ICICI Bank is driving its earnings growth through its aggressiveness in both retail and corporate lending. The bank has also explored the opportunity for inorganic growth by acquiring Bank of Madura in FY01. This fueled its first half earnings by 87% with 63% growth in interest income.
The bank’s initiatives to expand revenue base continued during the third quarter of the current fiscal. It has recently launched ICICI Bank eCheque’ for its Internet banking users. This facility will enable online payment of money from an ICICI Bank account anywhere in the country to an account in any bank in 8 major cities. This will soon be extended to 7 more cities, thus eliminating the time and inconvenience involved in making a demand draft or physical cheques. The bank plans to offer the service free for the initial three months and then it will charge Re 1 for every Rs 1,000 worth of transaction. Corporates are likely to take the maximum benefits of this facility, which will reduce their administrative cost and will help the bank in earning additional fee based income. About 900 clients have already registered with ICICI Bank for its iPayments scheme. The scheme manages the clients' supply chain related financial transactions across India on the Internet on a real-time basis through its web site.
The bank is also on an aggressive deposit mobilization spree to meet the SLR requirement before the merger with its parent ICICI. The bank’s total deposits increased by 34% in the quarter ended December from Rs 175 bn as on September 2001. It is offering interest rates higher than those offered by public sector banks. This is likely to increase the bank’s average cost of funds towards the year-end. However, after the merger of ICICI it will become the second largest bank in the country in terms of asset size. It can then have the opportunity to cross sell its products to its large number of clients leveraging on its IT infrastructure. The bank will then offer its entire range of products on reduced cost of deposits compared to ICICI’s (standalone’s) relative high cost of funds.
It is also expanding its reach rapidly by opening up new ATMs. Today it has the largest network of 650 ATMs in the country and it is planning to add another 250 ATMs by March 2002. ICICI Bank aims to widen its network globally also. It is considering a proposal to set up a wholly owned subsidiary in the UK with an estimated investment of about US$ 50 m (Rs 2.4 bn). The bank has also sought permission from the RBI for converting its representative office in London into a full-fledged branch. The London branch is to function as the hub for ICICI Bank's European operations.
ICICI Bank is expected to announce its third quarter results in the next week. We expect the bank to maintain its strong growth in earnings and interest income. The bank’s operating margins are however, expected to dip sharply due to increase in its operating cost (higher expenses on setting up ATM network and marketing cost).
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At the current market price of Rs 94, ICICI Bank is trading at a P/E of 5x and Price/Book Value ratio of 0.7x FY02 projected earnings (after considering the merger of ICICI with the bank). On a standalone basis the bank is trading at a P/E of 9x and Price/Book value ratio of 1.4x. Concerns about the reverse merger of its parent have adversely impacted the bank’s valuations in the last few months. Although the merged entity will require at least 3-4 years of profits to clean off the accounts, the potential to grow is unlimited considering its IT infrastructure and product offerings.
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