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ICICI Bank: Pressure on margins - Views on News from Equitymaster
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  • Jan 22, 2002

    ICICI Bank: Pressure on margins

    The merger with Bank of Madura (BoM), continued to power ICICI Bank's quarterly performance. The bank's 3QFY02 earnings skyrocketed by 73% based on a topline growth of 79%. However, the results are not strictly comparable as 3QFY01 does not include BoM's financials.

    (Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
    Income from operations 3,021 5,416 79.3% 8,730 14,746 68.9%
    Other Income 551 1,759 219.5% 1,204 3,982 230.7%
    Interest expense 2,046 3,836 87.5% 5,941 10,257 72.6%
    Operating Profit 112 (35) -131.1% 663 99 -85.1%
    Operating Profit Margin (%) 3.7% -0.6%   7.6% 0.7%  
    Other expenses 863 1,615 87.1% 2,126 4,390 106.5%
    Provisions and contingencies 37 702 1819.1% 402 1,172 191.7%
    Profit before Tax 626 1,022 63.2% 1,465 2,909 98.5%
    Tax 221 321 45.4% 358 895 149.8%
    Profit after Tax/(Loss) 405 700 72.9% 1,107 2,014 82.0%
    Net profit margin (%) 13.4% 12.9%   12.7% 13.7%  
    No. of Shares 196.8 220.4   196.8 220.4  
    Diluted Earnings per share* 7.4 12.7   6.7 12.2  
    P/E Ratio   7.2      7.5   

    The bank's aggressive customer acquisition (by setting up ATMs and centres) has resulted in a sharp drop in operating margins (0.7% in 9m FY02 from 7.6% in the comparable previous period). Currently, the bank has a network of 357 branches and 44 extension counters. Its network of 731 ATMs is the largest in the country and more than 50% of the bank's transactions are through ATMs. ICICI Bank has started utilizing this network for advertising its own and third party products. This would help it in generating additional fee based income in the coming years. The widespread reach and a large portfolio of financial products has enabled the bank to add 1.5 m new customers in the first nine months of the current fiscal. Thus, taking the total number of customers to 4.7 m, which happens to be one of the largest in the country.

    The bank's total deposits grew by 31% QoQ to Rs 229 bn and retail deposits accounted for 60% of total deposits. Higher retail contribution helped the bank in reducing its average cost of deposits to 7.3% as on December 2001 from 7.9% in the comparable previous period. Benefits arising from acquisition of BoM is reflected in this strong growth.

    As part of the ongoing process to merge with ICICI, the bank has substantially increased its investments in government securities (SLR portfolio). The bank's investment in G-Sec grew by 74% on a YoY basis to Rs 127 bn as on December 2001. The bank is still required to make investments of Rs 80 bn in G-Sec to adhere to RBI guidelines. As a consequence of the high investments, the bank's investment income doubled in the first nine months of FY02 accounting for 54% of total income (up from 44% in the comparable previous period). The diversion of funds to SLR however resulted in a decline in advances of banks to Rs 100 bn from Rs 114 bn as on September 2001. The bank's advances are expected to decline further in the coming quarters. Slowdown in lending is already reflected from 26% growth in interest on advances, which is lower than 43% recorded in the first nine months of FY02.

    Interest income break-up
    (Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
    Interest on advances 1,547 1,953 26.3% 4,045 5,802 43.4%
    Income from investments 1,279 3,137 145.3% 3,796 7,963 109.8%
    Interest on bal with RBI 184 256 38.8% 863 817 -5.3%
    Others 12 70 507.0% 26 164 526.3%
    Total 3,021 5,416 79.3% 8,730 14,746 68.9%

    During the first nine months of FY02, ICICI Bank's cost to income ratio declined to 52% from 53% in the comparable previous quarter. A triple digit growth in operating expenses was mainly due to the expenses on refurbishment and automations of branches after the acquisition of BoM. The contribution of other income to total income rose to 21% (from 12%) fueling its earnings by over 80%. ICICI Bank's provisions for non-performing assets (NPAs) figure witnessed a sharp rise during the December quarter. However, this was not due to rise in gross NPAs. The bank's gross NPAs actually declined by 7% to Rs 3.9 bn from Rs 4.2 bn as on March 2001. The bank made higher provisions to increase the coverage ratio to 65% (from 63% as on March 2001) consequent to which its net NPA to total assets ratio declined to 1.36% from 1.44% as on March 2001.

    At the current market price of Rs 91, ICICI Bank is trading at a P/E of 8x, 9m FY02 annualised earnings and Price/Book value ratio of 1.4x. The bank's capital adequacy ratio of 14% is likely to support its rapid business expansion in future. In the near term, its margins are likely to remain under pressure as it would continue to invest on technology. It had targeted to spend Rs 600 m on IT for FY02, of which two third has already been spent in the first nine months. However, this investment would bring BoM's systems at par with ICICI Bank allowing the combined entity to reduce the transaction costs further.



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