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ICICI Bank: The ‘Madura’ effect - Views on News from Equitymaster
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  • May 15, 2001

    ICICI Bank: The ‘Madura’ effect

    ICICI Bank had recently announced an encouraging financial performance for the year ended March ’01. The financials are inclusive of merger with Bank of Madura (BOM) with effect from March 10, 01. As a result although FY01 balance sheet includes BOM, the income statement will show only 21 days financials of BOM.

    However, if we were the merge the entire financials of BOM with ICICI Bank in FY01, it would show a clear picture of the impact of merger. The profits of ICICI Bank would double and operating income would jump by over 90%. Since BOM also earns higher operating margins (similar to ICICI Bank) and low cost of funds, the merger is likely to be positive for ICICI Bank. This is apart from the advantage of having large branch network of BOM and an access to over 1 million customers.

    With the merger of BOM, ICICI Bank has now one of the largest distribution networks. It has now access to over 3.2 m customers, out of which, 1.7 m are saving account customers. The transaction cost of the bank is expected to reduce further with 0.6 m Internet banking accounts. With a combined network of 378 branches and 510 ATMs, ICICI Bank is all set to cross-sell the products of the ICICI group. This will eventually increase the fee-based income of the bank, which is safer than the traditional banking business.

    Over the years, ICICI Bank has consistently improved its productivity ratios. The jump in margins in FY01 is largely due to reshuffling of loan portfolio which earlier had more weightage to corporate sector. Also, the contribution of retail deposits has increased to 61% (from 31% in FY00). Saving account deposits now account for nearly 12% of total deposit base, which has doubled, compared to the previous year.

    Productivity parameters
    Particulars FY98 FY99 FY00 FY01 *
    Number of Employees 603 891 1,344 2,577
    Revenues /employee (Rs m) 4.3 6.1 6.3 6.4
    Operating profit/employee (Rs m) 1.2 1.3 1.4 2.1
    OPM/employee 28.2% 21.8% 21.8% 32.7%
    Deposits/employee (Rs m) 43.6 68.2 73.4 63.6
    * Merger with BOM

    Nevertheless, ICICI Bank’s returns are comparatively less than its nearest competitor HDFC Bank. The bank’s returns on equity declined substantially in FY00 as a result of ADS issue of US$ 175 m. But this raised its capital adequacy ratio to 19.6% to support its future expansion. ICICI Bank’s ROE is likely to improve to about 17% by FY03. However, it is still less than HDFC Bank’s 24% (projected for FY03).

    Returns still low
    Particulars FY98 FY99 FY00 FY01 *
    ROE 18.8% 20.5% 9.2% 13.7%
    ROA 1.5% 0.9% 0.9% 1.1%
    * Merger with BOM

    At the price of Rs 148, ICICI Bank is trading at a Price/Book value ratio of 1.8 times and P/E of 12x. Its valuations are lower than HDFC Bank but are in line with other private sector banks. With a balance sheet size of over Rs 197 bn, ICICI Bank is all set to exploit the opportunities available in the finance sector. The re-rating of the stock is on the cards, if the bank maintains its growth trajectory in future.



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