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ICICI Bank: Under performer

Sep 19, 2001

The stock price of ICICI Bank has under-performed the markets over the last one year. While the BSE Sensex has come off by 36% YoY, ICICI Bank has lost over 40%. The reasons for this dismal performance include mounting concerns of merger with the parent ICICI and excessive reliance on volatile stream of revenues. After the merger with Bank of Madura (BoM), ICICI Bank has become the largest private sector bank in the country. The merger has provided significant benefits to the bank in terms of widening its reach and increase itís business operations.

BoM had a strong balance sheet compared to ICICI Bank before the merger. It derived 40% of its revenues from investment income. Presently, the combined entity gets 52% of total revenues from investment income. ICICI Bank has over 80% of its total investments in debentures and government securities. Its exposure to equity markets through direct investment is just 1.8% of net outstanding advances as on March í01. Its overall exposure to the markets (including direct assistance) is expected to be less than 4%.

Investment mix
Particulars FY99 FY00 FY01
Government securities 53.4% 63.7% 49.8%
Shares 4.8% 3.6% 1.5%
Debentures & bonds 23.3% 25.7% 37.5%
Others 18.5% 6.9% 10.7%
Total 100.0% 100.0% 100.0%

Key ratios
Particulars FY99 FY00 FY01
Yield on investments 7.3% 9.3% 6.8%
Contribution to total income 38.3% 48.0% 44.7%

Most of the banks have already increased their exposure in the debt markets with the dismal state of the equity markets. After the removal of deferral products, ICICI bankís exposure to the capital markets has already been reduced. As a result, the RBIís decision to allow banks to finance margin trading in equities within the overall exiting limit (5% of net outstanding advances) could facilitate ICICI Bank to open new earnings stream. Banks can finance stockbrokers for the purpose of margin trading in actively traded scrips forming part of the index (Nifty and BSE Sensex). In effect 57 stocks will be eligible for margin trading. Banks are required to maintain a minimum margin of 40%. The rate of interest for such funding will be however left to the discretion of individual banks. This would provide them relatively higher interest spread than traditional lending. Although, the RBIís move is in the right direction, considering the current market scenario, banks are likely to adopt a cautious approach before lending directly to the equity markets.

For ICICI Bank, if it decides to opt for this earnings stream, it is likely to see overall improvement in yield on investments from 7% as on FY01. This is considering the fact that the bank is expected to charge interest rate of at least 200-300 basis points above the prime-lending rate. Also, amidst the current favourable scenario in the debt markets, ICICI Bankís average yield on investment is likely to be higher towards the year-end.

At the current market price of Rs 84, ICICI Bank is trading at a P/E of 8x FY02 projected earnings and a Price/Book value (PBV) ratio of 1.2x. Historically, the stock traded in the PBV range of 2-3 times. The bank is expected to report earnings growth of about 50% in FY02. For the next three years itís profits are expected to rise at a CAGR of 25%-30%. Looking at the current fundamentals the stock looks attractively priced.


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