FPO Note Jun 18, 2007
ICICI Bank Ltd Subscribe in the FPO with a medium term view to participate in the banking growth
story and a pie in the private insurance play. Smart investors could add on dips post
Object of the issue:
Issue period: Jun19th – Jun 22nd 2007 ICICI bank is regulated by Reserve Bank of India being a banking entity. RBI guidelines require
Price band: Rs 885 – Rs 950 per share banks to maintain a minimum ratio of capital to risk adjusted assets and off-balance sheet
Discount (from the price fixed) of Rs.50 for
items of 9.0%, at least half of which must be Tier-1 capital. In April 2007 RBI issued the final
Retail Bidders and existing shareholders of the
bank holding upto 108 shares
guidelines on the implementation of Basel II by banks. These guidelines are applicable to banks
from March 31, 2008, require minimum Tier-1 capital ratio of 6% while also requiring the
Issue Details: maintenance of higher capital for various classes of assets and maintenance of capital for
(Rs. mn) The total capital adequacy ratio of ICICI bank was 11.7% at March 31, 2007 including Tier-1
Issue 87,500 capital adequacy ratio of 7.4% and Tier-2 capital of 4.3% of risk-weighted assets.
Existing Shareholders 4,375 Additional capital would be required for future asset growth and compliance with regulatory
Net issue to the public 83,125 requirements. The objects of the Issue are to augment the capital base to meet the capital
requirements arising out of growth in the bank assets, primarily loan and investment portfolio
driven by the overall growth of the economy. The current capital enhancement is to comply
MF 2,078.1 with these regulatory requirements besides other general corporate purposes including meeting
Non-institutional 12,468.7 the expenses of the issue.
Retail Portion 29,093.7 The fund raising would include a green shoe option of Rs.1,312.5 crore apart from Rs.8,850
crore taking the total capital raised from domestic markets to Rs.10,162 crore. An equivalent
Green shoe option: Rs.1,312.5 crore
capital would be raised through overseas markets by issuing American depository shares.
Face Value: Rs. 10
Book value: Rs 270.3 (Mar 31, 2007) Future Growth Impulse for ICICI Bank:
Bid size: 6 shares and in multiples thereof
ICICI bank aims to enhance its position as a premier provider of banking and other financial
100% book building process services in India. Further its objective is to leverage these competencies (in financial services
and technology) to develop its international business.
Listing: BSE & NSE
ICICI bank has ear-marked key thrust areas to invest the fresh capital raised to expand its
Lead Managers: DSP Merrill Lynch Ltd, business. The key areas marked are,
Goldman Sachs (India) Securities Pvt Ltd.,
Enam Financial Consultants Pvt Ltd., JM • Enhancing growth through strong impetus from retail franchise:
Financial Consultants Pvt Ltd..
The upward migration of household income levels, affordability and availability of retail finance
and acceptance of use of credit to finance purchases has assisted retail credit to emerge as a
rapidly growing opportunity for banks. Banks with necessary skills and infrastructure to succeed
could tap the retail business.
ICICI bank has capitalized on the growing retail opportunity in India. The bank has an
outstanding retail finance portfolio of Rs.1,292.8 billion at year-end fiscal 2007. The principal
retail credit products include home loan, automobile, commercial business, personal loan and
credit card business.
The recent increases in interest rates and asset prices as well a larger base have resulted in
moderation in growth rates. Going forward the growth rates may taper off but the Indian retail
financial services market has the potential for sustained growth. The loans and advances to
retail finance constituted 65.2% of the total loans and advances at year-end fiscal 2007
Milind Raginwar compared to 62.9% at year-end fiscal 2006 and 60.9% at year-end fiscal 2005.
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(Rs. Bn) 2005 2006 2007
Category Total Advances % (total retail adv) Total Advances % (total retail adv) Total Advances % (total retail adv)
Home Loan 284.8 50.3 454.8 49 638.5^ 49.4
Automobile Loan 102.9 18.2 188.7 20.3 191.8 14.8
Commercial Business 85.6 15.1 120.5 13 202.2 15.7
2-wheeler 12.4 2.2 20.9 2.3 23.3 1.8
Personal Loans 25 4.4 58.9 6.3 124.6 9.6
Credit cards 20.6 3.6 35.4 3.8 60.8 4.7
Other (including LAS) 35.3 6.2 50 5.3 51.6* 4
Total retail finance portfolio 566.6 100 929.2 100 1292.8 100
^includes developer financing (Source: Red Herring Prospectus)
* includes dealer financing
• Maintaining strong corporate Franchise:
The commercial banking services to corporate customers leverages ICICI bank’s strong
corporate relationships and increased capital base to increase the market share in project
finance, cross border finance, non-fund based working capital products and other fee-based
(Rs.Bn) 2005 2006 2007
Category Total Advances % (total advances) Total Advances % (total advances) Total Advances % (total advances)
Retail Finance 566.5 60.9 929.1 62.9 1292.8 65.2
Services - finance 19.5 2.1 58.9 4 96.1 4.9
Services - non finance 16.5 1.8 41.9 2.8 56.2 2.8
Iron/Steel & products 49.5 5.3 48.7 3.3 50.1 2.5
Chemicals & Fertiliser 18.4 2 30.4 2.1 48.8 2.5
Crude petroleum/refining & petrochem 43 4.6 44.3 3 48.6 2.5
Food & beverages 16.9 1.8 39.7 2.7 44.2 2.2
Power 17.4 1.9 27.1 1.8 41.3 2.1
Road, Port, telecom urban dev 34.6 3.7 30.1 2 29.9 1.5
Wholesale/Retail trade 9.5 1 12.7 0.9 24.6 1.2
Electronics & Engineering 19.6 2.1 23.7 1.6 21.9 1.1
Others 119 12.8 189.6 12.8 227.4 11.5
Total 930.4 100 1476.2 99.9 1981.9 100
(Source: Red Herring Prospectus)
The bank plans continued focus on corporate lending activities including structured project and
cross-border acquisition finance, corporate finance and working capital lending to highly rated
corporations. The focus on infrastructure development and the repositioning and emerging
global competitiveness of the Indian industry offer growth opportunities in the area of project
Despite the penetration in retail and corporate funding, the bank has maintained a well-
diversified portfolio though tilted towards retail lending with a share of 62%. This could help
the bank to reduce concentration risk.
• Insurance and Asset Management Businesses key to growth:
ICICI Bank has a joint venture partnership with Prudential Plc of the United Kingdom for the life
insurance business (74.0% stake). The joint venture company, ICICI Prudential Life Insurance
has an overall market share of approximately 10% based on new business premiums (on a
weighted received premium basis) during fiscal 2007 [Source: IRDA]. Typically insurance
companies incur losses during the periods of high growth, the loss is attributed to business set-
up life and customer acquisition costs as well as reserving for actuarial liability. ICICI Prudential
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Life Insurance recorded a total new business premium of Rs. 51.6 billion during fiscal 2007 as
compared to Rs. 26.0 billion during fiscal 2006, a growth of 98.4%
In the non-life insurance sector, the bank has a joint venture with Fairfax Financial Holdings.
(74.0% stake) The joint venture company, ICICI Lombard General Insurance Company Limited,
commands a market share of approximately 34% in gross written premium in the private sector
and a total market share of approximately 12% during fiscal 2007 [Source: IRDA].
The key dimensions of the strategy for growth in the insurance business are innovative
products, a wide distribution network, a prudent portfolio mix and sound risk management
practices. In addition, the focus is on leveraging corporate and retail customer base for cross
selling insurance products.
Though the insurance business is currently loss making the business could be key growth driver
for ICICI Bank. India’s total insurance premium as a percentage of GDP was 3.2% in 2005,
which was relatively lower than countries such as the United Kingdom, Singapore and Malaysia.
In the mutual fund business, ICICI Bank has a joint venture partnership with Prudential Plc of
the United Kingdom for the asset management business (51.0% stake) This joint venture
company, ICICI Prudential Asset Management Company has total assets under management at
approximately Rs.379.0 billion and a market share of approximately 11.6% at year-end fiscal
2007 [Source: AMFI].
• Making Inroads in Rural Banking Franchise:
The rural markets would be another key element in driving future growth for ICICI Bank. The
thrust by the policy makers to increase contribution from the agriculture sector in the gross
domestic product in the range of 3-4% would provide further boost.
ICICI Bank has planned strategy for rural, micro-banking and agri-business, encompassing
products and channels, with the objectives of meeting the needs of the rural economy while
building a sustainable business model. The bank offers a comprehensive suite of products for all
customer segments operating in the rural areas – corporates, small and medium enterprises
and finally the individual farmers and traders.
RBI has issued revised guidelines applicable from fiscal 2008 on lending to priority sector.
Under the revised guidelines the limit on the housing loans eligible for priority sector lending
has been increased from Rs. 1.5 million to Rs. 2.0 million per borrower. The guidelines have
capped eligible direct agriculture finance to non-individuals (i.e. partnership firms, corporates
and institutions) at Rs.10.0 million per borrower. One-third of loans in excess of Rs. 10.0 million
per borrower would also be considered as direct finance while the remaining two-thirds would
constitute indirect finance.
Category 30-Mar-07 (Rs.Bn) (% net bank credit)
Small scale Industries* 3.2 0.3
Others 380 30.3
Agriculture Sector^ 191.4 15.3
Total 574.6 45.9
*Small scale industries are defined as manufacturing, processing and services businesses with a limit of Rs.
10.0 million on investment in plant and machinery.
^Includes direct agriculture Rs. 91.61 billion constituting 7.3% of our residual net bank credit against the
requirement of 13.5%.
• Building International Presence:
The international markets present a growth opportunity; ICICI Bank has therefore expanded
the range of commercial banking products in international markets. The strategy for growth in
international markets is based on leveraging home country links for international expansion by
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capturing market share in select international markets. The focus areas are supporting Indian
companies in raising corporate and project finance overseas for their investments in India and
abroad (including financing of overseas acquisitions by Indian companies), trade finance and
personal financial services (including remittance and deposit products) for non-resident Indians
and international alliances to support domestic businesses.
Further the bank is building an international private banking franchise and leveraging the
technological capabilities and relative cost efficiencies by offering direct banking in select
international markets. The bank has entered into alliances with existing banks in various
markets, to leverage complementary capabilities, primarily the existing physical distribution
network in the overseas markets and India-linked products and services for the Indian
community. The bank would expand offering to include local banking to non-resident Indians as
well as to the broader local market.
• The ratio of net non-performing assets to net customer assets increased to 0.98% at
year-end fiscal 2007 compared to 0.71% at year-end fiscal 2006. At year-end fiscal
2007, the gross non-performing assets (net of write-offs and unpaid interest) were Rs.
41.68 billion compared to Rs. 22.73 billion at year-end fiscal 2006. Gross of technical
write-offs, the gross non-performing assets at year-end fiscal 2007 were Rs.48.50
billon compared to Rs. 29.63 billion at year-end fiscal 2006. With the rising interest
rate scenario and exposure to the retail sector on the higher side the NPAs are likely to
be on the higher side in the future.
• The key growth driver of the bank has been the retail loan book. Going forward the
retail sector growth is likely to be sub-dued due to the higher base and the rising
interest rate scenario. The credit growth from the sector is likely to be tapered off
affecting the key financials of the bank.
• At the year-end fiscal 2007, 76.2% of our Government securities portfolio was in the
Held to Maturity category. Though this would help the bank to immune from the
interest-rate risk the returns on the investment would be necessarily lower hence
putting pressure on the bank to earn higher returns from other key business.
The rural sector business is highly determined by the policy makers and any change in policies
may affect the plans of the bank.
ICICI Bank has a well diversified portfolio with total outstanding advances of Rs.1,900 billion.
The bank has plans to transfer its equity shareholding in ICICI Prudential Life Insurance
Company Limited, ICICI Lombard General Insurance Company Limited, ICICI Prudential Asset
Management Company Limited and ICICI Prudential Trust Limited to a proposed new
subsidiary. ICICI Bank proposes to transfer its aggregate investment in these companies of Rs.
22.28 billion at year-end fiscal 2007 and any further investments, to the proposed new
subsidiary at the book value of these investments on the date of transfer. ICICI Bank claims
that it has firm offers from investors for subscription to equity shares of the proposed new
subsidiary and for entering into definitive agreements for this purpose. The subscription amount
is Rs. 26.50 billion towards fresh issue of shares by the proposed new subsidiary, and the
investors would thereby acquire a collective stake of 5.9% in the proposed new subsidiary,
valuing it at Rs. 446.00 billion on a post-issue basis. This is nearly half of the current total value
of the bank.
The current offer at discount of Rs.50 to the price band of Rs.885-950 would mean effectively
the follow-on issue net of subsidiary valuation would be available in the range of Rs. 450-475
and would mean a fair valuation compared to its peers.
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Comparison of Accounting
Details Price NAV (Rs) EPS* (Rs) P/E Book Value P/BV
ICICI Bank 918.0 270.4 31.9 28.8 270.3 3.39
State Bank of India 1318.0 589.6 86.3 15.3 544.7 2.41
Punjab National Bank 489.0 321.6 48.8 10.0 321.6 1.52
HDFC Bank 1088.0 229.9 28.0 38.9 201.4 5.40
Bank of Baroda 260.0 201.4 34.6 7.5 214.6 1.21
*EPS is for trailing twelve months (Source: RHP, Capitaline)
Further the assurance of the India growth story and a proxy entry in the less-penetrated
insurance sector would make the valuations decent though the unlocking of the insurance
sector growth would be in the medium term.
At the disclosed price band, we recommend retail investors with a medium term view to
subscribe to the issue. This being a follow-on issue, no significant listing premium can be
expected. We expect that the issue could be priced in the 915-925 band with retail investors
able to get shares at Rs.50 discount to this price. An analysis of past issues suggests that the
share price of ICICI Bank tops out temporarily in the 3-5 weeks after the close of the issue,
meaning that the shares listed afresh come for selling as soon as possible. After remaining
sluggish / falling for the next few months, the share price resumes its uptrend. For safe
players, the period from July to Sept 07, could provide opportunities to buy this stock cheaper
from the secondary market. For investors who do not mind a temporary underperformance /
negative returns, however, the FPO provides an opportunity to acquire shares that could
provide 25-30% return in a year’s time from the issue price to retail investors. The Beta of
ICICI Bank being between 0.95 and 1, adverse movement (correction) in the broader market
could result in temporary under performance.
Details of Earlier FPO by ICICI Bank:
Issue Size (Rs Over
Price Band (Rs) Issue Price Month Close Date Cr) subscription
255-295 280 Apr-04 7/4/2004 3050+450 5.8 times
505-545 525 Dec-05 6/12/2005 5000+750 7 times
Payment Details by Retail Investor:
(Rs.) Retail/Individual Bidders
Payment Method-I € Payment Method-II
Amount payable per
Equity Share FV Premium Total FV Premium Total
On application 10 240 250 10 875-940 885-950
On allotment 250 250
On call* * *
Total 10 * * 10 875-940 885-950
€ = shares allotted under this option will be tradable only after they are 50% paid-up.
* = To be issued by the bank within a period of six months from the date of allotment, and the discount
would be adjusted against the call amount
Retail Research 5 of 5
Key Consolidated Financials:
Rs.million FY2007 FY2006 FY2005 FY2004 FY2003
Interest income 250,013.0 151,358.0 102,029.0 96,589.0 98,477.0
Interest expense 176,757.0 101,015.0 68,044.0 71,677.0 81,268.0
Net interes ncome 73,256.0 50,343.0 33,985.0 24,912.0 17,209.0
Non-interest income 163,625.0 94,797.0 62,530.0 41,758.0 22,671.0
Profit on sale of shares 0.0 0.0 0.0 0.0 11,911.0
Total income 236,881.0 145,140.0 96,515.0 66,670.0 51,791.0
Operating expenses 79,289.0 47,626.0 32,776.0 24,149.0 18,442.0
Direct marketing agency expenses 15,602.0 11,911.0 8,755.0 6,154.0 3,232.0
Depreciation on leased assets 1,883.0 2,771.0 2,975.0 2,805.0 3,167.0
Expenses pertaining to insurance business 83,358.0 43,389.0 26,361.0 9,200.0 3,006.0
Total non-interest expenses 180,132.0 105,697.0 70,867.0 42,308.0 27,847.0
Operating profit before provisions 56,749.0 39,443.0 25,648.0 24,362.0 23,944.0
Provisions & Contingencies 22,774.0 8,455.0 1,864.0 5,168.0 15,967.0
PBT 33,975.0 30,988.0 23,784.0 19,194.0 7,977.0
Tax provision 7,641.0 6,998.0 5,684.0 3,398.0 3,539.0
PAT 26,334.0 23,990.0 18,100.0 15,796.0 11,516.0
Minority Interest 1,272.0 211.0 423.0 8.0 4.0
Net Profit 27,606.0 24,201.0 18,523.0 15,804.0 11,520.0
Equity 8,990.0 8,900.0 7,370.0 6,160.0 6,130.0
FV 10.0 10.0 10.0 10.0 10.0
EPS 30.8 30.6 25.3 25.5 18.8
RETAIL RESEARCH Tel: (022) 6661 1700 Fax: (022) 2496 5066 Corporate Office
HDFC Securities Ltd. Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg,
Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066 Website: www.hdfcsec.com
Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This
document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any
security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied
upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or
perform investment banking, or other services for, any company mentioned in this document.
Retail Research 6 of 6