ICICI: Victim of perception

Many banks had exposure to Lehman Brothers, so why was ICICI Bank singled out by the rumourmongers? Kamya Jaiswal explains.

Kamya Jaiswal        Print Edition: November 13, 2008

It had all the makings of a thriller. A group of people skilfully used the chaos and confusion surrounding the fall of Lehman Brothers to try and bring down the country’s largest private bank. All it required was some judiciously placed text messages and comments. It worked so well that people believed ICICI Bank would go under. The bank’s stock fell by 10% in one day and there was widespread panic among its customers. Luckily, the heroes arrived on time in the form of RBI, the finance minister and top bank officials. A counter-campaign was launched to hammer home the fact that ICICI Bank was not, and would not be, in financial trouble.

So who were the villains of this piece? ICICI Bank has filed an FIR against a group of Tirupur-based subbrokers associated with a high-profile Mumbai-based broking house. Why did they want to bring the bank down? The reasons for this are far more obscure. Charudutta Deshpande, ICICI Bank spokesperson, says that senior officials of the bank are aware of the motives behind the rumour-mongering, but refused to reveal them. However, he admitted that this was not the work of a rival bank, as has been claimed.

Whatever the reasons behind the rumours, it is evident that people are more than willing to believe the worst about the bank. Perhaps it is because the sheer size and rapid growth of the bank have made the investors and analysts uncomfortable, and therefore, willing to buy into the rumours. Or perhaps because it’s seen as very aggressive.

What you should do now

Account holders: Stay put. The bank is not going down under. You can continue your banking transactions as usual. There is no need to transfer deposits to another bank.

Investors: Most experts maintain a buy on ICICI Bank’s stocks as they are confident that its sufferings are an extension of the market sentiment.

“I wouldn’t call ICICI Bank aggressive. If you are a change agent, you work differently, think out of the box.”

— K.V. KAMATH, Managing Director & CEO, ICICI Bank

On the condition of anonymity, a former employee of ICICI Bank who worked as a middle-level manager during 2005-6, admits that they were given sales targets “much higher than other banks”.

His statement can be corroborated by the break-neck growth of the bank’s total retail finance portfolio— about 63%—during his employment period. In comparison, the banking sector grew by only about 30% in 2005-6.

Some customers claim that the bank was flexible in accepting the documents required to pass their loan applications. A sales manager based in Gurgaon says that he was asked to “make a lease agreement” and present it as address proof of his rented apartment to get his car loan sanctioned. Though there are several such stories, we cannot single out ICICI Bank as its peers follow the same practice.

The bank’s MD and CEO, K.V. Kamath, in a recent interview to a newspaper, clarified, “I wouldn’t call ICICI aggressive. If you are a change agent, you work differently and think out of the box.” Deshpande admits that there are apprehensions about over-leveraging as well fuelled by the scorching growth of the bank in recent years. “The bank saw an opportunity in the market and exploited it,” he says. The price ICICI Bank has paid is what any other bank in its place would have had to pay.

The good news is that this episode has made brokers take a closer look at the bank. Prabhudas Lilladher, for instance, has upgraded its rating to buy, saying that, “the bank is available at extremely attractive valuations”. Enam Securities has maintained its outperformer rating.

But there can be no smoke without fire, say those who panicked and closed their accounts. The chief cause for their anxiety was seen as ICICI Bank’s exposure to Lehman Brothers and, therefore, to sub-prime credit. A Standard & Poor’s report rubbishes this belief. According to S&P’s Ratings Services, ICICI Bank, through its subsidiary ICICI Bank UK, has about $80 million exposure to Lehman Brothers. Although it could report marked-to-market losses, the rating agency believes that these losses can be easily absorbed, considering that the size of its balance sheet is $100 billion.

If there is any fire, it has to do with the bank’s unsecured loans; the default rate for personal loans and credit cards is very high. In a report, Edelweiss says that unsecured loans account for 65% of ICICI Bank’s total retail nonperforming assets. But, it adds, “Additions to NPA should decelerate as the bank sees a complete winding down of its small-ticket personal loan book.” It maintains a buy rating, while Macquarie Research retains an underperformer rating. “It is clear to us that ICICI Bank will remain under pressure for quite some time. The economy is slowing, and we believe this will retard credit growth and enhance asset quality strains.”

These accounting matters can be resolved over time. What might be difficult to restore is trust. ICICI Bank managed to patch up its relations with its customers five years ago when account-holders in Gujarat withdrew about Rs 15 crore in one day. This time, it might take longer for the customers to start trusting the country’s second largest bank.

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