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ICICI: Matching global peers?

Feb 23, 2001

With a meltdown in tech stocks, the focus of the markets worldwide is shifting towards finance and consumer stocks. The key financial stocks are trading at premium valuations (almost near to their 52 week high) with their ability to sustain good growth rates even on large balance sheet size.The primary reason for the large financial groups sustaining remarkable growth rates is their diversified focus. Citigroup is the best example of ‘Universal Bank’ (in Indian terms) with services provided by it in more than 50 countries with 1,000 branches. Starting from the traditional lending services to investment banking, and retail business to corporate banking, cash management and commercial insurance. The group also offers services in the areas of asset management and venture capital activities. The high margin retail banking business of the group contributed more than 47% of its total revenues for the year ended December ‘00. This has offered one of the highest profit margins and returns on equity to the Citigroup.

Comparative financials
Year endedDec-00Dec-00Dec-00Mar-01E
Particulars ($ m)Barclays PlcCitigroupHSBC HoldingsICICI
Revenues 17,051 52,085 34,862 2,025
Growth26.5%16.0%19.4%12.0%
Operating profits 7,457 21,160 13,340 619
Growth11.4%5.1%11.5%9.9%
Earnings 3,692 12,999 7,886 260
Growth40.9%26.9%32.7%0.4%

Key ratios
ParticulasBarclays PlcCitigroupHSBC HoldingsICICI
OPM43.7%40.6%38.3%30.6%
NPM21.7%25.0%22.6%12.9%
ROE24.0%25.2%18.7%12.1%

Back to India, the growths of financial institutions (FIs) are marred because of restrictions to enter diversified service areas. Although, the FIs are allowed to transform into ‘Universal Banks’, guidelines are not yet clarified. This limits their future growth prospects and also the valuations.

ICICI’s current valuations are comparatively lower than its global peers. High levels of NPAs have put a dent on its profit growth and market valuations. Manufacturing and project financing contributes more than 60% of ICICI’s profits where chances of NPAs are comparatively high. This is also reflected from the comparative valuations of select companies where ICICI is hit due to high non-performing assets (7.6% of total advances). We expect the ratio to come down further to 7% in FY03. Nevertheless it is still on the higher side than its global peers.

Comparative valuations
ParticularsBarclays PlcCitigroupHSBC HoldingsICICI
P/E (x) 14.2 20.5 21.1 6.3
Price/Book Value (x) 2.9 4.7 3.7 0.8
Market Cap/Revenues (x) 3.2 5.2 3.7 0.8
MC/Assets 0.1 0.3 0.2 0.1

However, ICICI compares well in terms of productivity parameters. Its ratio of revenues/employee and profits/employee are comparatively higher than Citigroup. ICICI is continuously reshuffling its portfolio from manufacturing to retail finance with innovative structured products and efficient marketing efforts. It has also forayed into new areas like insurance. Once it is allowed to enter into retail banking, cost of funds is expected to come down dramatically. This could effectively lead to increase in operating margins and thus higher bottomline growth. But when this will happen is a question of time and valuations could improve only then.

Performance parameters
ParticularsCitigroupICICI
Revenues/employee ($ m)0.52.0
Profits/employee ($ m)0.10.3
Assets/employee ($ m)7.315.8

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