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ICICI Bank: Fundamentally strong

Nov 16, 2000

ICICI Bank has reported excellent financial performance during the first half of financial year 2001. The bank’s operating profits showed an impressive growth of 95% and operating margins also increased to 31.8% from 18.5% in the corresponding period in FY00. However, the stock has been hammered on the bourses until recently, due to concerns of higher loan loss provisions and due to expectations of a merger with the parent (ICICI). Apart from these factors the other negatives during the 1HFY01 include:

  • Higher infrastructure and expenditure for retail business.
  • Decline in trading income.
  • Cost to Income ratio increased to 47% (from 34% in 1HFY00).
  • Adverse mark to market impact. This in turn resulted in higher NPA ratio to 1.33% (from 1.14% in FY00).

ICICI Bank is regarded as having an aggressive treasury operation. But in 1HFY01 its income from treasury operations took a hit of 67% and declined to Rs 270 m. Higher interest rates had adversely affected the banks’ bond portfolio valuations. However, as per the recent RBI guidelines, banks, which had to mark 100% of their portfolio to market, now could mark 75% of their portfolio. This is expected to reduce the bank’s mark to market losses on investment portfolio in future. Recently the RBI ruled out a near term merger of the bank with its parent. The announcement has helped in attracting strong buying interest in the stock and it has gained more than 30% in the last two days.

Financial Snapshot
Year End March 31 1HFY00 1HFY01 Change
Interest Income 3,876 5,709 47.3%
Other Income 550 654 18.8%
Total Income 4,426 6,363 43.8%
Interest Expenses 3,161 3,896 23.3%
Operating Profit 1,265 2,467 95.0%
Other Expenses 434 1,151 165.3%
Depreciation 91 112 24.1%
Profit Before Tax 741 1,204 62.5%
Tax 129 137 6.5%
Profit After Tax 612 1,067 74.3%
Provisions & contingencies 171 365 113.7%
Net Profit 442 702 59.0%

Key Ratios
Operating profit margins 18.5% 31.8%
Tax / Profits before tax 17.4% 11.4%
Net Profit margins 11.4% 12.3%
Cash EPS (Rs) 7.14 11.98
EPS (Rs) 4.49 7.13

Also, one should not ignore the following positive factors of the bank and the initiatives taken by it to increase the retail deposits.

  • ICICI Bank’s retail customer base nearly doubled from 0.6 m as on March 2000 to 1.2 m in September 2000 and retail deposits grew by 53%. During the same period the share of retail deposits to total deposits increased to 48% (from 31%).
  • The bank's customer assets registered a year on year growth 85% during the 1HFY01.
  • With the expansion of its product base and client base, the bank’s fee income increased by 100% during the first half of 2001.
  • ICICI Bank has the largest number of Internet banking customers (275,000) and ATMs (311) in the country. Being a part of ICICI group it has the seamless opportunity of cross selling group products to corporates and retail segments.
  • The bank has been appointed as bankers to NSE.
  • Its number of clients in cash management services (CMS) increased to 282 (from 254 as on FY00).

Investments by the bank in infrastructure and increased expenditure for retail business are likely to put pressure on profits in the short term. However, in the long term they are expected to drive topline growth of the bank along with sustained operating margins. At the current market price of Rs 158, ICICI Bank is trading at a P/E of 22 times its 1HFY01 annualised earnings with a Price/Book value ratio of 2 times. Strong fundamentals coupled with expected earnings growth of around 30% for FY01 will drive its future valuations.


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