The rise in the cost of overseas borrowing is likely to hit ICICI Bank Ltd far more than other Indian banks.
The reason: ICICI Bank has been laying much greater stress on its international banking business in the recent past than other Indian banks and the share of international business in incremental credit growth is growing progressively larger.
For instance, 57% of the incremental growth in the bank’s advances in 2007 came from its international operations. In the second half of 2007, this proportion was as much as 74% of its incremental growth in credit. And in the December quarter, while the bank’s total advances rose by Rs8,396 crore, advances from its international branches rose by Rs8,264 crore.
In effect, 98% of the growth in advances in the December quarter came from international branches, implying very marginal growth in domestic advances during the period.
If the lack of growth in the bank’s domestic loans persists, it could lead to a severe slowdown.
Margins on the international business are already thin, given the fierce competition. But, the sharp rise in funding costs as a consequence of the credit crunch is likely to impact not only the returns, but also the growth from this business.
In addition, the bank may have to make additional provisions for mark-to-market losses beyond what it has already disclosed, on account of widening credit spreads. Also, a large chunk of the treasury profits it used to earn may disappear.
Treasury income amounted to Rs651 crore over the nine months to 31 December,or 11.5% of the bank’s operating profit over the period. Provisions may also rise on account of rising delinquencies in the retail segment. On the credit side, ICICI Securities is likely to be listed this year. The bank management has also proved to be nimble-footed in the past and it shouldn’t be difficult for them to shift focus to the domestic corporate business.
ICICI Bank stock is 47% off its highs reached last January, while the Bank Nifty index is 40% off its highs. That underperformance should continue.
Cairn placement: getting the timing right
Cairn India Ltd’s private placement of about 6% equity for Rs2,535 crore was timed nearly to perfection, what with crude prices reigning at record levels.
Crude futures for April delivery were trading at $111.80 (Rs4,539) per barrel on the New York Mercantile Exchange, an all-time high, around the time the deal was announced. True, Cairn’s share price too has fallen in the recent tumble, but only at about half the rate at which the broad market has corrected.
The placement to Malaysia’s Petroliam Nasional Bhd (Petronas) and New Zealand billionaire Richard Chandler’s investment group was made at Rs224.30 a share, only 10% lower than the consensus target price of 19 analysts polled by Bloomberg.
Citigroup Inc. notes that Cairn India’s valuations are among the most highly leveraged to crude prices among global oil exploration and production peers, which is why the stock is among the better performers in the large-cap space currently.
Having said that, at current levels of about Rs220 per share, there seems to be little upside left, at least based on the target price of most analysts. According to an analyst with a domestic brokerage firm, the only upside now may be if there’s a discovery of new exploration assets. But as long as the uncertainty in global markets continues and crude prices remain high—analysts say there are signs that oil is being used as a hedge against inflation— Cairn’s shares should do well relative to the market.
The funds raised would help tide over the escalation in costs that is beyond the company’s initial estimates. It should also cover the additional cost of the $500 million pipeline Cairn is building to carry oil from its sites in Rajasthan.
But analysts aren’t worried that higher costs would eat into the company’s valuation, since estimates of long-term crude have also risen since and the company has also upgraded the reserve estimates of its Mangala oilfield and the peak production capacity.
The company’s 2007 results announcement, due end of this month, should bring further clarity on its revised capital expenditure, reserve estimates and updates on the accounting for the pipeline cost.
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