Sunday, October 12, 2008

ICICI Bank's woes

ICICI Bank is paying dearly for its international forays and for its reputation for aggression in general.

I have long been sceptical about the merits of Indian banks going abroad. I have always contended that banks need to make the most of domestic opportunities and develop a solid repertoire of skills before thinking of an overseas presence.

Setting up a subsidiary abroad as ICICI Bank has done would involve tapping into the following opportunities:
  • India-related retail opportunities: NRI remittances and deposits, for example, and investment in Indian stocks, mutual funds and real estate
  • Corporate banking: serving Indian companies with an overseas presence
  • Local market in overseas location: selling mortgages and other products to locals, Indian and non-Indian
India-related retail opportunities can be catered to without a foreign presence. They can be handled through correspondent relationships with overseas banks. Corporate banking does present opportunities but major ones such as overseas funding for acquisitions can be better done by foreign banks. As for grabbing a slice of the local market, what strengths do Indian banks bring to the table? Can they offer a higher rate on deposits or a lower rate on loans? How?

When you look at it very carefully, the Indian market growth is so high and the margins so attractive that going abroad does not seem attractive. There are also significant downsides to going abroad.

One, the overseas subsidiary may get into risky investments that happen to be the flavour of the moment (as in the case of ICICI Bank). Two, the regulatory risks can be high- it's hard for management in India to be keeping tabs and if there is a slip-up, there would be a heavy cost in reputational and other terms. As a result, the overseas operation can make disproportionate demands on management time.

ICICI Bank had set a target for international operations of 20-25% of overall revenue. What was the proportion in terms of profit? Going by its last annual report, PAT for the bank was Rs 4158 crore. ICICI Bank, UK, earned a mere Rs 155 crore while ICICI Canada and ICICI Bank Eurasia were in the red. Losses on investments in the sub-prime crisis can be expected wipe out the cumulative profit of ICICI Bank's overseas operations to date. It is not obvious that the international foray has been worth it.

ICICI Bank's general reputation for aggression is also part of the problem. That sort of reputation is a double-edged sword: at the top of the business cycle, it can boost your price-earnings multiple but, on the downside, it can undermine confidence. Many no doubt think that ICICI Bank, with its reputation for taking risks, is concealing more than it has revealed. This concern may be misplaced but it's there. The bank is heavily dependent on wholesale deposits. These would be the first to flee at the sign of trouble.

Interestingly, the bank's CEO, K V Kamath, has ruled out international acquisitions given "global challenges". Only a few weeks ago, top management was saying it was scanning the horizon for such opportunities.


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Realty Rider said...

Banks are all set for the anticipated correction the realty market and it’s the prospective home loan borrowers who will be hit. Expecting a fall in property rates, lenders have either increased or are planning to increase the borrower’s share in the actual cost of a home (down payment). Until recently, some banks were financing up to 90% of the home purchase value while other conservative ones had been giving out 85-90% of the actual price as loan. But according to a survey, some banks have now started increasing margins on home loans, which means borrowers will have to shell out more while purchasing a house. Even the public sector banks, which are already strict with their margins, might increase the borrower's share. However, big lenders like ICICI plan to stick to current margin levels.For more view-

Anonymous said...

I wish to add one point in the reasons behind setting up a foreign subsidiary: sourcing funds from foreign markets. This is based on my discussion with an insider in the bank. Apparently ICICI borrows funds (probably inter-bank lending) from the foreign markets and channels them into the Indian market. ICICI’s knowledge of the Indian market enables it to deploy those funds and earn sufficient spreads. According to the insider, retail operations in the foreign markets are just a show; the real reason is the borrowing in the foreign market. Please comment.