Issue Summary

Type 100% book-building public issue Min. subscription Not announced Size Rs 3,500 crore, including a green shoe option of Rs 450 crore Lead Managers DSP Merrill Lynch, JM Morgan Stanley, Kotak Mahindra Capital Price band Rs 255 to 295 Listing NSE and BSE Face value Rs 10 Promoters NA* Shares on offer 119 million based on a issue size of Rs 3,500 crore and a price of Rs 295 Promoters post     issue holding NA* Issue Opens April 2, 2004.   Issue Closes April 7, 2004   * over 70% stake held by Foreign investors

Issue structure

	QIBs	Non-Institutional Investor	Retail Investor
Total value	To a limit of Rs 13725 m	At least Rs 6862.5 m	At least Rs 6862.5 m
% of total size	50%	25%	25%
Minimum Bid/Application size	< Rs 50,000	< Rs 50,000	Not announced
Maximum Bid/Application size	Not exceeding the size of the offer	Not exceeding the size of the offer	Rs 50,000

Background

ICICI Bank, post its merger with the parent ICICI, has emerged as the second largest bank in the country after SBI in terms of asset size. The bank is a professionally managed entity and provides a range of corporate and retail banking services. ICICI Bank also prides itself as the first universal bank in the country due to the fact that it provides a wide variety of services. It is also the first Indian bank to offer Internet banking and also the first to get listed on the NYSE. At the end of FY03, the bank had an ATM network of over 1,500 ATMs and 540 branches spread across the country.

	Business
	ICICI Bank, post its merger with parent ICICI, is the second largest bank in the country with a strong presence in the retail segment. The full effect of the merger (completed in FY02) was seen in FY03. The bank has been trying to shed its image as a corporate banker and is aggressively targeting the retail segment for growth (more so out of compulsion), at the same time reducing its exposure to the corporate segment. Post its reverse merger in FY02, ICICI Bank has reoriented its focus towards the fast growing retail sector (36% of advances). In this process, the bank has reduced its exposure to the corporate segment both on the assets as well as the liabilities side. The bank has aggressively focused on reducing its interest expenses by concentrating on the retail segment in order to raise low cost demand and savings deposits. ICICI Bank has, thus, over the last 2-3 years emerged as one of the largest players in the retail segment. While the bank has aggressively targeted the retail segment off late, it still has a large exposure to the corporate segment, especially sectors like steel, chemicals and textiles (38% of total advances). This has led to high level of NPAs for the bank. In fact, post its merger with ICICI, ICICI Bank's NPAs have risen further. They currently stand at over 4% and, compared to its peers like HDFC Bank and UTI Bank, this ratio indicates poor performance from ICICI Bank.
	Sector
	Since the process of liberalisation was initiated in early 1990s, no other sector in India has witnessed the kind and pace of reforms as has been taking place in the banking sector. These reforms vindicate the importance of a vibrant banking system that stands as the backbone of a strong and prosperous economy. Banks, apart from being the repository of a nation's savings, are a vital source of capital for industry, commerce and agriculture. The Indian banking sector is currently in a transition phase. One of the most significant developments in recent times has been the enactment of the Securitisation Act, which aims to tackle the menacing problem of non-performing assets (NPAs). Another development taking place in the Indian banking industry is the increasing move towards absorption of technology and upgradation of technological infrastructure. This has immensely helped in improving the efficiency of banks in India, especially those of the public sector banks. While public sector banks are in the process of restructuring, private sector banks are busy consolidating through mergers and acquisitions (the sector has been recently opened up for foreign investments). With increasing competition, and the need to adhere to national and international (Basel) regulations, the need of the hour for Indian banks is to continuously upgrade their existing systems and processes to meet demands of the future. The government has initiated the process of unlocking the true potential of public sector banks. This, the government is doing by diluting its equity shareholding in these banks. Apart from improving operational efficiencies of these banks, this move is necessary if India hopes to build a first world banking industry. This will also unlock shareholder value for the government, so that the funds generated can be utilised to retire public debt and to invest in the development of the economy. FY03 was a good year for the banking sector, as the growth in credit off-take from banks was robust. The banks also benefited immensely from the falling interest rates. Going forward, banks might not have this benefit as interest rates are not expected to fall at the same pace as seen before. Hence profit growth may be subdued. In terms of credit growth, as India's core sectors continue to witness a revival, the trend in increased credit-off take is likely to continue. Especially, retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.
	Promoters
	ICICI Bank is a professionally managed entity that was created post the merger of the erstwhile ICICI Limited with its subsidiary ICICI Bank. Due to the merger with its parent, the shareholding of ICICI Bank has changed significantly and foreign investors now have over 73% stake in the bank. Government controlled entities own over 15% stake in ICICI Bank, while other Indian entities hold the rest of the stake. This means that there is no defined promoter entity for ICICI Bank and the functioning of the bank is in the hands of a professional team of managers.
	Objects of the issue
	The objects of the issue are to provide capital for executing the bank's business strategy, including growth in its retail portfolio, international expansion, investment in its insurance subsidiaries, and other general corporate purposes.

Reasons to apply

	Strong retail focus:  After the merger with parent ICICI, ICICI Bank is focusing strongly on the retail segment in order to fuel its growth for the future. The bank has been very aggressive in this segment, so much so that retail assets now make up nearly 48% of total advances of the bank. ICICI Bank's market share in incremental retail loans disbursed is close to 30%. This indicates the focus the bank has evinced in the retail segment. ICICI Bank has also significantly pared its exposure to the corporate segment in order to increase its presence in the retail segment.
	Wide reach:  ICICI Bank has been on an expansion spree in the last year and in this period it has seen its branch size increase to around 540 branches. The bank is also leveraging on a large ATM network in order to augment its reach further. At the end of FY03, the bank had an ATM network of over 1,500 ATMs spread across the country. Due to the aggressive branch and ATM network expansion, the bank has been able to grow its retail assets significantly. Going forward, the bank is in a good position to tap the retail market due to its extended reach.
	Benefits from the Securitisation Act:  The erstwhile ICICI Limited had a significant amount of NPAs in its books. The passing of the Securitisation Act is likely to go a long way in helping ICICI Bank recovering dues from defaulters. The bank has already formed an Asset Recovery Company (ARC), in partnership with entities like SBI and IDBI in order to take advantage of the provisions of the act.
	Restructuring operations:  In an effort to reduce its interest costs ICICI Bank undertook an exercise to reduce its parent ICICI's high cost liabilities. In this effort, the bank has met with significant success. ICICI Bank has paid back a large part of ICICI's long-term high cost borrowings and in its place replace it with low cost deposits. This has helped the bank to improve its interest spread to 1.5% (FY03) from 1.2% in FY02. Going forward with further restructuring of borrowings and increased contribution from retail deposits, ICICI Bank is likely to witness further improvement in its spreads.

Reasons not to apply

	Bearing the excesses of the past:  The reverse merger of its parent is likely to impact the asset quality and financial ratios of the bank. ICICI Bank's high non-performing assets (NPAs) will impact the earnings growth of the combined entity until the NPAs are completely written off. In FY03, ICICI Bank's net NPA to advances ratio stood at 4.9%. Also on a relative basis, ICICI Bank's net NPA ratio is higher than its peers like IDBI Bank, UTI Bank and HDFC Bank. Unless the bank does enough to mitigate the effect of NPAs, investor outlook towards the bank may continue to remain subdued.
	Subsidiary concerns:  One of the concerns regarding the bank is the state of its subsidiaries, especially the life insurance subsidiary. ICICI Bank's insurance subsidiary is loss making and being in the insurance business it may be a while before it breaks even. Till then it will continue to remain a drag on the bank's finances. The subsidiary reported a net loss of Rs 100 crore in FY03.

Financial Performance

(Rs m)	FY01	FY02	FY03
Income from operations	12,420	21,520	93,680
Growth (%)	45.6%	73.3%	335.3%
Other Income	2,200	5,750	31,590
Interest expenses	8,380	15,590	79,440
Net interest income	4,040	5,930	14,240
Net interest margin	3.6%	2.7%	1.4%
Other expenses	3,340	6,050	20,120
Operating profit	2,900	5,450	25,710
Operating profit margin (%)	23.3%	25.3%	27.4%
Provisions and contingencies	640	2,550	17,910
Profit before tax	2,260	2,900	7,800
Tax	650	320	-4,260
Profit after tax/(loss)	1,610	2,580	12,060
Net profit margin (%)	13.0%	12.0%	12.9%
No. of shares (m)	198.0	222.2	612.8
Diluted earnings per share	8.1	11.6	19.7

Shareholding

(%)	Pre-Offer	Post-Offer*
Foreign investors	73.1
Government controlled shareholders	15.0
Others	11.9
Total	100.0

* No details available

Valuations

At a price of Rs 275 (average of Rs 255 and Rs 295), the adjusted price to book ratio (based on FY04E NPA figures) of the bank stands at 2.8x. ICICI Bank has emerged as the most aggressive player in the retail segment, being the dominant player in most of the sub segments. Having said that, the bank's performance continues to be plagued by very large levels of NPAs. Its aggressive retail foray has also led to unprecedented delinquency rates in the same. We believe that, due to these concerns, at Rs 275 the valuation of the stock seems a bit aggressive on a relative basis. However, investors need to keep in mind the fact that the bank has significant room for improvement, which could justify to an extent the aggressive valuations. Post the capital infusion the aspect to watch out for will be the bank's NPA management strategies.

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