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ICICI Bank: Betting on retail

Jul 31, 2002

ICICI Bank has reported its first merged performance with its parent ICICI for the quarter ended June 2002. The bank's 1QFY03 results also include numbers of ICICI Personal Financial Services and ICICI Capital Services, which have been amalgamated with the bank with effect from March 30, 2002. The financials for the quarter are therefore not comparable with the previous quarter.

(Rs m)1QFY021QFY03Change
Income from operations 4,683 23,956 411.5%
Other Income 1,272 4,375 244.0%
Interest expense 3,186 20,595 546.4%
Net interest income 1,497 3,361 124.5%
Other expenses 1,382 4,426 220.2%
Operating Profit 115 (1,065)-
Operating Profit Margin (%)2.5%-4.4% 
Provisions and contingencies 457 4958.3%
Profit before Tax 930 2,816 202.7%
Tax 278 2873.2%
Profit after Tax/(Loss) 653 2,529 287.6%
Net profit margin (%)13.9%10.6% 
No. of Shares (m) 220.4 613.0  
Diluted Earnings per share*4.316.5 
P/E Ratio 8.5 
*(annualised)   

After the merger with ICICI, the bank's operating margins turned into red from a positive 2.5% in 1QFY02. A sharp jump in cost to income ratio to 57% from 53% in FY02 (50% in 1QFY02) and increase in cost of funds, resulted in operating loss of Rs 1 bn for the June quarter. ICICI's high cost of funds impacted the bank's operating performance. The bank is however, in the process of shifting its liability profile. It repaid high cost borrowings of Rs 70 bn of erstwhile ICICI during the quarter. It would take some time before the bank starts making operating profits. The contribution of fee-based income to total income also declined to 15% in 1QFY03 from 21% in the comparable previous quarter. This could be on account of lower profits from trading in G-Sec market.

The bank continued its aggressive retail focus, which increased the proportion of retail assets to total assets to 10% as on June 30, 2002. Retail assets witnessed a strong growth of 29% from Rs 77 bn in FY02 to Rs 99 bn at the end of June quarter. This fueled the growth in its core interest income from advances, which formed 61% of total income in 1QFY03. The bank's widespread distribution network also supported its retail assets expansion. Currently, the bank operates in about 240 locations across the country, with 409 branches and extension counters, and 1,066 ATMs. It is one of the largest distributors of third party investment products in the country.

During the quarter, ICICI Bank's provisions for non-performing assets increased marginally. The bank's non-performing assets stood at Rs 29 bn, 5% of customer assets as on June 2002. Going forward, the bank aims to make general provision of 2% against credit card oustandings, personal loans and consumer durable loans. It will also make provisions of 0.5% against home loans and 1% against all other standard assets. This exercise could help the bank in improving its asset quality and bring down the NPA ratio. The bank's aggressiveness in retail finance market could however, raise concerns over quality of its assets going forward.

At the current market price of Rs 141, ICICI Bank is trading at a P/E of 8.5x 1QFY03 annualised earnings and price to book value ratio of 1.3x. In the initial years, the bank's financial performance is likely to suffer due to the merger of ICICI (which had relatively high cost of funds). Also, concerns over the bank's asset quality, considering the higher proportion of project finance and corporate loan portfolio from ICICI, could impact the bottomline numbers (if the bank were to make higher provisions).

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