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Announcement:

Moody's: ICICI Bank's proposed merger with Bank of Rajasthan (India) do not impact ratings

01 Jun 2010

Limassol, June 01, 2010 -- Moody's Investors Service says that the proposed merger of ICICI Bank with Bank of Rajasthan (BoR) will not have an impact on ICICI Bank's C- bank financial strength rating (BFSR) nor its Baa2 global local currency deposit rating and foreign currency senior unsecured debt rating. Over the longer term, Moody's expects ICICI Bank's franchise value to benefit from this merger but with no immediate positive impact on its ratings.

Specifically, Moody's notes that ICICI Bank's proposal to merge with the relatively small private-sector Bank of Rajasthan will have either a limited or no effect on its financial fundamentals. Instead, Moody's notes that the proposed merger will add significant franchise value to ICICI Bank through BoR's existing network of 463 branches, mainly in the northern part of India. This would bring the total number of branches of ICICI Bank to around 2,500 throughout the country, thereby enhancing the retail network available for mobilising deposits and distributing its products and services. Moody's also notes certain regulatory and corporate governance issues that BoR has had with the local authorities, although these irregularities were primarily related to the main shareholders of the bank (Tayal Group has a 55% stake according to the Securities and Exchange Board of India) and are not expected to have any adverse influence on the merged entity.

BoR's loan book of around INR85 billion represents less than 5% of ICICI Bank's total loans and is not expected to cause any deterioration in the overall asset quality or create any credit concentrations. BoR reported a gross non-performing loans (NPLs) ratio of 3.5% in March 2010. Moody's does not expect any sizeable write-down from BoR's loan portfolio that would significantly affect ICICI Bank's net income. The same applies to BoR's investment book, which mainly comprises government securities and investments that qualify for statutory liquidity requirement (SLR).

In addition, Moody's notes that BoR's full-year results as of March 2010 recorded a net loss of INR1.02 billion (USD22.7 million) mainly due to higher credit costs and much higher employee expenses, while recording a capital adequacy ratio (CAR) of 7.52%, lower than the 9% regulatory minimum. Moody's believes that ICICI Bank's strong Tier 1 position of 14% as of March 2010 gives it the capacity to absorb any possible losses stemming from BoR's balance sheet, without compromising its financial standing and its ratings. In addition, Moody's estimates that BoR's volume of net NPLs combined with its restructured loans account for less than 6% of ICICI Bank's FY2010 (year ending March 2010) pre-provision income.

Provided that this transaction is approved by the shareholders of the two banks and the regulators, Moody's also expects the possible merger of BoR into ICICI Bank to be a relatively smooth process given the past experience of ICICI Bank in taking over small private-sector banks such as Bank of Madura in March 2001 and Sangli Bank in December 2006. The integration of BoR into ICICI Bank's system and infrastructure should be a relatively easy task given that they both operate on the same core banking platform. Moreover, despite the expected resistance to this merger by BoR's around 4,000 employees , Moody's does not view this as a major impediment to the transaction and expects ICICI Bank to be able to easily absorb the staff, most of whom are branch-based.

Looking ahead, Moody's expects ICICI Bank's franchise value to benefit from this merger but with no immediate positive impact on its ratings. Any upward rating pressure could develop once the bank leverages the increased branch network, resulting in an improved funding profile through a higher proportion of low cost retail deposits. This would in turn translate into higher net interest margins which -- when combined with a stronger asset quality and lower provisioning costs -- would mean a stronger, more solid and sustainable profitability base for the bank.

Looking at ICICI Bank's full-year FY2010 results, the bank was able to marginally grow its bottom-line by 7.1%, driven mainly by the bank's treasury income, which increased by 166.6%. In fact, when excluding treasury income, the bank's core revenues (net interest income + fee income) declined by 7.2%, although this was mainly driven by the bank's conscious decision to consolidate its relatively risky retail portfolio (mainly unsecured personal loans and credit cards) as well as its high-cost term deposits, thereby focusing more on low-cost CASA (current accounts + savings accounts) deposits. The proportion of CASA deposits for the bank increased to 41.7% in March 2010 from 28.7% the year before.

Over the past 12 months, ICICI Bank has continued to face asset quality challenges, with gross NPLs as of March 2010 standing at 5.06% compared to 4.32% the year before. However, Moody's notes the gradual decline in loan slippages into NPLs on a quarterly basis as the Indian economy accelerates back to its high-growth trajectory. The bank's volume of net NPLs declined by almost 12% from INR43.6 billion in December 2009 to INR38.4 billion in March 2010. According to recent data, the Indian economy grew by 8.6% during the fourth quarter ending March 2010 from a year earlier. The bank's capitalisation levels remain comfortable with a CAR of 19.4% and a Tier 1 ratio of 14%, underpinning its BFSR of C-, which maps to a baseline credit assessment (BCA) of Baa2.

The last rating action for ICICI Bank was January 27 2010 when the Upper Tier 2 notes were downgraded to Ba1 from Baa3 and the Hybrid Tier 1 Notes were downgraded to Ba2 from Ba1.

Headquartered in Mumbai, India, ICICI Bank Ltd had total assets of INR3,634 billion (USD80.7 billion) at the end of March 2010.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Nondas Nicolaides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: ICICI Bank's proposed merger with Bank of Rajasthan (India) do not impact ratings
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