M&A: The Birth Of A Super Bank [Pg. 2]

[Contn.]
The Birth Of A Super Bank

"We always believed that the optimal solution was to operate as a single entity"
Kalpana Morparia, Executive Director, ICICI

The Financial Joneses

How the financial sector shapes up post ICICI-ICICI Bank merger will pretty much depend on the way the new entity, christened ICICI Bank, plays its cards. But some aspects of the fallout are not hard to see. First of all, there will be a rush by other banks to increase the size of their assets. Agrees Subrahmanyam: ''(Even) ICICI is a tiny institution compared to global players. To compete effectively with the likes of Citigroup or HSBC, who have much bigger clout, the merger was almost a prerequisite.'' To survive, the FIs will have to go retail rather than limit their universe to a handful of corporate customers. That means they will have to expand their service offerings. Those who don't will meet an untimely death.

As one of the more progressive financial institutions, ICICI has more or less secured its future. And when the merged entity, with an asset base of Rs 95,000 crore and distribution network comprising 536 branches, gets down to competing, it will have a huge headstart. Points out Kamath: ''For the past five years, we have been working as a virtual universal bank. Once virtual turns real, there will be a discontinuous jump in size, scale, and we will be able to compete with global players.''

The building blocks for the technology-driven bank of tomorrow are already in place. By design, ICICI is also more retail than its competitors, thanks to its acquisition spree between 1997 and 1998. In that time, it acquired ITC Classic Finance and Anagram Finance. That apart, it launched a slew of retail products such as housing loan, car loans, personal finance and credit cards, reducing the share of project loans from 70 per cent in 1997 to just 50 per cent today. More recently, ICICI as a group has rolled out a strong distribution network and technology platform. That will now enable ICICI to cross-sell a suite of products from a child to a pensioner in the most cost-effective manner. Of customers, ICICI doesn't lack much. Its bank has four million customers and the institution nearly five million bond-holder accounts. Says Morparia: ''The ICICI Bank is now little less than third the size of ICICI. So it's no longer a puny bank that we would be acquiring to use as an engine for growth.''

ICICI's rivals, without the advantages of a merger, will be hard-pressed to stay their ground. A key impact of the merger will be on ICICI's cost of funds. As a financial institution, ICICI had been raising funds on an incremental basis at an average rate of 10.5 per cent. The ICICI Bank, in contrast, raises at an average rate of 7.2 per cent. Tabassum Inamdar, an analyst with Kotak Securities, sees the cost of borrowing for the new entity coming down by at least 100-150 basis points. Already, the merged company's cost-to-income ratio of 27 per cent, which compares favourably with that of other Indian banks, gives it an edge as a universal bank. Says Nachiket Mor, Executive Director, ICICI Bank: ''On its own, it was hard for ICICI Bank to get to the current size. The merger provides us a discontinuous leap.''

To be sure, the new ICICI will still trail the State Bank of India (''It will take time for ICICI to get a more balanced profile of assets,'' points out the bank's Chairman and Managing Director, Janki Ballabh) as the financial sector supremo. Still, it is well positioned as a competitor. Unlike SBI, Kamath's outfit has used technology to reach consumers in key markets more cost-effectively. Post-merger, ICICI can better justify its investments in virtual banking technology, which analysts believe will increasingly drive the industry's growth.

There may be some merger pitfalls that ICICI will need to negotiate skillfully. A more tangible of these pitfalls is the need to rustle up Rs 18,000 crore to meet the statutory liquidity and cash reserve ratios. The institution has already made a beginning with the ICICI Bank raising Rs 3,000 crore in October itself. ICICI is also exploring the option of securitising a part of its assets. With so much money parked in relatively low-yielding government securities, ICICI's earnings would be affected in the short run, but in the long term, the benefits could be enormous. Notes Peter Sikora, Analyst, Standard & Poor's: ''The potential benefits include improved access to low-cost retail deposits and a more unified organisation structure that will enable better penetration of the group's customer base and better utilisation of its resources.''

But, as Mor says, ''The bank was the last remaining piece in the puzzle, and, with the merger, we have been able to complete the puzzle.'' That, however, does not mean the job is over. Says Kamath: ''Now our vision is to execute the merger and take the entity to the next higher level. By the time we effect the merger, we will have a blueprint for all the things the bank could do.'' Pieces in ICICI's puzzle may finally have fallen into place. But for Kamath the Superbanker, the work may only have begun-all over again.

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