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ICICI Bank: Coming clean

May 7, 2002

ICICI Bank declared better than expected fourth quarter performance despite stiff pressure on margins. The bankís fourth quarter profits increased by 13%, largely driven by treasury gains. As the merger has come into effect on March 30, 2002, ICICI Bankís profits for FY02 includes only two days profits of ICICI and its merged subsidiaries. The bankís operating margins in the fourth quarter were impacted due to higher deposit mobilizations and substantial addition to SLR (government securities) portfolio to meet the reserve requirements of the merged entity. Since October 2001, the bank has added about Rs 150 bn of deposits, which accounts for a market share of 20% in incremental deposits of the banking system. The bankís average cost of deposits for FY02 at 7.3% is however on the lower side compared to its private sector peers.

Click for detailed financial performance

As a part of the merger exercise, ICICI initiated the process of selling down its assets, creating a market for securitized paper in the country. The group sold assets worth Rs 60 bn and utilized the funds in adhering to the banking regulations (priority sector norms and investments required in G-Secs). After the merger, it has become the second largest financially entity in India, with asset base of over Rs 1 trillion. The bank however, aims to curtail its asset size with growth of 15-20% for the next few years, as compared to a possible 25%. It will securitize the retail assets, which would enable it to reduce the asset size. The CAR of 11.4% for the combined entity is comfortable and the management does not expect to raise fresh capital for few years.

The combined entity is focusing on increasing the proportion of retail loans as the key growth area. On a merged basis, ICICI Bankís retail assets witnessed a CAGR of 32% in the last three years and now accounts for 8% of total loans of the bank. The bank is eyeing housing finance market as a potential growth area and expects to maintain a growth rate of 40-45% going forward. In FY02, its housing loan portfolio recorded a strong growth of 230%, though on a smaller asset base of Rs 29 bn. In corporate banking, the entity aims to capture new growth areas including small & medium enterprises and government solutions group. Having become the second largest bank in the country, it has now set its eyes on deposits and fee-based income that the public sector undertakings generate.

In addition to the loan growth, ICICI has been acting as a major distributor of third party products and the management is of the opinion that the sale of these products will be equal to the deposit mobilization by the bank.

Before going ahead with the large balance sheet size, the combined entity has made provision for Rs 37.8 bn, which includes Rs 19.5 bn provisions on standard loans and Rs 9.3 bn provision for diminution in value of equity. By providing for higher amounts, the ratio of provisions to loan assets has been increased to 63% and net NPA ratio has come down to 4.7%. In addition the management plans to use any capital gains they might book on the sale of ICICI Bank shares for such higher provisions.

ICICI Bankís initiatives to write off the assets would improve its asset quality and is also positive for its market valuations. At the current market price of Rs 120, ICICI Bank trades at adjusted price to book value ratio of 2x. The bank is likely to grow its revenues at a strong rate in the coming years leveraging its large balance sheet size and expanded network. State run banks and other private banks could face challenges with the groupís aggressiveness. The bankís earning growth is however likely to be flat in the next two years due to higher provisions to cleanup the accounts.

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