Credit Chatter Snares India's ICICI Bank

Despite nasty rumors, the bank's health is good. But anxieties about the world economy and future loans cast a dark shadow

By Nandini Lakshman

Even before the whispers started in early October, the stock price of ICICI Bank (IBN), second in size only to the State Bank of India (SBI.BO) and the country's biggest private-sector bank, was already down 56% from the start of the year. Then rumors about ICICI's health started circulating by anonymous e-mails and text messages. "Pull out your money from ICICI Bank—it will be insolvent," read one message. "ICICI Bank has lent money to Lehman, AIG…," read another. The messages prompted runs on some bank branches in southern India. Retail investors panicked, and the stock skidded.

After a particularly bruising three days of trading that sent the stock down 25% by Oct. 10, ICICI management finally decided to take action. On Oct. 12, ICICI filed a complaint with the police in Mumbai and the southern Indian city of Coimbatore, requesting their help in rounding up the culprits behind the campaign driving down its stock. And hours before dawn on Oct. 13, the bank sent e-mails to customers assuring them it had "zero exposure to U.S. subprime" and that it was "one of the highest capitalized banks in the country." The same day, rating agencies Moody's (MCO) and Standard & Poor's issued statements that ICICI Bank's credit fundamentals were sound. That helped send the bank's shares soaring 24% in two days.

Overseas Exposure

The pressure is still on, though. In trading Oct. 15-16, the stock price dropped 8% amid continued unease about the bank's prospects. Investor nervousness is understandable. ICICI has the greatest exposure overseas, with 25% of its consolidated banking assets in international business. The bank is also India's most aggressive at home. It has issued more than 9 million credit cards, making it the largest credit-card provider in the country. Net profit grew 22% in the 2007 fiscal year (ended in March) and 37% in the 2008 fiscal year, but with the central bank increasing interest rates and asking banks to go slow on lending, ICICI's earnings are likely to fall 10% in the year ending March 2009, according to a forecast (BusinessWeek.com, 10/8/08) by Macquarie Securities.

The financial health of ICICI means a lot to India. The bank provides important support for Indian companies with global ambitions. "The majority of our international lending business is to meet the foreign currency needs of Indian corporates," says Chanda Kochhar, ICICI Bank's joint managing director and chief financial officer.

The bank's aggressiveness overseas relative to its Indian peers is one reason it is now so vulnerable to rumors. Investors also worry about the bank's ownership, says Manish Chokhani, director at Enam Securities, a Mumbai broking firm. Unlike other Indian banks that are controlled by the government or a large business group, ICICI Bank is a standalone entity. So, analysts say, the bank has nobody to bat for it in tough times. Moreover, it is one of the few banks where foreigner ownership has reached the legal maximum of 74%. (Investors include Warburg Pincus and Temasek.) As the global financial crisis made bank stocks anathema, some foreign hedge funds are said to have off-loaded part of their ICICI holdings. ICICI officials, however, say that the foreign stake is intact.

Puny Returns

ICICI Bank's overseas exposure prompts fears among some investors. Although its capital adequacy ratio, or the ratio of the bank's capital to its risk, was a comfortable 13.2% at the end of June, lending in countries now hit by the credit crisis was, until recently, soaring. In the second quarter of 2008, year-on-year loan growth was 85% for its British and Canadian arms, compared with 13% for the bank as a whole. "There are concerns about ICICI" regarding its vulnerability outside India, says Hemindra Hazari, equity research head at Mumbai's Karvy Stock Broking,

Some investors also complain about the bank's return on equity, one of the lowest in the industry. In 2008, ICICI Bank's ROE was 11.7%, compared with the private-sector banks' average of 15.87%. ICICI officials attribute the low number to fast growth and capital raising. In the past year, ICICI has raised $5 billion in the domestic and international markets.

Tackling rumors is nothing new for ICICI Bank, which began life as a development financial institution more than four decades ago. In 2002, the institution and a subsidiary merged to create the country's first private bank. That year, some of its new automated teller machines failed in the west Indian state of Gujarat because of a technical glitch. Investors concluded that there was no money in the bank, resulting in a minor run on the bank.

ICICI Bank's current problems won't go away so quickly. As one of the few Indian banks thoroughly integrated with the global economy, it will probably enjoy a stock surge if markets bounce back elsewhere. But when global times are tough, ICICI will take a beating.

Lakshman covers India business for BusinessWeek.