M&A: The Birth Of A Super Bank [Pg. 1]

M&A
The Birth Of A Super Bank

ICICI's merger with ICICI Bank will skew the field for competitors and force them to clean up their act.

By Roshni Jayakar

K.V. Kamath, MD, ICICI

At 8.30 am on October 25, Kundapur Vaman Kamath walked into a 10th-floor boardroom in ICICI Towers, Mumbai. His agenda: Get the 16-member board to approve the reverse merger of ICICI with ICICI Bank. By the time the 53-year-old CEO and Managing Director finished his slick presentation, it was half past two in the afternoon. As a triumphant Kamath walked out of the boardroom trailed by applause, he must surely have paused to muse upon the setting of his coup de grace: befittingly, the boardroom connected ICICI's North Tower with the bank's South Tower.

Kamath's day wasn't done, though. Accompanied by Hoshang Noshirwan Sinor, CEO of ICICI Bank, Kamath rode in the backseat of his silver Pajero to the Reserve Bank of India's headquarters at Mint Street. There he formally submitted an application to the deputy governor, Y.V. Reddy, to turn ICICI into a universal bank. That done, Kamath rushed to Rendezvous, Taj Mahal's rooftop restaurant overlooking the Gateway of India, for a meeting packed with analysts. And barely eight hours later, he was on board a flight to Los Angeles, where he and his A-team-comprising, besides Sinor, Lalita Gupte, ICICI's Deputy Managing Director, and Kalpana Morparia, Executive Director-would make their first stop on a 10-day, global roadshow designed to get some 70 foreign institutional investors, who own 47 per cent of the merged entity, to back the marriage.

What The Merger Means For Rivals

Portfolio Pressures
ICICI's clubbing project loans with retail banking will force competitors to follow suit in a bid to retain their customers
Rate War
Cheaper funds for ICICI in the long term might trigger price wars, already intense in retail housing and car loans
Asset Build-Up
The pressure to become global will be higher, with the need to find new avenues of income
Distribution Reach
Technology will become a key component of banking strategy, as players try to balance reach with cost

Apparently, the FIIs didn't need to be hardsold-not one questioned the merger. In fact, the day the merger was announced in India, ICICI Bank's depository receipts on the New York Stock Exchange jumped more than 20 per cent. Over the next week, it gained an additional 15 per cent, more than making up for the 5 per cent fall in ICICI's ADR. If it was an endorsement of his move that Kamath was looking for, he couldn't have asked for more. Finally, his shareholders were willing to concede that universal banking was the way to go. ''It has been a journey of five years to this day,'' a jubilant Kamath told BT a week later, before jetting out to Singapore on the second leg of his roadshow. ''The merger will redefine banking in the highly competitive era of globalisation,'' he promises.

A Trendsetter

Kamath's 'project dream', as the universal banking project was internally code-named, is symbolic of the transition that the Indian financial sector is going through. The development financial institutions such as ICICI and IDBI had been created in the 50s to meet the financial requirements of Indian industry in the area of project funding. The idea was simple: a closed economy needed strong financial institutions to fuel industrial growth.

Merger with the parent represents a "discontinuous leap" for CEO H.N. Sinor's ICICI Bank

But half a century on, the original rationale has ceased to hold. Explains N. Vaghul, Chairman, ICICI: ''Development financial institutions are inconsistent with the market-oriented economy.'' Adds Marti Subrahmanyam, an independent director on the ICICI board, and also a renowned professor of finance at the Stern School of Business, New York University: ''As the markets became more accessible to companies the role of financial institutions has changed.'' But it's just that the government did not want to acknowledge it. In fact, it wasn't until April 2001 that the RBI gave a blueprint for financial institutions to convert themselves into universal banks. And in the mid-term review of the monetary policy for 2001-02, the apex bank actually promised to process such applications promptly. Says Morparia: ''We always believed that the optimal solution was to operate as a single entity.''

Having made the first move, ICICI will now set the tone for more such bids in the financial sector. Suddenly, it has brought the closed world of development institutions into the domain of retail banking. Besides, it may kindle wannabe universal banks into action. For instance, The Industrial Development Bank of India (IDBI)-faced with mounting bad loans and in dire need of government bail-out-may also make a case for merging with its bank, IDBI Bank, or taking over a public sector bank. There's the housing finance institution, HDFC, which is already exploiting all possible synergies with HDFC Bank, although it has denied any immediate plans of turning into a bank. (If that happened sooner than expected, few would be surprised, given that ICICI and HDFC have traditionally aped each other's moves.)

Their rationale for a merger would be the same as ICICI's. That as a development financial institution, they have ceased to make commercial sense-not just in terms of business activity, but also resource mobilisation. For a long time now, the state-owned financial institutions have been forced to borrow from markets. The relatively high cost of funds wasn't the only problem. More seriously, since they were funding long-term projects with money raised short term, there was a critical asset-liability mismatch. And every time a big loan turned bad, the financial institution found itself staring at a deeper crisis.

1 | 2

Issue Contents Write to us Subscription Syndication