Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the existing debt instruments of ICICI Securities Limited (I-Sec) at ‘CRISIL AAA/Stable/CRISIL A1+’. The ratings continue to reflect the company’s majority ownership by, and strategic importance to, ICICI Bank Ltd (ICICI Bank; rated 'CRISIL AAA/CRISIL AA+/Stable'), its strong market position in the retail broking segment, and robust risk management systems. These strengths are partially offset by uncertainties inherent in capital market-related businesses.

 

CRISIL Ratings has also taken note of the scheme of arrangement for delisting of equity shares of I-Sec via issuance of equity shares of ICICI Bank to the public shareholders of I-Sec - in lieu of cancellation of their equity shares in the company, thereby making I-Sec a wholly owned subsidiary of the Bank. The scheme has been approved by the respective board of directors of both the companies, stock exchanges, shareholders and National Company Law Tribunal (NCLT) and is following the due process of law to give effect to the arrangements envisaged under the scheme.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of ICICI Securities Ltd and its subsidiaries, collectively referred to as I-Sec. This is because these entities have significant operational and management linkages and operate under a common brand. CRISIL Ratings has also factored in the strong support from the parent, ICICI Bank, given the strategic importance of the entity to the parent along with the shared brand name. ICICI Bank is the majority shareholder of I-Sec, with a shareholding of 74.58% as on September 30, 2024.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to and majority ownership by ICICI Bank: ICICI Bank held 74.58% stake in I-Sec, post the initial public offering in March 2018 and offer for sale (OFS) in December 2020. However, in June 2023 - ICICI Bank announced to delist I-Sec and make it a wholly owned subsidiary, the bank also received requisite regulatory approvals for this scheme. Institutional and retail broking remain key activities for ICICI group, and I-Sec not only enables the group to provide the entire range of products related to capital markets, but also enhances diversification of the group’s revenue profile. I-Sec acts as a distribution channel for many financial products of the group, including mutual funds, loans, etc, for the ICICI group.

 

• Strong market position in the retail broking segment: ICICI Bank, along with its group companies, has a strong presence in all major financial segments, including retail broking. I-Sec is a strong player in the retail equity broking business with ~95 lakh client base and among top players in online retail broking. I-Sec also has a strong presence in the distribution of financial products and it is third largest distributor of mutual funds among non-banks. It is among the top players in the investment banking space and specializes in issue management. CRISIL Ratings believes that I-Sec will maintain its leading position in the equity-broking segment over the medium term on the back of its strong reach, sound research capabilities, and comprehensive and sophisticated internet-based trading platform.

 

It has successfully scaled up its margin trading book over the past years and consequentially its MTF lending book stood at 15,457.1 crore as on September 30, 2024.

 

• Robust risk management systems: Risk management and monitoring systems are adequate to mitigate risks arising from uncertainties inherent in the retail-broking business. Majority of I-Sec clients’ are under the three-in-one model for its online retail broking, wherein the client’s bank account and demat account in ICICI Bank, and icicidirect.com trading accounts are all interlinked.

 

On the investment banking side, I-Sec follows a sound system for selection and execution of underwriting mandates. Other aspects of the risk management framework for margin financing include maximum exposure limits per client, stock-wise exposure limits for each client, and stock and sector exposure limits across the company as a whole. The company has also clearly defined limits for undertaking proprietary trading.

 

Weakness:

• Uncertainties inherent in capital market-related businesses: Over the past couple of years, the broking industry has witnessed a dynamic regulatory environment. With the objective of enhancing transparency, limiting misuse of funds and safeguarding investor interests, SEBI has introduced several changes. Some of these include margin pledge/re-pledge mechanism, daily client collateral reporting and disclosure, collateral allocation at clearing corporations by brokers, and upfront margin collection for intraday positions. Furthermore, SEBI has approved blocking of funds facility for trading in secondary markets, and non-usage of client deposits for availing bank guarantees (BG) by brokers, which aim to prevent misuse of client funds, broker defaults and consequent risk to investor capital. This is similar to the Application Supported by Blocked Amount (ASBA) facility already available for the primary market, which ensures movement of money only when an allotment happens.

 

Recently, SEBI has introduced a slew of measures on derivatives trading, with a three-pronged intent. One, raising entry barriers for transacting in derivatives, thereby controlling retail participation, by hiking futures and options contract sizes and mandating upfront premium collections from option buyers. Two, curbing market volatility due to speculative activity close to expiry dates by limiting weekly index derivatives offered by exchanges to one each and removing the margin benefit available on offsetting positions across different expiries on the expiry day. Three, controlling and building a cushion for risk by mandating intraday monitoring of position limits and requiring additional margins on short options contracts on the expiry day. These changes will come into effect in a phased manner. This is in addition to the exchange announcing the flat fee structure for transaction charges which is further expected to impact derivatives volumes

 

The equity broking business is cyclical in nature; brokerage volumes and earnings are highly dependent on the level of trading activity in the capital market.

Liquidity: Superior

I-Sec’s liquidity position is comfortable due to agency nature of its business and healthy liquidity cushion in form of cash and bank balance of Rs 68 crore, liquid investments (including fixed deposits) of Rs 13,681 crore, and unutilised bank lines of Rs 3,500 crore as on October 15, 2024. Apart from this, I-Sec has healthy inflow from its other assets which can be liquidated and realized at short notice. The repayable borrowing till January 2025, as on the same date was Rs 17,145 crore, in the form of commercial paper. I-Sec also benefits from the support from ICICI Bank.

 

ESG profile

CRISIL Ratings believes that ICICI Securities’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

ICICI Securities has an ongoing focus on strengthening various aspects of its ESG profile.

 

ICICI Securities’ key ESG highlights:

 

• The company endeavours to reduce its paper consumption by 35% by FY25 from FY19 baseline.

 

• Basis the latest company disclosures, installation of water meter in 48 branches and 3 corporate offices for tracking water consumption metrics to monitor and identify abnormal fluctuations and installed 8,588 LED lights resulting in saving 14,675 KWH electricity per month on an average.

 

• The company has adopted employee-oriented policies covering areas such as growth & development, employee benefits, grievance redressal framework, health & safety and prevention of sexual harassment at the workplace which endeavors to provide an environment of care, nurturing, opportunity to accomplish professional aspirations and inclusion.

 

• Majority of the board members are independent directors, none of the independent directors have tenure of more than 10 years and there is a segregation in chairperson and executive positions. It has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. ICICI Securities’ commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes I-Sec will maintain its strong market position in the retail broking and investment banking segments and remain strategically important to ICICI Bank.

Rating sensitivity factors

Downward factors:

• Downward change in the credit risk profile of ICICI Bank by 1 notch could have a similar rating change on I-Sec
• Any material change in the shareholding or support philosophy of ICICI Bank impacting the quantum and timing of support

About the Company

I-Sec, a majority owned subsidiary of ICICI Bank, offers broking services to institutional and retail clients in the cash equity, derivatives, currency and commodities markets. Apart from strong online presence, it has well spread out distribution network of 135 branches as on September 30, 2024. I-Sec also distributes public issues to corporates and high-net-worth individuals and has a strong presence in investment banking. It has a large retail client base of around 95 lakh customers as on September 30, 2024. It is also growing its wealth management business. I-Sec distributes many financial market products for the ICICI group.

 

For fiscal 2024, I-Sec reported a PAT of Rs 1,696.7 crore on total income of Rs 5,051.1 crore, as against, a PAT of Rs 1,117.6 crore on total income of Rs 3,425.5 crore during the previous fiscal.

 

For the half year ended September 30, 2024, I-Sec reported a PAT of Rs 1,055.9 crore on total income of Rs 3,351.2 crore, as against, a PAT of Rs 694.5 crore on total income of Rs 2,183.4 crore during the corresponding period of the previous fiscal

Any other information: Not Applicable