• SEPTEMBER 19, 2001

ICICI Bank: Under performer

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
Government securities53.4%63.7%49.8%
Debentures & bonds23.3%25.7%37.5%

Key ratios
Yield on investments7.3%9.3%6.8%
Contribution to total income38.3%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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407