ICICI Bank, the largest private sector lender in the country, plans to repatriate a large part of its capital from its UK arm as its business growth there has slowed significantly due to the economic turmoil in the euro zone and a stringent regulatory environment. The bank has already initiated a similar move in Canada.
The bank has shed its investment portfolio in the UK and feels that despite repatriation, the subsidiary will have more than adequate capital to meet its business needs as the capital adequacy ratio is at 34.1 per cent.
The UK subsidiary saw a further decline in its balance sheet in the first three months of this financial year. Its total assets were $3.86 billion at the end of June 2012 compared to $4.08 billion a quarter ago.
“In the past, the bank was growing its UK business at 70 per cent per annum. The capital was allocated based on this growth rate. Given the regulatory environment, ICICI Bank does not see too much growth possible there. Even if there is a nominal growth, it doesn’t need that much of capital,” said a senior banking industry executive.
The private lender had earlier started discussions with the Canadian regulator for permission to send home a part of the capital of ICICI Bank Canada for a similar reason. “We have started a broad dialogue with both the regulators (in the UK and Canada) to say we would like some of our capital to come back,” an ICICI Bank executive said.
The bank’s Canadian subsidiary closed the April-June quarter with a capital adequacy ratio of 31.8 per cent.
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“We put in large capital three-four years ago, assuming much higher growth rate in those businesses. But since then we are only calibrating growth and have not really grown the balance sheet. Therefore, the capital there is in excess of the business requirement. So, in that sense, we will bring back some of the excess capital,” the executive added.
According to sources, from a profitability perspective the bank will fail to generate “a reasonable return on equity” if it leaves surplus capital idle in its overseas subsidiaries.
ICICI Bank currently has three overseas banking subsidiaries in the UK, Canada and Russia. In all the other international markets, the bank operates through branches.
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“The businesses are going to be there as they are strategic for us. We are not talking about shutting our businesses (in the UK or Canada). But the proportion of the international book will come down. When we see the global scenario, the right strategy is to have flat growth,” the executive said.
The overseas book currently has around 25 per cent share in the bank’s overall business. But it is partly on account of the depreciation of the Indian rupee against the US dollar. In the last three-four years, the bank’s international businesses have grown at a slower pace than its India operations.