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ICICI merger creates India's second largest bank

India's largest finance company and largest private bank announced on Thursday that they are merging, thus creating the nation's first universal bank, or one-stop provider of virtually all types of financial services.

ICICI Ltd and ICICI Bank said in a joint statement issued through the Bombay Stock Exchange that they planned to merge by next April.

The merged entity will be India's second-largest bank after state-run colossus State Bank of India, which along with its subsidiaries accounts for a third of the Indian banking industry's loans and deposits.

The ICICI universal bank will control assets of Rs 940 billion, surpassed only by SBI's Rs 3.16 trillion and ahead of third-placed state-run Industrial Development Bank of India with Rs 718 billion.

The merged entity will have a capital base of Rs 95 billion, 8,300 employees and a huge nationwide branch network.

As of September 30, ICICI Bank had 396 branches, India's largest ATM network of 601 automatic teller machines, and 3.2 million retail customers, including both depositors and borrowers.

ICICI, founded 47 years ago, focuses primarily on lending to corporations and for large-scale projects.

ICICI founded ICICI Bank eight years ago and owns a 46 per cent stake. Both companies are listed on the New York Stock Exchange and are based in Bombay, the Indian financial capital.

WHY MERGE

Analysts say ICICI wants to merge with its banking subsidiary to obtain access to cheaper funds for lending, and to increase its appeal to investors so it can raise capital needed to write off bad loans.

"This is basically a survival move from ICICI, as their core business doesn't look too good and they need some kind of a bank because only a bank has access to low-cost funds," said an analyst with a foreign brokerage.

As of March 31, ICICI had Rs 637.87 billion in outstanding loans. But net loans -- or total loans less dud loans already written off -- stood at Rs 575.06 billion, of which a further 5.2 per cent or Rs 28.7 billion of loans were classified as doubtful or substandard.

By contrast, only 1.31 per cent of ICICI Bank's loans looked dodgy.

The bad loan figure for the merged entity is estimated at 3.5 per cent, which would be the second lowest in the Indian banking industry after the three per cent at HDFC Bank, an investment fund manager favourite.

Like HDFC Bank, which raised $172.5 million in July by issuing American Depositary Shares, ICICI too needs to raise funds to write off bad loans that could swell, analysts say.

"ICICI's asset quality could deteriorate over the next year or two as steel and textile makers fail," said an analyst with a foreign brokerage. "That would require more capital."

Loans and loan guarantees to companies in the steel and textile industries account for nearly a fifth of ICICI's outstanding loans.

"It's very difficult to expect them to service the loans," said another analyst working for a foreign brokerage.

"The amount is so large I expect they (ICICI) will need to raise $1 billion over the next couple of years."

CHEAP CASH

Another reason for merging is to get access to cheaper funds after the Reserve Bank of India last Monday said it would begin processing applications to create universal banks.

"The move towards a universal bank will be positive for the firm in the long term," said Rajesh Sundaresan, a banking analyst at Credit Suisse First Boston, Hong Kong. "It will give the firm access to low-cost deposits."

Current rules prohibit ICICI and other long-term lenders from raising deposits of less than one-year maturity, which usually pay lower rates of interest. But that restriction is not applicable to commercial banks.

That would enable ICICI to compete more effectively in the retail finance market dominated by banks, to compensate for slowing loan demand from corporations and for big projects.

Loans to corporations and the manufacturing sector accounted for 75 per cent of ICICI's total loan portfolio of Rs 637.87 billion in the past year to March, while infrastructure projects accounted for 21 per cent.

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