The nation’s second largest lender, ICICI Bank Ltd has borne the brunt of the investor sell-off in recent weeks, primarily on concerns about its international exposure. On 31 March, the bank’s global operations accounted for about 25% of its consolidated banking assets, up from 19% of consolidated assets a year earlier.
Also, at the end of June, while the growth in advances for the parent bank was 13% year-on-year, advances for the UK and Canada subsidiaries had grown by 85%-90%.
At a time when a perfect storm has hit the world’s financial system, this increasing overseas exposure has been a concern. The management, however, has clarified that the bank, including its overseas subsidiaries, has plenty of liquidity and the fears are misplaced.
The question of liquidity arose because of the bank’s credit-deposit ratio, which was as high as 96% at the end of June. While customer loans went up by 13.1% in the year to 30 June, deposits grew by only 1.6%.
Also See Sinking Feeling (Graphic)
The management has said the huge amount of capital they raised last year reduced their requirements for deposit growth. But on 30 June, the year-on-year rise in ICICI Bank’s borrowings was 33.5% and borrowings increased by Rs7,424 crore between 31 March and 30 June.
On 31 March, about 15% of the UK subsidiary’s liabilities and 49% of its assets were debt securities. Mark-to-market losses on these assets amounted to Rs404 crore in 2007-08 and there was an incremental mark-to-market loss of $20 million (Rs97.4 crore) in the June quarter. Mortgages account for a big chunk of the Canadian subsidiary’s assets. These exposures on assets and liabilities have unsettled investors.
A 26 September research report by JM Financial Ltd puts the ICICI Bank UK investment book at $4.7 billion, of which global banks account for $3.1 billion, residential mortgage-backed securities for $600 million and other securities for $967 million. On 31 March, 18% of the bank’s debt securities portfolio in its UK subsidiary was rated AA and above. The bank’s shares were doing badly even before the current bout of nervousness on account of rising non-performing assets, or NPAs, and low return on equity. But the recent panic has been primarily due to feared losses on overseas operations and the liquidity crunch.
On the credit side, the bank has the advantage of having a capital cushion, having raised capital well in time, which is why its capital adequacy ratio at end-June was a high 13.42%, and solvency is not a concern.
Also, the panic has pushed the bank’s shares to Rs364 each, and it is trading at 0.9 times its book value on 30 June after adjusting for NPAs and at 0.85 times book if you don’t adjust.
In contrast, the price-to-book for the Bombay Stock Exchange’s Bankex is 1.47. What’s more, ICICI Bank’s valuation is now almost as bad as Citigroup Inc.’s, a bank in the heartland of the crisis, which trades at a price to book of 0.72.
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