Bond investors want transparency from ICICI UK

The UK subsidiary of the Indian bank is advised to clear up some of the confusion surrounding ICICI's borrowing strategy ahead of its proposed $500 million benchmark issue.
ICICI UK kicked off a roadshow for a rumoured $500 million benchmark bond deal this week. Bookrunners Citi, Lehman Brothers and Merrill Lynch have reportedly advised the Indian bank to demonstrate increased transparency and a firmer strategy regarding its borrowing programme. Indian paper has underperformed this year due to the glut of paper arriving on the market.

Elements of the buy-side feel the bank and its parent ICICI Bank have ôborrowed and sought any pocket of liquidity they can findö, despite the parent intimating a reduction in borrowing activities earlier this year.

ôICICI UK has not actually issued large quantities of paper, but the lack of a clear strategy concerning future issuance from both ICICI UK and its parent has led to confusion among investors,ö says one buy-side insider. Unlike its parent, the UK subsidiary has issued just one upper tier-2 perpetual bond (6.375%), as well as two FRNs due 2012 and 2016.

ICICI UK has already received $600 million in orders for its three-year dollar bond and has released pricing guidance in the area of 50bp over Libor. Rumour has it the size of the issue will be a benchmark at $500 million and Moody's Investors Service has rated the bond Baa1 with a stable outlook. In terms of comparables, bankers have quoted ICICI Bank's January 2010 FRN, which is currently trading at 45bp over Libor. In addition, UTIÆs January 2010 FRN is also relevant. This was quoted at 50bp over Libor.

The bank's five-year FRN issued in February is currently trading at 65bp over Libor. Barclays Bank and Deutsche Bank managed that transaction.

According to sources, guidance is satisfactory and the bonds should perform well as long as they price slightly wide to where the parentÆs secondary bonds are trading - and as long as supply is controlled. ôIn terms of secondary performance, unless we see a slowdown in new issuance, I donÆt think the spread will have much room to tighten. But if we do see a slowdown, we can expect spreads to tighten by 5bp-10bp this year,ö says one source.

As well as concerns regarding supply, some investors are skittish regarding the parentÆs aggressive expansion plans in a 30% credit growth environment. ôCredit risk on ICICI Bank's loan books is going up very rapidly, and they are borrowing a tonne. No-one is getting paid for that at 50bp over Libor.ö

Although ICICI Bank's capital growth had moderated this year, its proposal to raise $5 billion of new equity has caused some concern. ôThe pursuit of growth at all cost is putting pressure on profitability, capital levels, and asset quality," state an HSBC analyst, who also happens to recommend switching from ICICI Bank 2020-17c and SBI 2049-17c. This reflects the view that Bank Baroda and UTI Bank offer better upside based on their superior fundamentals, lower supply risk and asset quality.

Meanwhile, the complexity of ICICI UK's risks has increased since beginning a programme of international expansion. In 2006, the bank started operations in Belgium, and is planning operations in other continental European countries.

Regardless, three-year paper at this price is rare, and other investors are keen to get their hands on it. Investors who view the paper as a UK credit that benefits from UK regulations and a 20% credit weighting from the FSA feel this comes cheap.

ICICI UK is a wholly-owned subsidiary of ICICI Bank, the second largest bank in India and the largest bank in the Indian private sector in terms of total assets. ICICI UK offers retail, corporate and investment banking services in the UK and Europe. The bankÆs corporate and investment banking business encompasses funding and advisory services for Indian corporates seeking to expand in the UK and Europe. Its retail activities focus on financial services for the Indian community in the UK, and banking for British consumers.

As at March 2007, total assets stood at $4.87 billion compared to $2.04 billion in March 2006. ICICI UK has a total capital adequacy of 17.2%.
¬ Haymarket Media Limited. All rights reserved.
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