ICICI Bank: Gains from consolidation

S. Vaidya Nathan

The stock of ICICI Bank may be in the limelight on the back of the proposed acquisition of Bank of Madura.

Though the stock has gained sharply in the last two months after hitting a recent low of Rs 110, some upside may be left as the bank could get re-rated on account of the merger. Existing shareholders could hold their exposures in ICICI Bank while investors with an appetite for risk could contemplate exposures despite the impressive gains of the past few months. ICICI Bank continues to be one of the better options in the banking sector at the moment and the possible merger with ICICI may well be on the backburner.

The merger would pitchfork ICICI Bank as the leading private sector bank. The merger may be viewed favourably since Bank of Madura has focussed strengths and a reasonably good quality balance sheet. The board of directors is to meet on December 11 to consider the merger.

It is quite likely that the swap ratio may be fixed in a manner that holds out a good deal for the shareholders of Bank of Madura. This may also be influenced by the fact that the Bank of Madura stock has gained sharply by around 70 per cent in the past fortnight in the homestretch to the deal.

As the acquisition is to be financed by issuance of stock, the rise in the market capitalisation of Bank of Madura may mean a higher degree of equity issuance by ICICI Bank. But the price may well be worth paying as this is the only way that ICICI Bank may be able to get control over banks with reasonable quality balance sheets that could make a difference in the medium to long-term.

Bank of Madura has assets of Rs 3,988 crore and deposits of Rs 3,395 crore as of March 2000. The fact that the bank has a capital adequacy of 15.8 per cent with shareholder funds of Rs 263 crore may mean that ICICI Bank (post-merger phase) will have more leeway to pursue growth without expanding the equity base (other than paying for the acquisition).

Strong capital adequacy, a strong beachhead on the Internet arena, a revamped IT architecture, a growing retail client base through a brick-and-click strategy, and improving asset quality and earnings growth are positive features as far as ICICI Bank is concerned.

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Despite these factors, the share had been on a downtrend from after touching a high of Rs 271, eight months ago. The uptrend then was on the back of the announcement of its ADR issue and new technology initiatives. The subsequent downtrend was triggered by the possibility of the merger with its parent. There is continuing concern on asset quality of ICICI. It has been a stated goal of the ICICI group to go in for universal banking. It is clear that once regulatory hurdles are removed, such a possibility becomes distinctly feasible. But given the battering that bank stock took, ICICI may now hesitate to pursue this path. Also ICICI Bank is the most visible investor-friendly face for the group in terms of returns to shareholders and it may well be maintained as a separate entity. In this backdrop, the stock may hold scope for improvement in the valuation of the stock.