Spike...

I am thinkin' of an answer for short term yield spike, which can be terribly wrong...(plz correct me if i am wrong) -->

Monetary Tightening Measures (as mentioned in the article) --> Race to raise money in the debt market --> Secondary Market for debt has securities of all tenor, out of which shorter tenor papers are more attractive right now as yield curve is close to flat (investors would like to get the same yield as early as possible - a typical debt market phenomenon when the yield curve is flat!) --> Sale of such papers by PDs in the market to raise cash --> increase in volume of short term papers --> Fall in Prices --> Increase in Yields (a Spike in the Yield curve (near the short term area!)

(As mentioned in class, there can be many more signaling reasons. All T-Bill auctions in August closed at high yields!!)

SANAT SATYAN

Holding Company...& more

Here are some reasons i can think of for banks like ICICI and SBI pitching for a holding company set up -

• RBI is planning to allow international banks like China's largest bank, ICBC, to enter the indian markets by 2009 (with full foreign capital holding - in retail banking operations). In order to protect the Indian banking system from competitive banking products (like high deposits rates & cheaper loans in the future), they want bigger banks like SBI and ICICI to have a strong capital structure. This is also followed by completion of adherance to BASEL II norms by March 2008.
  
  In this light, banks are working on a better capital structure. Now, as discussed in class, currently there exists a conflict of interest between a parent bank and its subsidiaries - which sell products generating fee based income. Using bank's channel for the same, it might so happen that bank's increasing trend towards fee based income might hurt the capital-based expectations of the bank.

• ICICI Bank wishes to form a holding company, namely ICICI Financial Services, in order to free its own capital and increase its capital in the subsidiaries. As of now, a bank is allowed to hold only 20% of capital in a subsidiary. Once the holding company is formed under ICICI Bank, the parent bank can invest in the holding company (with no current limit) and then, this holding company can in turn invest in the subsidiaries (with no current limit). This way, ICICI Bank can increase its stake in the subsidiaries. Also, in its books, it can show the investment in the holding company as an 'investment'.

• A very important factor that ICICI Bank mentions in the DHRP of it's FPO in June is that it wishes to form the holding company to facilitate its price discovery. According to the valuation technique "Sum of it's parts", a company's valuation would be based on the valuation of its individual lines of business and entities. Since the subsidiaries are a part of the parent bank, the bank would be valued as a sum of the valuations of the subsidiaries. Now, consider the lines of business ICICI Bank is in - Life Insurance, General Insurance, Mutual Funds etc. Insurance companies have generally a lower EPS than banks as their EPS is based on their capital locked up by IRDA norms. ICICI Bank thinks that its true business value is not being reflected in its share price as some of the subsidiaries are lowering its inherent value! Once the holding company is formed, ICICI Bank's real profitability can be easily 'discovered'.

• SBI's consolidation as mentioned in the article i have posted earlier, is more to do with making the bank stronger, in order to make it ready for ICBC's entry into India. SBI Chairman from time to time, has made sweeping statements that the bank may face some threat from chinese banks in the future. These banks are 6 times bigger than SBI and might capture the market with higher volumes. The merger of the 7 subsidiaries with SBI would help the bank have a stronger balance sheet in terms of capital and revenue, plus, the bank would be able to provide uniform services across the nation (in all regions where its branches are not present currently - but has a tie up with the associate banks) under the Core Banking Solution framework! It is currently merging all those banks (SHS) where it has 100% holding and has branch network enhancement scenario. Second would be those banks, where it has major stake (SBH...). It wishes to complete this process by 2009.
  
  This would help SBI to foray into international financial markets to buy foreign banks to increase its global presence. Currently, SBI has presence in 60 countries only, whereas ICBC is a wider global pressure. By expanding into international markets, it would be able to make a wider global mark. Also, a stronger capital structure and wider branch network closer home would help SBI comply with the international capital structure standards of other countries.
  
  We never know - it might so happen tomorrow that after the ICICI Bank's Holding Company issue is solved & implemented (whichever way it is done - ICICI Bank - Holding Company - Subsidiaries or Holding Company - ICICI Bank & Subsidiaries), SBI might follow the same model. Currently the bank also has innumerable subsidiaries which provide varied services to different target segments. They can be all brought under the same umbrella. Probably, ICICI Bank's step right now might a roadmap for SBI later.

(These are my views and can be wrong...!! )

SANAT SATYAN