In these febrile times, it doesn’t take much for a bank’s reputation to be questioned. So it has proved for ICICI, India’s biggest private bank.
Heralded not so long ago as a regional champion, its share price fell to a two-year low on September 29, before recovering the following day, amid rumours of poor liquidity, a weak capital base and a vulnerable investment portfolio. With speculation mounting over the bank’s health, some depositors started to withdraw money. ICICI’s chief executive was forced into a public statement dismissing rumours about its financial strength as "baseless and malicious". Just for good measure, India’s central bank and finance minister weighed in too, defending the bank’s position.
Loss of confidence in ICICI appears to stem from a research report by Morgan Stanley, released on September 2, in which the US firm identified it as Asia’s most leveraged bank and, so, most vulnerable to a downturn. The second bank on the list was Bank of East Asia, the Hong Kong lender that suffered a run last month after announcing trading losses for the first half of the year.
Morgan Stanley’s criticisms of ICICI highlighted several all-too-familiar issues. The two most important claims it makes: that the bank ramped up its loan book too aggressively but with little capital discipline – its growth in earnings per share trailed its growth in risk-weighted assets – and this in a country lacking a properly functioning credit bureau; and that ICICI’s profits over the past three years were over-reliant on the capital markets – indeed, according to Morgan Stanley, it was more reliant on trading-related gains than any other bank in Asia.