‘Key focus for ICICI’s merged entity will be total earnings’

The ICICI-ICICI Bank merger plans announced last year will bring into reality the universal banking dream and a change in the way financial services are provided in India. ICICI Ltd executive director Kalpana Morparia spoke to Sujata Mody on the implications of the merger on shareholder value.

What does the ICICI management identify as critical issues for ensuring a success of the merger?
The idea of the merger is to create an entity that has the ability to offer the entire gamut of banking and financial products to various customer classes in India. This also means that ICICI Ltd will be subject to a different regulatory environment, ie, one relevant to a banking entity that relies primarily on savings deposits of individuals and, therefore, has to bear a very heavy burden in terms of reserve ratios and liquidity ratios. So there is this trade-off. But we feel that the benefits from accessing the demand deposit base, even post the CRR and SLR burden, results in a cheaper mobilisation of funds as an intermediary compared to a non-bank.

The systemic impact of the merger is that earlier you had segmented markets allowing players to operate only within their segment. In such a situation, each segment has a different regulatory burden imposed on it and a restriction in activity, thereby giving a sub-optimal solution to the customer.

For instance, if you are selling A product but not B product, you will price everything on the basis of your A product. But if you are going to bundle A, B and C products together, you will track a total profitability of the client and you can offer a better pricing from a consumer perspective. So the scale and scope of your entire operations undergoes a dramatic change and therefore, on a system wide basis, it brings the very strong niche players into the mainstream of banking providing the entire gamut of services.

When we announced the merger, we took full cognisance of the current rules applicable to a bank with which we are willing to comply even if it means compliance on a historic book. In so far as priority sector is concerned, we knew that there is a new emerging scenario in the entire priority sector. So we have asked for a more flexible approach towards priority sector lending. Otherwise, we are saying that we will comply. In the interim, we might need some time periods to comply with requirements like 30 per cent equity holdings in a company, etc.

What kind of merged entity will the investors have a stake in?
It will be, very clearly, a technology-enabled banking entity in India operating across the entire gamut of the customer segment. From large infrastructure projects, that are capital intensive, all the way upto someone who wants to buy a refrigerator. That does not mean that we will be a bank for everybody. It means that we have an ability to provide all services after which we will do the customer segmentation in terms of profitability, etc.

At the time of announcing the merger, the management had indicated that the first few years post merger could see reduced earnings. Could you elaborate on the reasons for such a concern?
We had said that we would need to do a catch up on our existing liabilities which did not attract a regulatory burden linked to demand deposits as we had bond issuances.

Incremental money that we are raising is going towards Government of India securities. To that extent, the yield is lowered but the risk is also much lower since it is government paper. So in the near term, we will have a profit impact.

Medium and long-term benefits will be shareholder value accretive. One of the principal reasons is that as a banking entity, we have an ability to participate in fee and commission services in terms of remittances, cash management, trade finance that could not be done by a non-bank. Whereas our bank could have done it but it had too small a size to be a really meaningful player. So the contribution of the fees and commission will be a great value addition to the profit and loss account.

What is the growth forecast post merger?
The way we are now looking at growth, we are not focussing so much on asset growth. The traditional way of doing banking business was to hold the asset that you took on your books till maturity. That’s no longer the case. Our belief is in the financial services sector.

There will be a set of players having skill sets in originating business, whether it’s with a corporate loan, a project loan, infrastructure funding or a consumer loan receivable.

There will be a set of financial players who will be great mobilisers of savings, but not having great origination capabilities, who, in turn, have an appetite to buy assets.

Today it is feasible to find a marriage between these two so as to transfer loans that have been originated, matured and nurtured for a while through the securitisation route.

Our key focus will be in terms of total returns that we are giving to the shareholders, total returns that we are earning from the client, rather than asset growth, which will be incidental to that. The key driver really will be the earnings.

How will the merger enhance shareholder value?
One of the biggest benefits is that the merged entity will be able to tap the fee and commission market, which is a Rs 10,000 crore market in India.

The second thing is that it gives both sets of shareholders an access to the benefits that each entity had.

The bank had access to a low cost deposit base but a large part of the talent pool on the retail asset side was situated in ICICI Ltd. ICICI Ltd had capabilities in structuring but its funding cost was much more expensive than the bank.

ICICI Ltd spawned a whole lot of subsidiaries in insurance, investment banking, etc, which will now be accessible to the bank shareholders. Within what timeframe will the investors reap the benefits of the merger?
The way I see it is once the merger is completed, in the very first year of performance of the merged entity, they will clearly be able to see the benefits and that will get reflected on the share prices.