International ratings agency Fitch Ratings has assigned a long-term foreign currency rating of 'BB+' to ICICI Bank, in addition to a short-term foreign currency rating of 'B', an individual rating of 'C/D' and a support rating of '3'. The outlook on the ratings is 'stable'.

ICICI Bank's ratings reflect its strong management and improved financial condition compared with its earlier incarnation, ICICI Ltd, which was primarily a project financing institution. ICICI's management has proactively diversified the institution's activities, which culminated in its merger with its commercial banking arm, effective March 2002. The new ICICI Bank has grown aggressively in consumer banking, and consumer loans now account for 61 per cent of the bank's loan book.

While ICICI Ltd predominantly relied on market borrowings for its funding, ICICI Bank has rapidly grown its low-cost customer deposit base, improving the bank's net interest margin (NIM) to 2.4 per cent as at December 2004, from below 2 per cent previously. While this is lower than most other Indian banks, it should further improve as its legacy high-cost borrowings progressively mature. Technologically, ICICI Bank is among the most advanced in India, which enables it to compete effectively not only with its local peers but also against well-established foreign banks.

Thanks to aggressive provisioning and write-offs, together with sustained recovery efforts, ICICI Bank's asset quality has significantly improved; the bank's net NPL ratio was 2.3 per cent at December 2004, compared with 4.9 per cent in March 2003. But some legacy asset quality problems remain, with net 'restructured performing loans' exceeding the bank's reported gross NPLs as at December 2004.

Its relatively new and unseasoned consumer portfolio — combined with the breakneck speed at which the bank has been growing its loan portfolio — could pose some asset quality problems in future. However, so far the bank has not experienced major problems related to its consumer portfolio, with the net NPL ratio at about 0.6 per cent as at December 2004.

After raising common equity worth about Rs32 billion ($700 million) in April 2004, ICICI Bank's capital position has strengthened considerably. Its total capital adequacy ratio (CAR) and Tier-1 ratio were 13.5 per cent and 8.62 per cent, respectively, as at December 2004. The bank's relatively strong capital position should help address its latent asset quality problems and meet with unexpected loan losses in future, apart from funding its growth. ICICI Bank is listed on the New York Stock Exchange and has good access to international capital markets, both for equity and debt, which improves its financial flexibility.

As the second-largest bank in India, the likelihood of government support is high, although ICICI Bank's long-term rating is largely a result of its superior standalone financial condition compared with most Indian banks. Fitch recognises the considerable progress that the ICICI management has achieved in strengthening the bank's balance sheet compared with previous years. Barring unforeseen circumstances, the bank's individual rating should improve in the near future.