ICICI Bank board trusts Chanda Kochhar, but do investors trust ICICI Bank board?
On 28 March, the board of the country’s second-largest lender ICICI Bank Ltd issued a statement reposing its confidence in the corporate governance of the lender and the integrity of its head Chanda Kochhar.
The statement was a reaction to allegations that ICICI Bank disbursed loans to the Videocon group without following strict governance rules that would have otherwise avoided conflict of interest of Kochhar. Investigative agencies were said to be looking at the series of transactions including loans disbursed to Videocon group by ICICI Bank.
The bank’s stock dropped 6% on Monday as these allegations against its top official hurt sentiment. It seems that investors are far from satisfied with the assurance of an independent board that all was kosher with the Videocon loans. The group has a debt pile of more than Rs40,000 crore as of March 2016 and was labelled a non-performing asset in 2017 by all banks that had exposure to it.
In that sense, ICICI Bank has already provided for these loans. Any further hit through the Videocon group would only come by way of haircuts as two of its subsidiaries are already awaiting resolution through tribunals under the Insolvency and Bankruptcy Code (IBC).
Indeed, the lender’s balance sheet has taken a huge hit over the last two years as it saw its bad loans rise to 7.8% of its loan book as of December 2017. Its slippages haven’t abated and the management has indicated that credit costs and provisions are unlikely to come down in the coming quarters. To that extent, the stock’s underperformance has reflected the weakness in the balance sheet.
The stock has fallen a huge 15% over the last three months but it has not been alone. Other private sector lenders that have a large corporate book have also taken a big hit. Axis Bank Ltd shares have dropped 11% while Yes Bank Ltd fell a modest 2% during the same period. In contrast, other banks such as HDFC Bank Ltd and Kotak Mahindra Bank Ltd have gained, being lenders to mainly retail and small businesses.
For ICICI Bank, the troubles have deepened now simply because of the aspersions cast on its top official and by extension its own processes. Being a corporate lender, a questioning of the process of loan disbursement against one corporate group is bound to kindle doubts on the integrity of its sanctioning process.
The timing of the allegations couldn’t have been more wrong for ICICI Bank. The banking sector is facing a loss of trust given the series of frauds at various public sector lenders that came close to the heels of a colossal pile of bad loans. ICICI Bank’s stock has already lost value and trades at the lowest multiple compared with other private sector lenders. According to analysts, the standalone banking business is valued at a discount to its estimated book value for 2018-19.
The ICICI Bank board has stressed that upon scrutiny it found nothing wrong with the process as well as the checks and balances at the lender. Analysts still have a buy rating on the stock. But the tension is palpable and the board’s attempts to soothe frayed investor nerves haven’t worked so far.
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