Capital protected

Analysts say ICICI Bank issue is priced right from a long-term view

India's leading private sector bank, ICICI Bank, has hit the markets with a public issue aggregating a whopping Rs 3,500 crore.

The primary reason for the issue, as the bank states, is to increase its tier-one capital to fuel growth. The bank also expects the issue to help it prepare for the Basel II norms which will come into play in a couple of years.

The norms require banks to maintain a higher capital adequacy ratio (CAR) of 12.5 per cent. In a competitive scenario like the one prevailing among Indian banks, a swell in the capital is positive as it will help the bank leverage its capacity as a universal bank.

But will the bank be able to service its bloated equity capital well enough to deliver decent returns to shareholders?

The growth story

Analysts say one needs to look beyond the institution's banking operations. The bank's insurance, mutual fund and investment banking business need to be viewed in consortium.

"Within the next three-four years, the insurance business should be able to contribute a major chunk to the group's income," says an analyst with a domestic research house.

Currently, the bank's subsidiaries together do not contribute much to the group's earnings. Analysts, however, believe that in the next three-four years, ICICI Securities and ICICI Prudential Life Insurance should bring in substantial earnings. Going ahead, this potential earnings growth will add to the share value.

ICICI Bank has 14 subsidiaries, including ICICI Securities, which provides investment banking services to investors, ICICI Prudential Life Insurance, which is the biggest private life insurance company in India, and Prudential ICICI Asset Management, which is the largest Indian private mutual fund house.

The bank is also expected to witness robust growth in its core banking operations fuelled by retail lending. The growth story will keep the stock buzzing, says an analyst with a domestic brokerage and research house. "There is enough reason for foreign institutional investors (FIIs) to buy the stock," he adds.

A war chest

Analysts believe that the issue is attractively priced especially when viewed with a long-term perspective. Post-issue the tier-one capital of the bank will be over 10 per cent (7.2 per cent as on December 31, 2003), higher than the RBI prescribed minimum CAR of of 9 per cent (tier-one and -two capital).

The increased CAR will provide the bank with the impetus to grow further by augmenting its lending portfolio. Though return on equity (RoE) will fall marginally in the forthcoming quarters, growth numbers will ensure a higher RoE by the end of fiscal FY05. Analysts expect an RoE of 20 per cent by FY05. Currently, the bank has an RoE of 16-18 per cent.

The aggressive advent of foreign banks in the country has also prompted the bank to raise money.

Analysts say a war chest would be helpful for the bank given the recent regulatory changes allowing greater freedom to foreign banks to operate in India. If a foreign bank decides to expand business aggressively in India, ICICI Bank's 7.2 per cent tier-one capital may not be enough to defend its marketshare.

Of intentions and expectations

The bank intends to concentrate on its retail business which is a high margin segment. The bank's growth-oriented strategy resulted in a significant increase in its retail finance portfolio - Rs 28,265 crore (28.2 per cent of the total exposure) on December 31, 2003, compared with Rs 6,080 crore (7.6 percent of the total exposure) on March 31, 2003.

Total income recorded a marginal decline of 15.6 per cent to Rs 3,670 crore for the nine-month period ended December 31, 2003, mainly due to a fall in other income. The bank's net interest margins have also been improving. They rose to 20.36 per cent for the nine months ended December 31, 2003, from 14.22 per cent in the corresponding year-ago period.

Though interest income for the period fell, the bank registered an impressive 40 per cent rise in its net interest income to Rs 1,351 crore. It was able to post a decent net profit increase of 36 per cent to Rs 1,182 crore during the period.

Non-performing assets (NPAs) still remain an area of concern. However, according to a section of analysts, they are expected to wane given the bank's efforts in recovering loans and restructuring assets. Net NPAs as on December 31, 2003, stood at 4.7 per cent (Rs 3,189 crore), down from 4.9 per cent as on March 31, 2003. The bank is taking measures to recover doubtful assets, which will augur well going forward.

Moreover, securitisation deals have helped the bank deal with NPAs, say bank officials. The bank has also attuned itself to the 90-day norm of classifying assets in the beginning of fiscal 2003-04. Currently, it is close to the industry average of 4.5-5 per cent net NPA levels.

Analysts feel that retail NPAs could still be a worry going forward, especially considering the bank's aggressive retail lending strategy. "Retail defaults can be a cause of concern," says an analyst. Net NPAs in the retail portfolio as on December 31, 2003, stood at 0.92 per cent of net retail assets.

Valuations

Analysts believe that the bank is getting its fair share of valuations.

The issue price is also close to the ruling price in the market. "This ensures that existing shareholders do not lose out on the offer," says an analyst tracking the sector.

Though there will be a fall in earnings per share (EPS) in the coming quarters, analysts expect an EPS of around Rs 25 for FY04 and Rs 30 for FY05. Based on these estimates, the stock currently trades at 12.03 times its FY04 earnings and 10.02 times its FY05 earnings.

Issue snapshot
Opens: April 2
Closes: April 7
Size: Public issue aggregating to Rs 3500 crore (including green-shoe option of Rs 450 crore)

    

Price band: Rs 255-Rs 295

  

Lead managers: DSP Merrill Lynch

  

Listing: BSE and NSE

    In the last one year, the stock has moved from Rs 149.8 to the current levels of Rs 300.64 - a rise of 100.69 per cent. In essence, the stock appears to be a good long-term holding candidate especially since investors seem to be betting on the bank's aggressive management team.