ICICI Bank shareholders pay for ICICI's NPAs

S. Vaidya Nathan

WHAT was in the air for the past two years is now happening: The merger between ICICI and ICICI Bank.

About the only thing that could offer some solace for the latter's shareholders is the fact that the group has been shouting from the rooftops about the merger for almost two years now.

All this is part of the financial institution's move to become a `universal bank' _ an entity that would offer all kinds of financial services and products under one roof. The focus towards universal banking had a lot to do with the basket of poor quality assets ICICI was stuck with from project financing.

In this aspect, ICICI has not been alone and has IDBI and IFCI for company. What ICICI has done that the others have not is a conscious switch to diversify the portfolio of clients. It has gone retail in a big way. Yet, the burden of non-performing assets remains large even after a massive provision of Rs 813 crore last year.

It is in this backdrop that the proposed merger has to be seen. It is some kind of a partial bailout for ICICI as its bad eggs are now spread over a much larger asset base. While ICICI Bank's NPAs are a small 1.41 per cent of net assets, those of ICICI are 5.2 per cent of net assets. The picture on the NPA front is better than what it might have been as a consequence of the accelerated provisioning done by ICICI. Even allowing for this, this is a merger wherein ICICI takes all the gains.

The advantages that may accrue to ICICI Bank, according to the management, are benefits from ``a large capital base and scale of operations, access to ICICI's strong corporate relationships, entry into new business segments, higher market share and access to ICICI and its subsidiaries''.

There may be some truth in all these points touted in favour of ICICI Bank. But these may not result, for ICICI Bank, the kind of growth it has had the past last few years and the valuation that its stock enjoyed. The size factor (at Rs 95,000 crore of assets) would also work against high growth rates.

Not unexpectedly, the ICICI Bank stock price has suffered a sharp fall compared to the levels that prevailed even a few months back. This is attributed to the fact that the merger is likely to lead to lower growth rates and a lower price earnings multiple on account of concerns over asset quality.

To sample what ICICI Bank's shareholders would have to forego, a look at the valuation commanded by the HDFC Bank stock. The HDFC group, as a matter of policy, has indicated that it would not pursue the merger path and it would try to broadbase it services across various companies.

Of course, HDFC does not have the kind of baggage ICICI has. So, both HDFC and HDFC Bank are much sought-after stocks in the financial sector. ICICI Bank was also in the same league but the merger has dealt a blow to the valuation commanded by the stock.

Whatever the ICICI top brass may say to justify the merger, from the perspective of ICICI Bank shareholders, the truth is that the stock may never offer similar value for a long time to come.

There are two more aspects that merit close look: One, the manner in which institutional investors have ramped up the ICICI Bank stock price from time to time. Either they ignored the merger risk or the spurt was based on the view that it may not come through.

Two, the merger could have been done at a more appropriate time after cleaning up ICICI's balance-sheet. Even if this had taken two-three years, a merger then would have been more equitable for shareholders of both the companies. That is not the case now.

This is a merger that has destroyed value upfront and is unlikely recreate it for those who have suffered the erosion _ that is, for ICICI Bank shareholders. Shareholders can now only hope that, post-merger, the value of the merged entity would be better than what is indicated by the swap ratio (one share of ICICI Bank for every two shares of ICICI) and the price of the ICICI stock.

Pic.: The ICICI Managing Director and CEO, Mr K. V. Kamath.