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ICICI Bank: Investment concerns

Dec 22, 2000

After the merger with Bank of Madura, ICICI Bank has become India’s largest private sector bank with an assets base of over Rs 160 bn. The bank will now have over 360 branches and similar number of ATMs across the country. The deal with Bank of Madura (BOM) was an all-stock deal, which will dilute the current equity capital of ICICI Bank by around 12%. The merger is expected to bring 20% gains in earnings per share of ICICI Bank in the next year.

During the year ended March 2000, the bank has raised Rs 5 bn through an ADS issue. This has helped it to improve its capital adequacy requirement (CAR) enabling it to expand swiftly. With the bank’s aggressive expansion CAR of 19% has declined to 17.6%. The ADS issue has also impacted its FY00 returns on net worth as the proceeds, which were received on the last day of that year, are yet to be deployed efficiently. The RONW further declined to 12% for the first half ended September 2000. Nevertheless, the bank expects to improve the ratio to 15% for the year ended March 2001.

ADS hit returns
ParticularsFY98FY99FY00
RONW 26.4%30.7%17.4%
ROA 3.9%2.0%2.1%
ROIC 3.1%1.8%1.9%

During the year apart from the positive merger effect, the performance of ICICI bank is likely to be adversely affected by decline in investment income. Presently the bank derives more than 50% of its operating income from investments of which government securities account for approximately 60%. Total investments contribute 40% to capital employed of the bank, which is comparatively higher than the contribution from advances (32%).

Revenue mix
ParticularsFY98FY99FY00
Interest on advance55.4%41.5%40.8%
Income from investments30.8%38.3%48.0%
Interest on balance with RBI12.4%20.1%11.1%
Others1.4%0.0%0.1%
Total100.0%100.0%100.0%

Over the past three years the income from advances has sharply declined while investment income increased substantially. However, the bank earns comparatively lower yield on investments (11.2%) than yield on advances (13.1%). ICICI Bank’s excessive reliance on volatile stream of revenues raises concerns of its ability to maintain future earnings growth.

At the current market price of Rs 158 ICICI Bank is trading at a P/E of 17 times its FY01 projected earnings (including the merger impact).

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