ICICI Securities delisting: A course correction better late than never
The delisting of ICICI Securities (I-Sec) has been approved by over two-thirds of its public shareholders facilitating its transition into a wholly owned subsidiary of ICICI Bank. Notably, the listing in April 2018 did not yield any material benefit to the parent bank. Thus, the move seems like a course correction.
This is also likely to be taken as a cue by its peers – HDFC Bank, Axis Bank and Kotak Mahindra Bank – to keep their brokerage business private. Even global banking giants such as JP Morgan and Bank of America have shied away from separate listing of their brokerage business.
In any case, investors value each business of a company separately to arrive at the sum-of-the-parts, or SOTP, valuation, and ICICI Bank is no different. To be sure, the brokerage business of banks has never accounted for more than 10% of the total valuation of the four leading banks—ICICI, HDFC, Kotak and Axis.
Even if we take a price-to-earnings multiple of 20 times on FY23 earnings base, in line with the current valuation multiple of I-Sec, the market capitalization of the brokerage business of the banking majors seems to be minuscule compared to that of their parent as can be seen from the table alongside.
In fact, arguments in favour of keeping the brokerage business of banks unlisted are gaining ground. Going forward, the outlook for the business is challenging especially in the retail segment as discount brokerages have spread their wings even to remote locations.
Discount brokerages offer a flat fee with some of them even offering zero fee. I-Sec and other brokerage firms owned by banks have followed suit by coming up with low-cost pricing offers. To offset the pressure on brokerage revenue, most players are resorting to extending margin funding facility (MTF) at attractive terms to earn interest income.
This should work to the advantage of bank-led brokerages as they have access to low-cost funding from the lender. If their brokerage arm is listed separately, there will be questions raised about funding them at an arm’s length price.
Indeed, there was some skepticism at the time of the listing of I-Sec. The brokerage business, though cyclical, does not need much capital. A classic example here is Zerodha, which has stayed away from the capital market.
Recall that ICICI Bank had resorted to an offer for sale to get I-Sec listed as there was no justification for a fresh issue of shares. The offer was priced at ₹520 per share, which was considered to be rather steep at the time with the price-to-earnings multiple at 30 times based on FY18 earnings per share of about ₹17. Consequently, the response to the offer was underwhelming and the listing day’s closing price stood at ₹445, almost 15% below the offer price.
Over the past five years, the earnings per share has doubled to ₹35 in FY23. Still, the price-to-earnings multiple works out to nearly 20, indicating the drop in valuation amid concerns about the intense competition in the brokerage business. Thus, the delisting not only eases the burden of managing investor expectations and compliance but also realigns the business.
