ICICI Bank’s $3 bn capital raised to target growth

A potential capital raise of $3 billion by ICICI Bank could be tofurther improve its margin of safety and to be better prepared to capitalize on potential growth opportunities.

According to a research report by Morgan Stanley, ICICI Bank may look to raise capital for two reasons. To further improve its margin of safety, HDFC Bank and Kotak have much higher capital ratios and to be better prepared to capitalize on potential growth opportunities as the economy stabilizes amid weak competition.

During its F4Q20 results conference call, the bank had mentioned that while its capital position is comfortable (CET 1 ratio at 13.4 per cent), it would look for opportunities to strengthen its balance sheet further. Against this backdrop, the bank has already reduced its stake in the two insurance subsidiaries (ICICI Prudential Life and ICICI Lombard), boosting capital ratios by 40bps.

“In our view, the bank doesn’t need to raise capital for potential NPLs,” Morgan Stanley said. ICICI Bank is well placed among Indian banks and it could absorb up to 12 per cent of loans as potential NPLs, based on current excess capital/coverage. “This is 2X what we estimate would arise in a high stress scenario,” it said.

“In our base case, we are currently building in 3% annual slippages over F21-22 and credit costs at 245 bps and 120 bps, respectively, keeping NPL coverage high at 72 per cent as of end-F22. Despite this, we see CET 1 ratio above 13 per cent by end-F22,” it said.

“As of now, we project a 10 per cent loan CAGR over the next two years and still arrive at a F22 CET 1 ratio of 13.2 per cent excluding 40bps accretion from stake sales in subsidiaries. This implies that internal core equity generation will fund most of the incremental growth,” Morgan Stanley said.

“But if the bank believes that it can grow at a faster pace given the weak competition in the system, then capital consumption would be quicker. If it raises equity, we believe it would be a function of the growth it is targeting,” it added.

At current prices, a $ 3 billion capital raising would imply 10% dilution: This would add 300bps to CET1, taking F20 CET 1 ratio to 16.4 per cent (16.8 per cent including gains from stake sale in subsidiaries).

A $3 billion capital raising is large and would further improve the bank’s balance sheet but could weigh on the stock price in the near term and push out core ROE improvement.