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ICICI Bank – Breaking new grounds

Sep 23, 2000

"Great ability develops and reveals itself increasingly with every new assignment." ICICI Bank, India’s second largest private sector bank has grown at a phenomenal rate in the past three years. It is at the forefront of new technology initiative and was the first to launch Internet banking as also web based stock broking. The bank is at an advantageous position compared to other privates sector banks, as it is promoted by ICICI (62.2 percent stake), the second largest financial institution in India. The parent’s strong relationship with corporates and brand has helped the bank to gain a good customer base in both corporate and retail banking. This relationship also provides an opportunity to the bank in cross-selling its products.

ICICI Bank is the first Indian commercial bank to list on NYSE. Its recent ADS issue of US $175 m has helped it to meet its capital requirement enabling it to improve its capital adequacy ratio to 19.2 percent. The removal of capital constraint will now allow the bank to maintain its scorching growth rates.

When it comes to technology, ICICI Bank could be called as vanguard of the banking sector. It has taken a lead by introducing a whole range of services under B2B, B2C, Internet banking and WAP enabled banking. The bank will continue to enjoy the first mover advantage for few more years due to enormous gap in technology levels over government banks.

The one way growth
Particulars FY00 FY01
  1Q 2Q 3Q 4Q 1Q
Operating profit margins 19.1% 17.7% 19.9% 28.3% 30.1%
Net profit margins 10.2% 12.6% 13.8% 12.7% 9.2%

During the quarter ended June 2000, the bank crossed two milestones by opening more than 100 offices (85 branches and 16 extension counters) and installing more than 200 ATMs. Thus the physical distribution network of the bank is complemented by other technology driven delivery channels such as web-enabled kiosks, call centres, mobile phones and Internet. Its Internet banking customers are growing by leaps and bounds and currently stands at over 155,000. But these are not the only achievements. The bank is also expected to become a clearing member to Bombay Stock Exchange and National Stock Exchange in the next few months.

The retail segment has emerged as a key thrust area for ICICI bank. The bank is primarily targeting middle and upper middle class customers, leveraging on its strong brand equity to deliver high quality products and services. To begin with, the bank through the launch of new products such as kid-e-bank for small children and bank@campus for students has associated its products with all stages of a person’s life cycle. The bank has also launched array of new products in the personal segment, which includes web-enabled credit cards and loans against shares. The expanding retail reach should help the bank to reap the benefits of lower funding costs and cross-selling opportunities.

The bank is also not lagging behind in terms of financial performance. Its deposits during the first quarter of financial year 2001 witnessed a spectacular year on year growth rate of 47 percent to Rs 87 billion and advances grew by 55 percent to Rs 54 billion. The profits of the bank increased by 98 percent and interest income grew by 43 percent. Strong forex gains, fees arising from cash management product and NRI remittance business drove the growth. The bank’s non-performing assets to total customer assets ratio of 1.1 percent compares well with other private sector banks. It will be able to reduce the ratio further with change in its loan portfolio mix, which currently has high exposure to corporate clients. During the first quarter of financial year 2001 the bank reshuffled the composition of its deposits by gradually liquidating higher cost deposits. This has resulted in increase in its operating margins to 30.1 percent. Although the bank is continuously improving its operating margins, net margins have declined due to higher expenditure on ATMs, credit card launch spend and amortization of ADR expenses.

Sparkling financial performance
Particulars ICICI
Global Trust
Interest income (Rs bn) 2,830 2,786 2,049 1,688
Growth 42.5% 132.1% 50.6% 57.0%
Net profit (Rs bn) 401 464 372 161
Growth 98.2% 83.1% 76.4% 152.2%
Operating profit margins 30.1% 43.6% 25.6% 9.7%
Net profit margins 9.2% 16.6% 12.7% 9.4%
Capital adequacy ratio 19.2% 12.2% 13.7% 11.4%
NPAs 1.2% 0.8% 0.9% 4.7%

ICICI bank derives more of its revenues from investment income (40 percent in financial year 2000). Its excessive reliance on volatile stream of revenues raises a concern for maintaining its future earnings growth. Also the increase in interest rates entails an increase in provisions since more than 60 percent of the bank’s investments are in government securities.

Reserve Bank of India has recently allowed financial institutions to convert themselves into universal banks. Although the road map for the transition is not yet clear, there is a likelihood of a reverse merger with its parent ICICI. This could adversely impact the valuations of the bank as the parent with an asset base of 5 times larger is trading at a significant discount to its banking subsidiary. Nevertheless ICICI Bank’s future profitability would continue to be driven by robust volume growth with the proliferation of electronic banking, better product portfolio, aggressive credit growth and superior customer orientation.

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