ICICI probe may hit: Fitch

Mumbai: Rating agency Fitch has said that the ongoing investigation in ICICI Bank could undermine investor confidence, with potential implications for funding costs and liquidity in an extreme scenario. However, the bank’s status as a systemically important bank will ensure that it benefit from some form of state support.



Meanwhile, there is a potential risk of financial penalties, as well as legal action, if the investigation comes up with findings against the bank, the agency said. According to Fitch if the investigations expose misconduct, it will throw into question the rating agency’s assumptions that corporate governance at private banks, such as ICICI, is generally stronger than at state-owned banks due to better-qualified board members and more professional management. Moreover, compensation structures at private banks are more performance-oriented, while a large and diversified investor base encourages greater management accountability.

Analysts, meanwhile, are cautioning that the investigations might hit stock price. “Till further clarity emerges, the development will be an overhang for the stock. Already, the news of tepid response to IPO of ICICI Securities has dented sentiments,” said an analyst report from Sharekhan. However, the report also pointed out that the bank has several positives in place including a strong capital position, stable net interest margins and an opportunity to grow market share.

Shares of ICICI Bank opened sharply lower at Rs 276 but gained in the second half and finally closed at Rs 280 almost unchanged. Fitch currently has a BBB- rating which places the bank at the edge of investment grade. The allegation relates to a $500 million loan to Videocon Group, whose controlling shareholder co-founded a separate company with the spouse of ICICI’s CEO.

“A significant portion of the (Videocon) loan has since become non-performing. ICICI’s board has denied any wrongdoing, highlighting that the loan was underwritten in accordance with the bank’s credit standards and was extended as part of a consortium involving over 20 banks. The bank has stressed that it has not given any credit to the borrower group outside of the consortium.

“The presence of the bank’s CEO on this credit committee — and the bank’s reluctance to support an independent probe — have, in our opinion, created doubts over the strength of its corporate governance practice,” the rating agency said. The allegations come against a backdrop of high non-performing assets in the banking sector, some of which have been linked to fraudulent lending.

“Fitch will closely monitor developments, and would take appropriate rating action if risks to the banks’ reputation and financial profile were to rise considerably,” the rating agency said. On the positive side, ICICI Bank has relatively strong capitalisation and profitability. Core capitalisation was 14.2% in December 2017, among the highest in the sector.