Event update: ICICI Bank (Outperformer) - Fine, enquiry and board clarification

• RBI has imposed a penalty of Rs589M on ICICI Bank for non-compliance of rules relating to the sale from its Held to Maturity (HTM) Investment portfolio. We note that this is the highest ever penalty imposed by RBI on any bank. Before this, the last highest penalty was on YES Bank at Rs60M in October 2017. While this fine will not have a material impact on earnings, it is negative on sentiment because other banks seem to have interpreted the rules correctly.
• In separate news, ICICI Bank Board last week issued a statement that 1) they fully back the current MD&CEO of ICICI Bank 2) due diligence was properly done while sanctioning loans to Videocon 3) Neither NuPower Renewables nor any of its investors are borrowers of ICICI Bank 5) The bank’s credit appraisal processes are robust. 6) There is no question of nepotism or conflict of interest by the current MD&CEO in relation the lending to Videocon 7) In 2012, a consortium of banks sanctioned Rs400bn to the Videocon group. ICICI’s share of Rs32.5bn was less than 10% and ICICI was not the lead bank. Also the bank lent to Videocon on the same terms as the rest of the consortium. 8) While the current MD&CEO was part of the credit committee that sanctioned the loan, she did not chair it. The clarifications were in response to news articles that alleged that the MD&CEO has influenced the decision to give loans of Rs32.5bn to Videocon because Videocon had business dealing with her husband’s firm NuPower Renewables. Videocon is NPL for ICBK and the system.
• Also, the Central Bureau of Investigation (CBI) has registered a preliminary enquiry (PE) against Deepak Kochhar, husband of ICICI Bank CEO Chanda Kochhar and Venugopal Dhoot, chairman of Videocon group to verify the Rs400bn loan to the company.  Chanda Kochhar has not been named in the enquiry. Several ICBK officials were questioned by CBI yesterday.  A PE is the first step to verify allegations of corruption. As part of the procedure, the CBI collects material to determine if there is prima facie criminality requiring registration of an FIR. The agency normally has three months to decide whether to close the PE or convert it into a regular FIR. Some media reports say that CBI will decide in a week whether there is a need for an FIR or not.

Valuation and view

ICBK’s banking business trades below book value on FY20E. We currently maintain OP. We see pressure in the short term following the fine, allegations and CBI’s PE. 4Q earnings will likely be weak with slippage of Rs130bn plus, and a core pre-tax loss in our view.