help us give our corporate clients better pricing power. The derivatives business is driven by volatility in the foreign exchange market.’’

The bank has product experts that assist corporate bankers in helping companies understand various derivatives products which would best suit their operations.

“Our large franchise, corporate and SME relationship and the talent pool have been an advantage. We had to develop an in-house facility on structuring. The franchise and technology are fairly important in driving the derivative business. For foreign banks, this is easy as they can import products from their group headquarters,’’ pointed Shilpa Kumar.