Description
The document gives the banking industry overview, organization structure of ICICI bank, performance of various verticals of ICICI bank and ratio analysis of ICICI bank
Financial Statement Analysis
ICICI Bank
OVERVIEW: ICICI Bank is India's second-largest bank with total assets of Rs. 3,446.58 billion (US$ 79 billion) at March 31, 2007 and profit after tax of Rs. 31.10 billion for fiscal 2007. ICICI Bank is the most valuable bank in India in terms of market capitalization and is ranked third amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation*. The Bank has a network of about 950 branches and 3,300 ATMs in India and presence in 17 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in Belgium. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). HISTORY: ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development
financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. SHAREHOLDING PATTERN: ICICI bank’s shareholding pattern post its Follow-On Public Offer (FPO) as on 30th June, 2007 stands as follows:
Foreign Institutional Investors (FIIs) hold a majority stake in ICICI Bank reflecting their strong confidence in the company. Life insurance companies come next which also hold a substantial stake in the company. INDUSTRY PROFILE: The banking industry is facing concerns on margin pressure and higher provisioning on account of implementation of Basel II norms. The credit growth is likely to be in the
range of 22-25% as against 30% last year while deposits are expected to grow by 20% as against 15-18% in the previous year. The Government has directed its efforts to curtail the excess liquidity resulting in inflationary scenario. Thus, we observed a series of CRR and repo rate revisions and LAF adjustments in the form of MSS auctions, in order to suck liquidity from the money markets. This consummated in a hike in PLR across banks, thereby increasing the cost of deposits of the bank as well. We foresee a maximum rise of 25bos in interest rates in India, thereby maintaining pressure on the banks to curtail cost of funding and focusing on raising low cost deposits. The other concern has been the RBI directive regarding entry of foreign banks in India in 2009. This would make survival issue for the smaller banks that will find it difficult to compete with the large size foreign banks. Hence, consolidation is a key trigger watched for unlocking value and attains size and reach for survival. BUSINESS REVIEW: Economic Overview The Indian economy has continued on its high growth path recording an estimated GDP growth rate of 9.4% during fiscal 2007 following the GDP growth rate of 9.0% in fiscal 2006. The highlight of the economy’s performance was the continued growth of the industrial sector coupled with a double-digit growth in the services sector. The Index of Industrial Production (IIP) recorded an annual average growth rate of 11.3% in fiscal 2007 following the growth of 8.2% in fiscal 2006. This growth was driven mainly by continued growth in the manufacturing sector which grew by 12.3% in fiscal 2007 following a 9.2% growth in the previous year. This was supported by an increase in the growth rate of the mining sector from 1.0% in fiscal 2006 to 5.1% during fiscal 2007. The electricity sector grew by 7.3% in fiscal 2007 as compared to 5.2% during fiscal 2006. The momentum of growth in the services sector (including construction) continued with 11.0% growth during fiscal 2007. Growth in agriculture and allied activities declined to 2.7% during the fiscal 2007 as compared to 6.0% in fiscal 2006, primarily on account of the uneven distribution and delay in rainfall.
Fiscal 2007 witnessed an increase in inflation primarily on account of a sharp increase in the prices of primary articles, due to a decline in growth of agricultural production. The annual average rate of inflation as measured by the Wholesale Price Index (WPI) was 5.3% for fiscal 2007 as compared to 4.4% for fiscal 2006, with continuing fiscal and monetary policy interventions aimed at controlling price levels. The year-on-year rate of inflation peaked at 6.7% for the week ended January 27, 2007 before declining to 5.7% for the week ended March 31, 2007. Global oil prices eased, reducing inflationary pressures experienced on this account in the previous fiscal. International crude oil prices increased from US$ 66.63 per barrel at March 31, 2006 to a peak of US$ 76.35 per barrel at August 9, 2006 before declining to US$ 64.00 per barrel at May 28, 2007. In view of rising inflation, and the liquidity situation following rapid growth in credit and large capital inflows, Reserve Bank of India (RBI) increased the reverse repo rate from 5.50% to 6.00%, the repo rate from 6.50% to 7.75% and the Cash Reserve Ratio (CRR) from 5.0% to 6.5% during fiscal 2007. The annual rate of inflation as measured by the WPI declined to 5.3% at May 12, 2007. The investment pipeline and demand for credit continue to be robust, and inflation conditions, global developments and external inflows will be key factors impacting liquidity and interest rates during the current year. India’s exports were US$ 124.6 billion during fiscal 2007, a growth of 23.9% over the previous year. During April–November 2006, exports of agriculture and allied products recorded a growth of 23.5% and exports of engineering goods recorded a growth of 38.5%. According to RBI, invisibles receipts reached US$ 82.6 billion during the first nine months of fiscal 2007, a growth of 29.9% over the corresponding period in the previous year. Growing import demand from a resurgent manufacturing sector has led to a deficit in the current account (US$ 11.8 billion during first nine months of fiscal 2006). Net Foreign Direct Investment (FDI) into India was US$ 5.8 billion during the first nine months of fiscal 2007 while net portfolio investment was US$ 5.2 billion. Foreign exchange reserves continued to grow, reaching US$ 199.2 billion on March 30, 2007. The resilience displayed by the economy in fiscal 2007 is evidence of the broad-based and sustainable nature of India’s growth momentum. With the resurgence of the
manufacturing sector and robust growth in the services sector the growth prospects for fiscal 2008 appear favourable. Investment in infrastructure, reorienting education and skill-building to the needs of the new economic drivers and holistic development of the agricultural sector and the rural economy are the key imperatives to realize India’s full potential in the long run. Financial Sector Overview The financial sector mirrored the developments in the Indian economy. Credit growth was robust, given the increase in economic activity. Non-food credit increased by 28.0% in fiscal 2007 compared to 30.8% in fiscal 2006. Based on data published by RBI, during April-December 2006, industry accounted for 38.5% of non-food credit, retail credit for 26.4%, agriculture and allied activities for 12.2%, trade for 6.1%, real estate for 2.4% and other sectors for the balance 14.4%. The credit-deposit ratio increased from about 70.0% in April 2006 to about 74.0% in March 2007. The incremental credit-deposit ratio was about 86.0% for fiscal 2007 compared to about 102.0% for fiscal 2006, on account of robust growth in deposits during fiscal 2007. Deposits of the banking system grew by Rs. 5,130.05 billion, or 24.2%, in fiscal 2007 compared to 17.4% in fiscal 2006. In response to the increase in the cash reserve ratio and the reverse repo rate and the liquidity conditions, banks have increased their lending and deposit rates. The average yield on 10-year Government securities increased from 7.1% in fiscal 2006 to 7.8% in fiscal 2007. Growth in both the life and non-life insurance markets was significant. First year retail premium underwritten in the life insurance sector recorded a growth of 91.9% (on weighted received premium basis) to reach Rs. 402.77 billion in fiscal 2007 with the private sector’s retail market share (on weighted received premium basis) increasing from 34.2% in fiscal 2006 to 35.5% in fiscal 2007. Gross premium in the non-life insurance sector (excluding Export Credit Guarantee Corporation of India Limited) grew by 22.4% to Rs. 250.02 billion in fiscal 2007 with the private sector’s market share increasing from 26.6% in fiscal 2006 to 34.9% in fiscal 2007. Total assets under management of mutual funds grew by 40.8% from Rs. 2,318.62 billion at March 31, 2006 to Rs. 3,263.88 billion at March 31, 2007.
The banking sector witnessed several important regulatory developments. In April 2007, RBI issued final guidelines for the implementation of a revised Basel II capital adequacy framework that would be effective year-end fiscal 2008 for banks like us. The guidelines include an increase in the minimum Tier-I CAR from 4.5% to 6.0% and introduction of capital for operational risk. The guidelines prescribe a 75.0% weight for retail credit exposure and rating based differential risk weights for other credit exposures, including on undrawn commitments. During the fiscal year, RBI increased the general provisioning requirement on standard advances in specific sectors to 1.0% from 0.4%. In January 2007, RBI further increased the general provisioning requirement for real estate sector loans (excluding residential housing loans), credit card receivables, loans and advances qualifying as capital market exposure, personal loans and exposures to non-deposit taking systemically important non-banking financial companies to 2.0%. In April 2007, RBI issued revised guidelines on lending to the priority sector. The guidelines are effective fiscal 2008 and link priority sector lending targets to adjusted net bank credit. In April 2007, RBI issued draft guidelines aimed at permitting banks and primary dealers to begin transactions in credit default swaps. RBI also issued modified consolidated supervision norms limiting a bank’s consolidated capital market exposure limit at 40.0% of its consolidated net worth and restricting direct exposure to 20.0% of the consolidated net worth. The Indian financial sector is rapidly moving towards international benchmarks, with increasing efficiency, transparency and dynamism. Given the robust growth prospects in India, the financial sector has a crucial role to play in the development of the economy. Broad-based reforms have made the banking sector competitive and have positioned it well to support sustained economic growth. ORGANISATION STRUCTURE: Its organisation structure is designed to be flexible and customer-focused, while seeking to ensure effective control and supervision and consistency in standards across the organisation and align all areas of operations to overall organisational objectives. The organisation structure is divided into six principal groups – Retail Banking, Wholesale Banking, International Banking, Rural, Micro-Banking and Agri-Business, Government Banking and Corporate Centre.
ICICI Bank’s Organisation Structure
Retail Banking Group
Wholesale Banking Group
International Banking Group
Rural, MicroBanking and AgriBusiness Group
Government Banking Group
Corporate Centre Group
The Retail Banking Group is responsible for our products and services for retail customers and small enterprises including various credit products, liability products, distribution of third party investment and insurance products and transaction banking services. The Wholesale Banking Group is responsible for our products and services for large and medium-sized corporate clients, including credit and treasury products, investment banking, project finance, structured finance and transaction banking services. The Rural, Micro-Banking & Agri-Business Group is responsible for envisioning and implementing our rural banking strategy, including agricultural banking and microfinance. The Government Banking Group is responsible for our government banking initiatives. The International Banking Group is responsible for our international operations, including our operations in various overseas markets as well as our products and services for non-resident Indians and our international trade finance and correspondent banking relationships.
The Corporate Centre comprises the internal control environment functions (including operations, risk management, compliance, audit and legal); finance (including financial reporting, planning and strategy, asset liability management, investor relations and corporate communications); human resources management; and facilities management & administration. In addition to the above, the Global Principal Investments & Trading Group is responsible for taking proprietary positions in the Indian and international markets. The Global Markets Group is responsible for the global client-centric treasury operations. The Structural Rate Risk Management Group is responsible for taking interest rate views and determining interest rate risk positions for the Bank as a whole, with oversight over banking subsidiaries as applicable. The Bank also has certain specialised groups namely, Technology Management Group (TMG) which is responsible for enterprise-wide technology initiatives, Organisational Excellence Group (OEG) which is responsible for quality initiatives and Social Initiatives Group (SIG) which is responsible for our social and community development activities. VERTICALS’ REVIEW: The bank maintained its leadership position in retail credit, achieved robust growth in their fee income from both corporate and retail customers, grew its deposit base and significantly scaled up their international operations and rural reach. Retail Banking Their retail strategy is centered on a wide distribution network, leveraging their branches & offices, direct marketing agents, dealer & real estate developer relationships; comprehensive & competitive product suite; technology-enabled back-office processes; and a robust credit and analytical framework.
Key statistics as on 31 March 2007 Total retail disbursements Total retail portfolio Retail customer accounts Branches and extension counters ATM network
777 billions 1,277.03 billion 25 million 755 3,271
Cross-selling new products and also the products of life and general insurance subsidiaries to their existing customers is a key focus area for the Bank. In fiscal 2007, about 18% of ICICI Prudential Life Insurance Company’s new business was generated through ICICI Bank. Small and Medium Enterprises In this segment their strategy has been focused around customer convenience in transaction banking services, and working capital loans to suppliers or dealers of large corporations and clusters of small enterprises that have a homogeneous profile. During fiscal 2007, their customer base increased by more than 50% to over 900,000 transaction banking customers. These customers are serviced by over 580 branches of the Bank, covering over 200 locations. Corporate Banking They offer a complete range of corporate banking products including ? ? ? ? ? Rupee and foreign currency debt working capital credit structured financing syndication and transaction banking products and services
Corporate banking group has been re-organised into two groups, the Global Clients Group, which is responsible for corporate clients having significant international presence and/or international investment plans, and the Major Clients Group, which is responsible for all other corporate clients. They have created an integrated Global Investment Banking Group, which is responsible for working with the Global Clients Group and the Major Clients Group and their international subsidiaries and branches,
for origination, structuring and execution of investment banking mandates on a global basis. Project Finance In order to sustain India’s growth momentum, infrastructure development is a key requirement. The investment requirement in the infrastructure sector is expected to increase significantly over the next five years. There is tremendous potential in the infrastructure and manufacturing sectors which is borne out by the large projects which are currently being developed and implemented. In the transportation sector, the road sector development is now being undertaken across both the national highways and the state highways. The proposed modernisation, upgradation and expansion of metro and non-metro airports are expected to continue to provide significant business opportunities in the future. In addition to the Delhi and Mumbai airports which have already been transferred to the private developers, the airports at Kolkata and Chennai are also proposed to be modernised through a suitable model. The telecom sector is expected to see continued growth given the relatively low teledensity and consequently large investments in networks by telecom service providers. Rural banking and agri-business They offer a range of financial products and services that cater to the rural masses in all the important sectors like infrastructure, horticulture, food processing, dairy, poultry, seeds, fertiliser and agrochemical industries. They have developed a hybrid distribution channel strategy, a combination of branch and non-branch channels (credit access points). They have embarked on a ‚no white spaces? strategy wherein they aim to setup an ICICI Bank touch point within 10 km of any customer. The amalgamation of Sangli Bank would extend their outreach in rural areas. The rural initiative exposes them to increased risks including credit risk, increased operational risk and increased fraud risk. During fiscal 2007, a provision of Rs. 0.9 billion (USS$ 22 million) was made on account of identified frauds in warehouse receipt financing business of agricultural credit. International Banking ICICI Bank has established a strong franchise among non-resident Indians (NRI). They have established strong customer relationships by offering a comprehensive product suite, technology-enabled access for overseas customers, wide distribution network in
India and alliances with local banks in various markets. They have over 450,000 NRI customers. Their market share in inward remittances into India has increased to over 25%. They have created a holistic product suite across the entire risk spectrum starting from deposits and bonds to the more complex structured derivative products, private equity and real estate. RISK MANAGEMENT: They have three dedicated groups, the Global Risk Management Group (GRMG), the Compliance Group and the Internal Audit Group which are responsible for assessment, management and mitigation of risk in ICICI Bank. In addition, the Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence to regulations, policies and internal approvals. Credit Risk Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. They measure, monitor and manage credit risk for each borrower and also at the portfolio level. They have standardized credit approval processes, which include a well established procedure of comprehensive credit appraisal and rating. They have developed internal credit rating methodologies for rating obligors. The rating serves as a key input in the approval as post-approval credit processes. Credit rating, as a concept, has been internalised within the Bank. Industry knowledge is constantly updated through field visits and interactions with clients, regulatory bodies and industry experts. In their retail credit operations, all products, policies and authorisations are approved by the Board or a Board Committee or pursuant to authority delegated by the Board. Credit approval authority lies only with their credit officers who are distinct from the sales teams. Credit scoring models are used in the case of certain products like credit cards. External agencies such as field investigation agencies and credit processing agencies are used to facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers. Before disbursements are made, the credit officer conducts a centralised check on the delinquencies database and review of the
borrower’s profile. They continuously refine their retail credit parameters based on portfolio analytics. They also draw upon reports from the Credit Information Bureau (India) Limited (CIBIL). Market Risk Market risk is the risk of loss resulting from changes in interest rates, foreign currency exchange rates, equity prices and commodity prices. Their exposure to market risk is a function of their trading and asset liability management activities and their role as a financial intermediary in customer-related transactions. Market risk policies include the Investment Policy and the Asset-Liability Management (ALM) Policy. The policies are approved by the Board of Directors. The Asset-Liability Management Committee (ALCO) of the Board of Directors stipulates liquidity and interest rate risk limits, monitors adherence to limits, articulates the organisation’s interest rate view and determines the strategy in light of the current and expected environment. These policies and processes are articulated in the ALM Policy. The Global Market and Operational Risk Management Group exercises independent control over the process of market risk management and recommends changes in processes and methodologies for measuring market risk. ? Interest rate risk is measured through the use of re-pricing gap analysis and duration analysis. ? Liquidity risk is measured through gap analysis. The Treasury Middle Office Group monitors the asset-liability position under the supervision of the ALCO. It also monitors the treasury activities and adherence to regulatory / internal policy guidelines. The Treasury Middle Office Group is also responsible for processing treasury transactions, tracking the daily funds position and complying with all treasury-related management and regulatory reporting requirements.
Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risks in the Bank are managed through a comprehensive internal control framework. The control framework is categorized into 1) Front Office comprising business groups 2) Mid office, comprising credit and treasury mid-offices 3) Back office, comprising operations and 4) Corporate and support functions All the key process, risks and controls are documented and risk and control assessments are carried out on a periodic basis. As part of compliance with RBI guidelines, an operational risk management policy was approved by their Board of Directors. The policy is applicable across the Bank including overseas offices and aims to ensure that there is clear accountability, responsibility and mitigation of operational risk
CSR - PROMOTING SUSTAINABLE DEVELOPMENT:
The work in the area of development is focused on facilitating wider participation by India’s poorer communities in social and economic processes. This is done basically through the following ways: 1. Partnership based Initiatives 2. Market based direct initiatives Partnership Based Initiatives The core strategy has been to identify partners and work with them to build competencies and effectiveness on the field. The principal interventions in this category are being carried out through four sharply focused efforts: 1. Social Initiatives Group
The foundations of ICICI Bank’s most recent approach towards human and social development were laid with the setting up of the Social Initiatives Group (SIG), a nonprofit resource group within the Bank in 2000. The group selected early child health, elementary education and access to financial services as the key areas of focus. SIG seeks to catalyze change by supporting innovation and research, influencing policy and reforming mainstream practices. SIG’s work is carried out through the following specialized groups: ? ? ? ICICI Centre for Child Health and Nutrition (ICCHN) Elementary Education Practice Microfinance Practice
2. Technology Finance Group TFG has been instrumental in ushering in new technology, innovative projects, processes and products. Projects supported under this scheme include collaborative R&D, post-harvest agri-business, energy research, child and reproductive health, pollution prevention and control, clean technologies and energy efficiency through dedicated programmes in association with international agencies and organizations. 3. ICICI Knowledge Park ICICI Knowledge Park (IKP) in Hyderabad, promoted by ICICI Bank and the Government of Andhra Pradesh, seeks to ensure that the companies of today have the requisite infrastructure and advantages of world-class technology available at crucial moments in their development. This will enable them to produce innovative results comparable with the best global companies the world over. This work is being carried out through the following centres: ? ? ? The Biotech Park ICICI Centre for Technologies in Public Health (ICTPH) ICICI Centre for Advancement of Agricultural Practice (ICAAP)
4. The ICICI CSO Platform
Well-functioning Civil Society Organizations (CSOs) help create a climate and consensus for change and an enabling environment for best practices to flourish in. The current set of partners includes: ? ? ? GiveIndia Mitra Foundation Infochange
Market Based Initiatives The broad approach taken is to build access to markets as a strategy to alleviate poverty. The key components of this strategy comprise: 1. Universal access to basic financial services Almost all regions of India have a set of economically-viable occupations that even the very poor can engage in without the need for any specialized inputs. The only external input required to leverage these economic opportunities is access to basic financial services, which include savings, credit, insurance and tools for risk management. The basic approach followed has been the development of a network of community-based financial institutions, which have the ability to provide the requisite services. In order to facilitate the creation of such a network, through our uniquely designed ‚partnership model? we provide partner microfinance institutions financial resources for on-lending, access to mezzanine finance for growth, financial engineering (securitization) and product development (health insurance, rainfall insurance, savings, risk management) and direct links with capital markets as the entities mature. We have also participated in the creation of an enabling environment that can support the continued growth in the number of entities. The steps that have been taken are: ? ? ? Partnership with Venture Capital Funds engaged in the task of identifying and providing equity finance Launch of FINO (www.fino.co.in), an Application Services Provider that seeks to provide frontend, back-end and information services. Supporting institutes such as Institute of Financial Management and Research
Following this approach, we have catalyzed the creation of over 210 micro finance partners and have been able to go from US$1.2 million (Rs. 48 million) in micro-loans extended to about 20,000 clients to over US$470 million (Rs. 18.80 billion) being provided to over 3 million clients in four years. 2. Bridging the missing markets gap Taking clients to the next level of economic activity needs a much more concerted effort; one that builds on the reality that a large population of economically-active poor now have access to basic financial services and have shown their preference for certain economic activities through actual choices of occupations once they are freed from credit constraints. Since the skills required to meet this goal are not core to the bank, the following steps have been taken: • Building a partnership with social venture capitalists to create a series of specialized Network Enterprises (NEs) that will be able to build specialized capabilities in specific sectors and links between the poor and larger markets • Assisting the NEs in building partnerships between grass-roots organizations and large companies. • Identifying and facilitating the work of specialized entities so that they can work closely with MFIs and other grass-roots organizations on health and productivity interventions. 3. Creation of complementary infrastructure The third step is the creation of larger-scale infrastructure that will change the economic environment of the poor through the provision of better roads, healthcare infrastructure, government and private schools, electricity, clean water, etc. This work is being done in collaboration with local self-governments, district and state level administration and the private sector. Many of the initiatives mentioned above are in the nature of long-term investments and will yield the desired results over a period of time.
CORPORATE GOVERNANCE REPORT: ICICI Bank has established a tradition of best practices in corporate governance. The corporate governance framework in ICICI Bank is based on an effective independent Board, the separation of the Board’s supervisory role from the executive management and the constitution of Board Committees, generally comprising a majority of independent Directors and chaired by an independent Director, to oversee critical areas. ICICI Bank’s corporate governance philosophy encompasses not only regulatory and legal requirements, such as the terms of listing agreements with stock exchanges, but also several voluntary practices aimed at a high level of business ethics, effective supervision and enhancement of value for all stakeholders. PERFORMANCE REVIEW: ‘Profit before Provisions’ and ‘Creation of higher provisions on standard assets’ It has been observed that ‘Profit before provisions and tax’ increased 51.1% to Rs. 58.74 billion in fiscal 2007 from Rs. 38.88 billion in fiscal 2006 primarily due to the following reasons: i. An increase in net interest income by 40.9% to Rs. 66.36 billion in fiscal 2007 from Rs. 47.09 billion in fiscal 2006 ii. An increase in non-interest income by 39.4% to Rs. 59.14 billion in fiscal 2007 from Rs. 42.42 billion in fiscal 2006 (offset, in part, by an increase in non-interest expenses by 33.8% to Rs. 66.91 billion in fiscal 2007 from Rs. 50.01 billion in fiscal 2006). It has been seen that ‘Provisions’ increased significantly during fiscal 2007 because of the reasons given below: i. Due to higher provisions created on standard assets ii. Lower level of write-backs Profit before general provisioning and tax increased 27.4% to Rs. 43.79 in fiscal 2007 from Rs. 34.36 billion in fiscal 2006 and Profit after tax increased 22.4% to Rs. 31.10 billion in fiscal 2007 from Rs. 25.40 billion in fiscal 2006.
Impact of revised RBI guidelines on ‘Provisions and Contingencies’ Provisions and contingencies (excluding provision for tax) increased to Rs. 22.26 billion in fiscal 2007 from Rs. 7.92 billion in fiscal 2006 because of the reasons explained below: i. Higher provisions of about Rs. 3.92bn created on standard assets in accordance with the revised guidelines issued by RBI ii. Higher level of specific provisioning on retail loans due to change in the portfolio mix towards non collateralized loans (where credit losses are higher, but the higher losses are more than offset by the higher yield on such loans) and seasoning of the loan portfolio iii. Lower level of write-backs in fiscal 2007 compared to about Rs. 6.62 billion writebacks in fiscal 2006, provision of about Rs. 1.05 billion on account of frauds in rural portfolio, primarily in ICICI’s warehouse receipt financing business and a higher level of specific provisioning on retail and other loans Impact of RBI guidelines on Accounting for securitization of Assets In February 2006, the Reserve Bank of India (RBI) issued guidelines for accounting for securitisation of standard assets. In accordance with these guidelines, with effect from February 1, 2006, ICICI will account for any loss arising on securitisation immediately at the time of sale and the profit/premium arising on account of securitisation is amortized over the life of the asset. Prior to February 1, 2006, profit arising on account of securitisation has been recorded upfront at the time of sale. Income from sell-down of loans was approximately 8.6% of net interest income in fiscal 2006 as against a loss in fiscal 2007, due to the impact of the aforesaid guidelines requiring amortization of profit on securitisation from February 1, 2006 and the prevailing liquidity and interest rate scenario. Net interest income and spread analysis The following table sets forth, for the periods indicated the net interest income and spread analysis.
Net interest income increased 40.9% to Rs. 66.36 billion in fiscal 2007 from Rs. 47.09 billion in fiscal 2006, reflecting mainly the following: ? ? An increase of Rs. 856.70 billion or 49.8% in the average volume of interestearning assets; and Net interest margin of 2.6% in fiscal 2007 compared to 2.7% in fiscal 2006.
i. Until the year end fiscal 2006, ICICI Bank deducted commission paid to direct marketing agents of automobile loans from the interest income. For fiscal 2007, ICICI have reported all direct marketing agency expenses, on automobile loans and other retail loans separately under ‚non-interest expense?. These commissions are expensed upfront and not amortised over the life of the loan. The necessary reclassifications have been made for the prior years. ii. The average volume of interest-earning assets increased by Rs. 856.70 billion in fiscal 2007 primarily due to the increase in average advances by Rs. 500.28 billion, and an increase in average investments by Rs. 256.03 billion. The increase in the average advances was mainly due to increased disbursements of retail finance loans, offset, in part, by securitisation of loans and repayment of existing loans, and the increase in average investments was mainly due to increased investment in Government securities. iii. Retail advances, net of provisions and write-off, increased by 38.5% to Rs.1,277.03 billion at year-end fiscal 2007 from Rs. 921.98 billion at year-end fiscal 2006.Interest income increased by 60.7% to Rs. 229.94 billion in fiscal 2007 from Rs. 143.06 billion in fiscal 2006 primarily due to an increase of 49.8% in the average interest-earning assets to Rs. 2,577.27 billion in fiscal 2007 from Rs. 1,720.57 billion in fiscal 2006. iv. Yield on average interest-earning assets increased to 8.9% in fiscal 2007 compared to 8.3% in fiscal 2006, primarily due to the increase in the yield on
advances portfolio to 9.9% in fiscal 2007 from 9.1% in fiscal 2006. The yield on advances has increased despite the significant decline in income from sell-down of loans due to an increase in lending rates in line with the general increase in interest rates and increase in the volumes of certain high yielding loans. v. ICICI Bank’s benchmark prime lending rate had increased by 300 basis points from March 31, 2006 to April 1, 2007 and home loan rates have increased by 350 basis points on the outstanding floating rate portfolio during the same period. vi. Interest expense increased by 70.4% to Rs. 163.58 billion in fiscal 2007 from Rs. 95.97 billion in fiscal 2006, primarily due to an increase of 49.8% in the volume of average interest-bearing liabilities to Rs. 2,484.99 billion for fiscal 2007 from Rs. 1,658.73 billion for fiscal 2006 and increase in the cost of funds by 0.8% to 6.6% for fiscal 2007 from 5.8% in fiscal 2006. vii. Total deposits at year-end fiscal 2007 constituted 76.5% of ICICI’s funding (i.e. deposits, borrowings and subordinated debts) compared to 77.2% at year-end fiscal 2006. Total deposits increased 39.6% to Rs. 2,305.10 billion at year-end fiscal 2007 from Rs. 1,650.83 billion at year-end fiscal 2006. This is commensurate with ICICI’s focus of increasing funding through deposits. viii. As a result of the higher cost of funds and decrease in the gains on securitisation/sell down of assets, net interest margin decreased to 2.6% in fiscal 2007 from 2.7% in fiscal 2006. Net interest margin is expected to continue to be lower than other banks in India until we increase the proportion of retail deposits in ICICI’s total funding. The net interest margin is also impacted by the relatively lower net interest margin earned by ICICI’s foreign branches, which is offset by the higher fee income that we are able to earn by leveraging ICICI’s international presence and ICICI’s ability to meet the foreign currency borrowing requirements of Indian companies. Various other incomes have also been affected as explained below: a. Fee income: Fee income increased by 45.4% to Rs. 50.12 billion in fiscal 2007 from Rs. 34.47 billion in fiscal 2006 primarily due to growth in retail products and services, including fee arising from retail assets products and retail liability related fee income like account servicing charges and third party distribution
fees. Fees from corporate banking and international business also witnessed a strong growth. b. Treasury income: The gross treasury income increased to Rs. 10.14 billion in fiscal 2007 from Rs. 7.40 billion in fiscal 2006 primarily due to higher level of gains from equity divestments, offset in part by 24.6% increase in premium amortization on Government securities to Rs. 9.99 billion in fiscal 2007 from Rs. 8.02 billion in fiscal 2006 and lower profits on proprietary trading as a result of the sharp fall in the equity markets in May 2006 and adverse conditions in debt markets. c. Lease & other income: Lease income decreased by 34.1% to Rs. 2.38 billion in fiscal 2007 from Rs. 3.61 billion in fiscal 2006 primarily because of a decrease in leased assets to Rs. 10.03 billion at year-end fiscal 2007 compared to Rs. 11.74 billion at year-end fiscal 2006 since they are not entering into new lease transactions. Other income increased by 53.0% to Rs. 6.64 billion for fiscal 2007 compared to Rs. 4.34 billion in fiscal 2006 primarily due to increase in income by way of dividend from ICICI’s subsidiary companies and increase in profit on sale of land, buildings and other assets. Non-interest expense: The following table sets forth, for the periods indicated, the principal components of non-interest expense.
i. Total non-interest expense: It increased by 33.8% to Rs. 66.91 billion in fiscal 2007 from Rs. 50.01 billion in fiscal 2006, primarily due to a 49.4% increase in employee expenses and 41.9% increase in other administrative expenses. ii. Employee expenses: It increased 49.4% to Rs. 16.17 billion in fiscal 2007 from Rs. 10.82 billion in fiscal 2006 primarily due to a 31.3% increase in the number of employees to 33,321 at year end fiscal 2007 from 25,384 at year end fiscal 2006, annual increase in the salaries and facilities available to employees at concessional rates of interests and other employee benefits. The increase in employees was commensurate with the growth in ICICI’s retail and other businesses. iii. Depreciation: Depreciation on own property increased by 2.7% to Rs. 3.57 billion from Rs. 3.47 billion. There was a 4.0% increase in premises and other fixed assets to Rs. 29.20 billion at year-end fiscal 2007 from Rs. 28.07 billion at year-end fiscal 2006. Depreciation on leased assets decreased to Rs. 1.88 billion in fiscal 2007 from Rs. 2.77 billion in fiscal 2006 primarily due to reduction in leased assets to Rs. 10.03 billion at year-end fiscal 2007 from Rs. 11.74 billion at year-end fiscal 2006. iv. Other administrative expenses: They increased by 41.9% to Rs. 30.03 billion in fiscal 2007 from Rs. 21.16 billion in fiscal 2006 primarily due to increased volume of business, particularly in retail banking, and includes maintenance of ATMs, credit card expenses, including promotional expenses on cash back scheme, insurance premium, collection expenses and other expenses. Reclassification of Commission expenses: ICICI uses marketing agents, called direct marketing agents or associates, for sourcing ICICI’s automobile loans. Until the year end fiscal 2006, the company deducted commission paid to direct marketing agents of automobile loans from the interest income. For fiscal 2007, it has reported all direct marketing agency expenses, on automobile loans and other retail loans separately under ‚non-interest expense?. These commissions are expensed upfront and not amortized over the life of the loan also making the necessary reclassifications have been made for the prior years.
Impact of interest rate changes nullified by higher Deposits: Total deposits increased 39.6% to Rs. 2,305.10 billion at year-end fiscal 2007 from Rs. 1,650.83 billion at year-end fiscal 2006. This is commensurate with the company’s focus of increasing funding through deposits. Its cost of deposits has increased by 1.2% to 6.2% in fiscal 2007 from 5.0% in fiscal 2006 consequent to general increase in interest rates reflecting tight systemic liquidity scenario, particularly in the second half of fiscal 2007 and resulting in an increase in deposit rates for retail and other customers. The cost of borrowings increased marginally to 7.7% in fiscal 2007 from 7.6% in fiscal 2006 primarily due to increase in borrowings of foreign branches at higher rates, including raising of subordinated bonds. INVESTMENTS: Total investments at year-end fiscal 2007 increased by 27.5% to Rs. 912.58 billion compared to Rs. 715.47 billion at year-end fiscal 2006 primarily due to 31.9% increase in investment in Government and other approved securities in India to Rs. 673.68 billion at year-end fiscal 2007 from 510.74 billion at year-end fiscal 2006 in line with the increase in the company’s net demand and time liabilities (NDTL). Banks in India are required to maintain a specified percentage, currently 25.0%, of their net demand and time liabilities by way of liquid assets. Other investments (including debentures and bonds) increased by 16.7% to Rs. 238.90 billion at year-end fiscal 2007 compared to Rs. 204.73 billion at year-end fiscal 2006, reflecting an increase in investments in insurance and international subsidiaries, pass through certificates and credit linked notes. Total assets (gross) of overseas branches (including overseas banking unit in Mumbai) increased by 90.2% to Rs. 524.71 billion at year-end fiscal 2007 from Rs. 275.86 billion at year-end fiscal 2006. Capital Adequacy and BASEL-II norms:
ICICI’s total capital adequacy ratio calculated in accordance with the RBI guidelines at year-end fiscal 2007 was 11.69%, including Tier I capital adequacy ratio of 7.42% and Tier II capital adequacy ratio of 4.27%. In accordance with the RBI guidelines, the risk-weighted assets at year-end fiscal include home loans to individuals at a risk weightage of 75%, other consumer loans and capital market exposure at a risk weightage of 125%. Commercial real estate exposure and investments in venture capital funds have been considered at a risk weightage of 150%. Deferred tax asset amounting to Rs. 6.10 billion and unamortised amount of expenses on Early Retirement Option Scheme amounting to Rs. 0.50 billion at year-end fiscal 2007, have been reduced from Tier I capital while computing the capital adequacy ratio. In April 2007, the RBI issued final guidelines for the implementation of a Basel-II capital adequacy framework that would be effective year-end fiscal 2008 for the company. The guidelines for the capital adequacy framework include an increase in the minimum Tier I CAR from 4.5% to 6.0% and, the introduction of capital for operational risk as per Basel II. Further, the risk weight for consumer credit and residential mortgages will continue to remain at 125.0% and 75.0% (risk weights for residential mortgage loans of less than Rs. 2.0 million with loan-to-value ratio of less than 75.0% would be 50.0%). The capital adequacy norms stipulate a capital charge on undrawn commitments. The norms also increase the risk-weightage for domestic corporates (for loans greater than Rs. 100.0 million) without a solicited external rating to 150.0% in a phased manner as compared to 100% currently. Similarly, nonresident corporates (for loans greater than
Rs. 100.0 million) without a rating from an international rating agency would attract 150.0% risk weightage in a phased manner compared to 100% currently. Retail Finance and Portfolio Management- strategizing to increase the proportion of retail loans: ICICI follows a policy of portfolio diversification and evaluates its total financing in a particular sector in light of its forecasts of growth and profitability for that sector. ICICI identified retail finance as an area with potential for growth and sought to increase its financing to retail finance. The company believes that retail finance offers significant risk diversification benefits as the credit risk is spread over a large number of relatively small individual loans. The growth of ICICI’s retail finance portfolio has been the principal driver of ICICI’s portfolio diversification strategy. ICICI’s loans and advances to retail finance constituted 65.2% of its total loans and advances at year-end fiscal 2007 compared to 62.9% at year-end fiscal 2006 and 60.9% at year-end fiscal 2005. ICICI’s Credit Risk Management Group monitors all major sectors of the economy and specifically follows sectors to which it has loans outstanding. It seeks to respond to any economic weakness in an industrial segment by restricting new exposures to that segment and any growth in an industrial segment by increasing new exposures to that segment, resulting in active portfolio management. The following tables set forth, at the dates indicated, the composition of ICICI’s gross advances (net of write-offs).
ICICI Bank’s Financials
Income Statement Summary (Rs cr): Particulars (Y.E. Mar 31) Net Interest Income Other Income Net Income Operating Expenses Pre Provision Profit Provisions except tax Profit Before Tax Income Tax Tax Rate Profit After Tax FY 07 6,635.79 5,929.17 12,564.96 6,690.56 5,874.40 2,226.37 3,648.04 537.82 14.74% 3,110.22 FY 06 4,708.68 4,180.89 8,889.57 5,001.15 3,888.42 791.81 3,096.60 556.53 17.97% 2,540.07 FY 05 2,839.00 3,416.14 6,255.14 3,299.15 2,955.99 428.80 2,527.20 522.00 20.66% 2,005.20
It has been observed that ‘Profit before provisions and tax’ increased 51.08% to Rs. 58.74 billion in fiscal 2007 from Rs. 38.88 billion in fiscal 2006 primarily due to the following reasons: i. An increase in net interest income by 40.9% to Rs. 66.36 billion in fiscal 2007 from Rs. 47.09 billion in fiscal 2006. ii. An increase in other income by 41.81% to Rs. 59.29 billion in fiscal 2007 from Rs. 41.81 billion in fiscal 2006.
Balance Sheet Summary (Rs cr): Particulars (Y.E. Mar 31) Equity Share Capital Preference Share Capital Reserves and Surplus Net Worth Deposits Borrowings Other liabilities & provisions Total Liabilities Cash and Bank Investments Advances Fixed Assets Others Total Assets FY 07 FY 06 899.34 889.83 350.00 350.00 23,413.92 21,316.16 24,663.26 22,555.99 230,510.19 165,083.17 51,256.03 38,521.91 38,228.64 25,227.88 344,658 251,389 37,121.32 17,040.22 91,257.84 71,547.39 195,865.60 146,163.11 3,923.42 3,980.71 16,489.92 12,657.51 344,658 251,389 FY 05 736.78 350.00 11,813.20 12,899.98 99,818.78 33,544.50 21,396.16 167,659 12,929.98 50,487.35 91,405.15 4,038.04 8,798.89 167,659
?
Deposits increased by 39.63% to Rs. 230,510.19 crores in fiscal 2007 from Rs. 165,083.17 crores in fiscal 2006 reflecting a huge confidence in the people’s minds on the company.
?
Advances increased by 34% to Rs. 195,865.60 crores in fiscal 2007 from Rs. 146,163.11 crores in fiscal 2006 showing proportionate rise in deposits and advances. ICICI bank’s retail portfolio advances are growing at the fastest pace in the industry due to its aggressive lending policy.
Growth Ratios (%): Particulars (Y.E. Mar 31) Net Interest Income Other Income Net Income Operating Expenses Pre Provision Profit Provisions Profit Before Tax FY 07 40.93% 41.82% 41.34% 33.78% 51.07% 105.01% 17.81% FY 06 65.86% 22.39% 42.12% 51.59% 31.54% 41.81% 22.53%
Income Tax Tax Rate Profit After Tax
-3.36% -17.97% 22.45%
6.62% -12.99% 26.67%
Operating Ratios (%): Particulars (Y.E. Mar 31) Yield on Advances Yield on Investments Net Interest Margins Cost of Funds Cost of Deposits Cost of Borrowings Spread Cost-income Tax Rate FY 07 9.4 7.4 2.7 6.6 5.9 7.8 2.3 53.2 14.74% FY 06 8.6 6.0 2.6 5.8 4.4 8.3 2.5 58.7 17.97%
Balance Sheet Ratios: Particulars (Y.E. Mar 31) Credit Growth Deposit Growth Gross NPA Ratio (%) Net NPA Ratio (%) Capital Adequacy Ratio - Tier I (%) FY 07 34.0 39.6 2.03 0.98 11.7 7.4 FY 06 59.9 65.4 1.50 0.71 13.4 9.2
Ratios (ROA Decomposition) (%): Particulars (Y.E. Mar 31) NII/Assets Net Revenues/Assets Operating Expn/Assets Provisions/Assets Taxes/Assets FY 07 2.4 4.5 (2.4) (0.8) (0.2) FY 06 2.7 4.8 (2.8) (0.4) (0.3) FY 05 2.2 4.5 (2.6) 0.1 (0.4)
Total Costs/Assets RoA Equity/Assets RoE
(3.4) 1.1 8.3 13.4
(3.5) 1.3 8.9 16.8
(2.9) 1.6 8.0 19.5
Incremental ROE on unsecured loans The ROE on unsecured credit portfolio is about 25%, even after factoring in the higher loss rates.
Particulars ( % ) Yield Cost of funds NIM Fees Total operating revenue Operating cost Operating profit NPA provision PBT Tax PAT Equity/assets ROE
Personal Loans Credit Cards Micro Banking 20.0 27.0 38.0 9.5 9.5 9.5 10.5 17.5 28.5 3.0 10.0 4.0 13.5 27.5 32.5 6.1 14.6 11.4 7.4 12.9 21.1 4.5 9.5 17 2.9 3.4 4.1 1.0 1.2 1.5 1.9 2.2 2.7 8.0 8.0 8.0 23.0 28.0 33.0
Mortgage 12.0 9.5 2.5 1.0 3.5 1.6 1.9 0.3 1.7 0.6 1.1 7.0 15.0
DU-PONT Analysis: % of Average Asset Interest Income Interest Expenses Net Interest Income Non interest income Total Income Operating Expenses Pre-provision Profit FY 07 7.7 5.5 2.2 2.3 4.6 2.2 2.3 FY 06 6.6 4.3 2.2 2.4 4.6 2.4 2.2
Provision Pre tax ROA Tax ROA Equity / Assets ROE
1.1 1.2 0.2 1.04 6.8 15.3
0.8 1.5 0.3 1.2 7.6 16
Valuations Metrics: Particulars (Y.E. Mar 31) EPS (Diluted) (Rs) EPS Growth (%) Book Value (Rs) P/E Ratio (x) (TTM) P/BV (x) (TTM) Dividend Yield (%) (TTM) FY 07 34.64 7.74% 270.34 37.00 3.22 1.05% FY 06 32.15 17.64% 249.55 21.54 2.36 0.90% FY 05 27.33 3.37% 170.34 15.12 2.31 0.90%
SEGMENTAL INFORMATION: ICICI Bank’s operations are classified into the following segments: 1. Consumer and Commercial Banking segment and 2. Investment Banking segment. The consumer and commercial banking segment provides medium-term and long-term project and infrastructure financing, securitisation, factoring, lease financing, working capital finance and foreign exchange services to clients. Further, it provides deposit and loan products to retail customers. The investment banking segment includes treasury operations. Consumer & Commercial Banking Segment Review: Profit before tax of the consumer and commercial banking segment was Rs. 23.38 billion in fiscal 2007 as compared to Rs. 26.55 billion in fiscal 2006 primarily due to an increase in provisions and contingencies and increase in non-interest expense, offset, in part by an increase in net interest income and non-interest income.
Provisions and contingencies were Rs. 21.97 billion in fiscal 2007 as compared to Rs. 7.32 billion in fiscal 2006 primarily due to higher provisions created on standard assets, in accordance with the revised guidelines issued by RBI, a higher level of specific provisioning on retail loans due to change in the portfolio mix towards noncollateralised loans and seasoning of the loan portfolio and lower level of write-backs on corporate portfolio. General provision on standard assets increased by 115.6% to Rs. 7.31 billion in fiscal 2007 from Rs. 3.39 billion in fiscal 2006. Net interest income, increased by 32.3% to Rs. 56.53 billion in fiscal 2007 from Rs. 42.73 billion in fiscal 2006, primarily due to an increase in the interest income on advances, offset, in part, by an increase in the interest expense on deposits. Non-interest income increased by 36.5% to Rs. 50.73 billion in fiscal 2007 from Rs. 37.17 billion in fiscal 2006, primarily due to growth in fee income from retail products and services, including fee arising from retail assets products and retail liability related income like account servicing charges and third party distribution fees. Fees from corporate banking and international business also witnessed a strong growth. Non-interest expenses increased by 34.5% to Rs. 61.92 billion in fiscal 2007 from Rs. 46.03 billion in fiscal 2006, primarily due to an increase in employee expenses and the growth in the retail franchise, including maintenance of ATMs, credit card expenses, call center expenses and technology expenses. Employee expenses increased primarily due to increase in the number of employees, annual increase in the salaries and higher cost due to monetisation of benefits on loan facilities available to employees at concessional rates of interests and other employee benefits. The increase in employees was commensurate with the growth in our retail businesses. Investment Banking Segment Review: Profit before tax of investment banking segment increased to Rs. 13.48 billion in fiscal 2007 from Rs. 4.80 billion in fiscal 2006 primarily due to increase in non-interest income and net interest income, offset in part, by an increase in the non-interest expenses. Net interest income was Rs. 9.83 billion in fiscal 2007 compared to Rs. 4.36 billion in fiscal 2006 primarily due to a 54.8% increase in interest income from Government securities, offset, in part, by an increase in interest on inter-bank borrowings.
Non-interest income increased by 84.5% to Rs. 8.56 billion in fiscal 2007 from Rs. 4.64 billion in fiscal 2006 primarily due to higher level of gains from equity divestments, offset in part by 24.5% increase in premium amortisation on Government securities to Rs. 9.99 billion in fiscal 2007 from Rs. 8.02 billion in fiscal 2006 and lower profits on proprietory trading as a result of the sharp fall in the equity markets in May 2006 and adverse conditions in debt markets. Non-interest expenses increased by 28.1% to Rs. 4.61 billion in fiscal 2007 from Rs. 3.60 billion in fiscal 2006 primarily due to increase in payments to and provisions for employees and other administrative expenses.
Particulars Revenue Growth Revenue contribution to Total Income Profit Before Tax Growth PBT contribution to Total PBT Segment Assets Utilisation Ratio
Consumer and Commercial Banking 31.03.07 31.03.06 52.38% 39.87% 76.87% -11.93% 64.10% 10.85% 78.70% 40.13% 85.74% 9.37%
Investment Total Banking 31.03.07 31.03.06 31.03.07 31.03.06 69.44% 60.79% 56.45% 46.32% 23.13% 180.86% 36.95% 5.70% 21.30% -28.46% 15.50% 4.97% 17.81% 8.98% 22.53% 7.88%
ICICI Bank’s Investments: (As on 31.03.2007) (Rs in ‘000s) I. Investments in India [net of provisions] i) Government securities ......................................................................... 673,681,742 ii) Other approved securities................................................................... 601
iii) Shares (includes equity and preference shares) ........................... 19,372,558 iv) Debentures and bonds ...................................................................... 24,628,194
v) Subsidiaries and/or joint ventures ................................................... vi) Others (commercial paper, mutual fund units, pass through
26,071,831
certificates, security receipts etc.) .................................................. 123,785,241 TOTAL INVESTMENTS IN INDIA ...................................................... 867,540,167 II. Investments outside India [net of provisions] i) Government securities ..................................................................... ii) Subsidiaries and/or joint ventures abroad (includes equity and preference shares) ........................................................................... 14,650,476 iii) Others ............................................................................................. 27,422,038 TOTAL INVESTMENTS OUTSIDE INDIA ........................................ 45,038,251 TOTAL INVESTMENTS ......................................................................... 912,578,418 III. Investments in India Gross value of investments................................................................. 873,108,274 Less: Aggregate of provision/depreciation...................................... 5,568,107 2,965,737
Net investments ................................................................................. 867,540,167
IV. Investments outside India Gross value of investments ................................................................ 45,052,750 Less: Aggregate of provision/depreciation .................................... 14,499
Net investments .................................................................................. 45,038,251 TOTAL INVESTMENTS ........................................................................ 912,578,418
Purchase of investments: During the year ended March 31, 2007, the Bank purchased certain investments from its subsidiaries and joint ventures amounting to Rs. 14,186.8 million (March 31, 2006: Rs. 15,255.5 million) and from its associates amounting to Rs. 944.7 million (March 31, 2006: Rs. Nil). During the year ended March 31, 2007, the Bank invested in the equity share capital of its subsidiaries amounting to Rs. 13,584.7 million (March 31, 2006: Rs. 8,217.3 million). Sale of investments: During the year ended March 31, 2007, the Bank sold certain investments to its subsidiaries and joint ventures amounting to Rs. 8,569.2 million (March 31, 2006: Rs. 6,757.7 million) and to its associates amounting to Rs. Nil (March 31, 2006: Rs. 1,545.0 million). On the sales made to subsidiaries and joint ventures, the Bank accounted for a gain of Rs. 186.4 million (March 31, 2006: Gain of Rs. 16.7 million) and on the sale made to associates, the Bank accounted for no gain (March 31, 2006: Gain of Rs. 10.1 million). Income on Investments: During the year ended March 31, 2007, the Bank earned Rs. 59,885,435,000 (March 31, 2006: Rs. 36,927,577,000) from income on investments. Yield Analysis: YoY change (bps) 169 42 89 124 (35) 115 137 (22) QoQ change (bps) 85 4 29 71 (42) 34 70 (36)
Particulars Yield on Advances* Yield on Investments* Yield on Assets* Costs of Funds* NIM* Yield on Assets – Reported Costs of Funds – Reported NIM - Reported
Q1 FY 08 11.06 7.63 9.15 7.08 2.07 10.10 7.80 2.30
Q1 FY 07 9.37 7.21 8.26 5.84 2.42 8.95 6.43 2.52
Q4 FY 07 10.21 7.58 8.86 6.37 2.49 9.76 7.10 2.66
NIM – Reported #
2.30
2.45
2.53
(15)
(23)
Source: Company, Emkay Research
* Calculated on basis of average quarterly balances # adjusted for interest on CRR balances Lower CASA mix – Repricing of term deposits hits hard: ICICI Bank has one of lowest Current Account and Saving Account (CASA) mix amongst the Indian bank, which has hurt severely during the quarter. The repricing of the term deposits has resulted in 210 bps yoy and 110 bps sequential rises in the deposit cost despite bank having kept the proportion of CASA deposits at the same level. CASA Mix: Particulars (Rs bn) Total Deposits Savings Account Current Account CASA as % of total Term Deposits Cost of Deposits (%)
Source: Company
Q1 FY 08 2,308 320 200 22.5 1,788 7.90
Q1 FY 07 1,830 240 160 21.9 1,430 5.80
Q4 FY 07 2,305 290 220 22.1 1,795 6.80
% YoY change 26.1 33.3 25.0 25.0 210 bps
% QoQ change 0.1 10.3 -9.1 -0.4 110 bps
International Business and Retail Portfolio see sharp growth: ICICI Bank’s strong advances book growth of 34.7% was led by almost 2.5x increase in the international loan portfolio and 31.2% growth in the retail loan portfolio. The international loan book is expected to continue to grow at 50%+ CAGR over FY07-10 and increase to 20% of the total portfolio over the same period. The rural lending will also be another key driver of the advances book and grow at 30%+ over the same period. International business offers a strong potential In just four years of international operations ICICI Bank has build the largest international banking presence among all Indian banks with a US$17bn asset book – about 19% of its consolidated banking assets.
The international loan book has reached a CAGR of about 153% over FY04-07, as Indian companies raised finance overseas for their investments in India and abroad - including financing of overseas acquisition by Indian companies - trade finance and personal finance services for non resident Indians. An appreciating rupee and rising interest rates in the domestic economy has also encouraged Indian corporate to raise debt internationally. Portfolio Mix: % of Q1 FY 08 1,274 325 141 1,983 Q1 FY 07 971 134 114 1,472 Q4 FY 07 1,280 244 202 1,959 total portfolio 64.3 16.4 7.1 -
Particulars (Rs tn) Retail International Rural Total Advances
% YoY change 31.2 142.7 24.3 34.7
% QoQ change -0.5 33.2 -29.9 1.2
Source: Company, Emkay Research
Retail Loan Mix: % YoY change 30.0 1.1 47.8 93.1 96.8 30.5 6.8 31.2 Change in bps YoY -2 -445 150 282 159 -27 -117 QoQ 4 41 -116 -71 29 101 11 -
Particulars 2 – wheelers Cars CV Personal Loans Credit Cards Mortgages Others Total
Rs bn 26,000 190,000 170,000 112,000 61,000 650,000 65,160 1,274,160
Proportion 2.0 14.9 13.3 8.8 4.8 51.0 5.1 100.0
Source: Company, Emkay Research
Robust other income and … The fee income continued its robust growth, up 35.4% yoy to Rs14.3bn. During the first quarter of FY 08, the treasury gains also grew 10-fold driven by equity gains, thereby driving the other income to Rs17.2bn, a growth of 70%.
Fee Income: % YoY change 35.4 983.3 59.8 -12.0 69.7 % QoQ change 0.1 -56.3 44.1 -11.7 -6.5
Particulars (Rs mn) Fee Income Treasury Lease/Dividend Amortisation Total
Q1 FY 08 14,280 1,950 3,270 -2,350 17,150
Q1 FY 07 10,550 180 2,046 -2,670 10,106
Q4 FY 07 14,270 4,460 2,270 -2,660 18,340
Source: Company, Emkay Research
… Stable operating expenses help Aided by much slower growth in the direct marketing agency (DMA) expenses, the operating expenses grew by much slower 28.5% yoy. In Q1FY07, The lower DMA expenses are result of slower growth auto loans coupled with renegotiated DMA charges.
Particulars (Rs mn) Staff Expenses DMA Expenses Other Operating Expenses Total Expenses
Q1 FY 08 5,218 3,827 10,008 19,053
Q1 FY 07 3,568 3,908 7,739 15,215
Q4 FY 07 4,408 4,229 10,569 19,206
% YoY change 46.3 -2.1 29.3 25.2
% QoQ change 18.4 -9.5 -5.3 -0.8
Source: Company, Emkay Research
Asset Quality: Asset quality remains a concern for ICICI Bank due to its aggressive lending to non collateralised borrowers. Gross NPAs have risen to INR 60.4 bn during the quarter, primarily due to rise in retail NPA. Net retail NPAs currently are at INR 19.4 bn, 46% of which comprises non-collateralised loans. These slippages can be attributed to rates hardening and to the fact that personal lending is largely an unseasoned book. We retain our cautious view on asset quality due to slowdown in retail business.
Gross NPA increase is driven by changing loan mix An increasing proportion of unsecured loans reflect the changing risk profile of ICICI Bank’s loan book. Concerns about the bank’s rising gross NPAs are overstated. About 50% of the increase can be attributed to the rising proportion of unsecured loans, which are priced for higher defaults. ICICI Bank’s unsecured loan portfolio grew 100% YoY in 1QFY08 to Rs210bn and now accounts for 16% of the bank’s retail loan book and about 11% of the total loan book. Unsecured loans being high yielding yet high risk are priced for higher loss rates. Unsecured loans include personal loans, outstanding credit-card payments and microbanking personal loans. Micro-banking loans are personal loans given to the lower middle class strata of the society, without any collaterals and at yields of >36%. With unsecured loans being of a shorter tenure versus other retail loans such as mortgages and auto loans, the reported gross NPA ratio rises significantly if the bank doesn’t technically ‚write off? the gross NPAs.
Comparing the Asset Quality: Particulars ( FY 07 ) (Rs mn) Gross loans Write offs Adjusted gross loans Reported gross NPAs NPAs including write offs Loan loss reserves (LLR) LLR including write offs Reported Gross NPAs/loans (%) Underlying NPAs/loans (%) LLR to loans – Actual (%) LLR to loans (incl write offs) (%) NPA coverage – stated (%) Adjusted NPA coverage (%)
Source: CLSA Asia-Pacific Region
ICICI Bank 1,980,154 6,800 1,986,954 41,680 48,480 (34,448) (41,248) 2.1 2.44 1.74 2.08 82.6 85.1
HDFC Bank 469,448 13,938 483,386 6,578 20,516 (7,988) (21,926) 1.4 4.24 1.7 4.54 121.4 106.9
Axis Bank 370,289 1,200 371,489 4,187 5,387 (3,344) (4,544) 1.13 1.45 0.9 1.22 79.9 84.4
Sangli Bank acquisition blends with bank’s rural acquisition strategy: In Dec-06, ICICI Bank acquired Sangli Bank, a Maharashtra-based old private sector bank, with an asset base of Rs21bn. Sangli bank had about 190 branches of which 80% were in the state of Maharashtra and had a strong presence in rural credit. Apart from helping ICICI Bank ramp up its liability base, we believe the network could also aid it in its rural initiative by: ? Providing it with the skill set (in form of former Sangli Bank’s employees) to tap into some of the rural markets and ? Providing a strong presence in the rural and semi urban areas allowing it to tap into that market more effectively. Impact of hike in Cash Reserve Ratio on home loan sector: Rising interest rates and high property prices have led to a slowdown in property sales. The 200bps hike in Cash Reserve Ratio done by RBI in past six months has forced banks to raise lending rates for mortgage loans. However housing finance companies are not impacted by hike in CRR requirements and have not raised rates as much as banks. As a
result, ICICI bank has, in the past two quarters, lost market share to its main competitor HDFC.
Unsecured loans are driving retail growth: Unsecured loans have been the fastest-growing retail segment for ICICI Bank; its share of unsecured loans in total retail loans has steadily increased from 6% in FY06 to 11% in 1QFY08.
Restriction on ECB borrowing to increase demand for domestic credit: RBI recently issued restrictions on raising of new External Commercial Borrowings (ECBs) with ECB of >US$20m allowed only if the expenditure is in foreign currency. In last one year, Indian companies have raised >US$20bn through ECBs. Given the recent restriction on raising ECB, many large corporate are likely to fund their incremental credit demand by borrowing from Indian banking system, especially in the absence of a developed bond market.
ICICI is well capitalised / positioned to leverage the opportunity With its recent fundraising, ICICI Bank now has the highest net-worth among all Indian banks and has thus augmented its ability to take on big-ticket exposure required for large projects (banks are not allowed to lend > 15% of their net-worth to a single project). Banks can take exposure up to 15% of net worth Name of Bank (Rs bn) ICICI Bank SBI HDFC Bank PNB Axis Bank Net worth 472 355 130 121 82 Max exposure 70.80 53.25 19.50 18.15 12.30
ICICI Bank’s P/E ratio and Price/Book Value performance:
Source: CLSA Asia-Pacific Markets
KEY DOMESTIC SUBSIDIARIES: ICICI Prudential Life Insurance Company ICICI Prudential Life Insurance Company (ICICI Life) continued to maintain its market leadership among private sector life insurance companies with a retail market share of about 28% in the private sector in fiscal 2007 (on weighted received premium basis).
While the growing operations of ICICI Life had a negative impact of Rs. 4.80 billion on the Bank’s consolidated profit after tax in fiscal 2007 on account of the above reasons, the company’s unaudited New Business Achieved Profit (NBAP) for fiscal 2007 was Rs. 8.81 billion as compared to Rs. 5.28 billion in fiscal 2006. Largest private sector insurance player ICICI Prudential Life insurance (IPLI) (74% stake held by ICICI Bank), is largest private sector insurance player in India with a market share of 30%. In seven years of operation, IPLI has built the largest distribution network (among private players) of about 680 branches and an agency force of more than 235,000. IPLI’s new business premium (APE) has grown at 90% CAGR over the past three years to Rs44bn in FY07, total customer base has expanded to more than four million and total AUM have increased to about Rs160bn.
Source: CLSA Asia-Pacific Markets
ICICI Lombard General Insurance Company ICICI Lombard General Insurance Company (ICICI General) enhanced its leadership position with a market share of 34% among private sector general insurance companies and an overall market share of about 12.4% during fiscal 2007. ICICI General’s gross written premium grew by 89% from Rs. 15.92 billion in fiscal 2006 to Rs. 30.04 billion in
fiscal 2007. ICICI General is required to expense upfront, on origination of a policy, all sourcing expenses related to the policy. While ICICI General’s profit after tax for FY 2007 was Rs. 680 million, its combined ratio was 97%. The combined ratio is the sum of net claims and expenses as a percentage of premiums and indicates the surplus generated on an annualised basis from the business written during a period (excluding investment income). The surplus based on the combined ratio and investment income aggregated Rs. 1.80 billion on a pre tax basis. 34% market share in the general insurance industry ICICI Lombard General insurance (ILGI) is a joint venture (74:26) between ICICI Bank and Fairfax Holdings of Canada. It is the largest private sector general insurance company with a market share of about 34% among private players. ILGI’s gross written premium has grown at a CAGR of 57% over last two years with >50% business being from retail segment. Despite the strong growth in general insurance industry for past few years, the market continues to be under penetrated with a total premium to GDP less than 0.7% versus regional benchmarks of 2-3%.
Source: CLSA Asia-Pacific Markets
ICICI Prudential Asset Management Company ICICI Prudential Asset Management Company (ICICI AMC) was the second largest mutual fund in India at April 30, 2007 with assets under management of over Rs. 420.00
billion. Prudential ICICI AMC achieved a profit after tax of Rs. 0.48 billion in fiscal 2007 compared to Rs. 0.31 billion in fiscal 2006. ICICI Venture Funds Management Company Limited ICICI Venture Funds Management Company Limited (ICICI Venture) strengthened its leadership position in private equity in India, with funds under management of about Rs. 98.00 billion at year-end fiscal 2007. ICICI Venture achieved a profit after tax of Rs. 0.70 billion in fiscal 2007 compared to Rs. 0.50 billion in fiscal 2006. ICICI Securities Limited and ICICI Securities Primary Dealership Limited The securities and primary dealership business of the ICICI group have been reorganised. ICICI Securities Limited has been renamed as ICICI Primary Dealership Limited. ICICI Brokerage Services Limited has been renamed as ICICI Securities Limited and has become a direct subsidiary of ICICI Bank. Erstwhile ICICI Webtrade Limited was amalgamated with ICICI Securities Limited during fiscal 2007. ICICI Securities achieved a profit after tax of Rs. 0.63 billion and ICICI Securities Primary Dealership achieved a profit after tax of Rs. 1.33 billion, in fiscal 2007. CONCERNS / RISKS FOR ICICI BANK: ? Diseconomies of scale: While ICICI Bank’s branch and employee efficiency compares favourably against its peers in the private and public sector banking space, the rapid expansion in franchise and employee base has led to the bank compromising in terms of efficiency. Going forward, as the bank’s growth rate gets moderated, efficiency ratios might improve. The heavy employee intake in the last four fiscals (average 30% growth per year) has escalated the cost to income ratio to 53% in FY07. However, excluding the DMA (direct marketing agents) and lease depreciation costs, the bank has reported a cost to income ratio of 40% in this fiscal. ? Slippages likely: The aggressive growth in retail assets seems to have shown a red signal to the bank in FY07, as there has been a visible growth in incremental delinquencies in absolute terms. The accretion of Sangli Bank’s NPAs (which ICICI Bank acquired in FY07) has also added to the bank’s gross NPA levels (2.5% in FY07 from 1.6% in FY06). The same has, however, got partially
camouflaged in percentage terms due to the higher growth in advances. The bank’s net NPAs (as percentage of total advances) increased to 1% in FY07, from 0.7% in FY06. This was seemingly a result of incremental delinquencies (slippages in asset quality) in the retail portfolio. The gross and net NPAs in retail portfolio were 2.4% and 1.2% respectively in FY07. The net NPAs in the home loan portfolio stood at 0.7%. Also, the bank clarified that 54% of the NPAs were from non-collateralised assets such as personal loans and credit cards. Importantly, despite the consistent rise in net NPAs over the past fiscal, the provisioning cover has continued to decline, which calls for additional risk mitigation. SHARE PRICE PERFORMANCE OF ICICI BANK:
The above chart shows the relative performance of ICICI Bank’s share price and the movement in BSE SENSEX index over a period of last three years. It is evident that the Bank’s share price has consistently outperformed the market index. Currently, the share is trading at its life-time high.
doc_638594973.docx
The document gives the banking industry overview, organization structure of ICICI bank, performance of various verticals of ICICI bank and ratio analysis of ICICI bank
Financial Statement Analysis
ICICI Bank
OVERVIEW: ICICI Bank is India's second-largest bank with total assets of Rs. 3,446.58 billion (US$ 79 billion) at March 31, 2007 and profit after tax of Rs. 31.10 billion for fiscal 2007. ICICI Bank is the most valuable bank in India in terms of market capitalization and is ranked third amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation*. The Bank has a network of about 950 branches and 3,300 ATMs in India and presence in 17 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in Belgium. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). HISTORY: ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development
financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. SHAREHOLDING PATTERN: ICICI bank’s shareholding pattern post its Follow-On Public Offer (FPO) as on 30th June, 2007 stands as follows:
Foreign Institutional Investors (FIIs) hold a majority stake in ICICI Bank reflecting their strong confidence in the company. Life insurance companies come next which also hold a substantial stake in the company. INDUSTRY PROFILE: The banking industry is facing concerns on margin pressure and higher provisioning on account of implementation of Basel II norms. The credit growth is likely to be in the
range of 22-25% as against 30% last year while deposits are expected to grow by 20% as against 15-18% in the previous year. The Government has directed its efforts to curtail the excess liquidity resulting in inflationary scenario. Thus, we observed a series of CRR and repo rate revisions and LAF adjustments in the form of MSS auctions, in order to suck liquidity from the money markets. This consummated in a hike in PLR across banks, thereby increasing the cost of deposits of the bank as well. We foresee a maximum rise of 25bos in interest rates in India, thereby maintaining pressure on the banks to curtail cost of funding and focusing on raising low cost deposits. The other concern has been the RBI directive regarding entry of foreign banks in India in 2009. This would make survival issue for the smaller banks that will find it difficult to compete with the large size foreign banks. Hence, consolidation is a key trigger watched for unlocking value and attains size and reach for survival. BUSINESS REVIEW: Economic Overview The Indian economy has continued on its high growth path recording an estimated GDP growth rate of 9.4% during fiscal 2007 following the GDP growth rate of 9.0% in fiscal 2006. The highlight of the economy’s performance was the continued growth of the industrial sector coupled with a double-digit growth in the services sector. The Index of Industrial Production (IIP) recorded an annual average growth rate of 11.3% in fiscal 2007 following the growth of 8.2% in fiscal 2006. This growth was driven mainly by continued growth in the manufacturing sector which grew by 12.3% in fiscal 2007 following a 9.2% growth in the previous year. This was supported by an increase in the growth rate of the mining sector from 1.0% in fiscal 2006 to 5.1% during fiscal 2007. The electricity sector grew by 7.3% in fiscal 2007 as compared to 5.2% during fiscal 2006. The momentum of growth in the services sector (including construction) continued with 11.0% growth during fiscal 2007. Growth in agriculture and allied activities declined to 2.7% during the fiscal 2007 as compared to 6.0% in fiscal 2006, primarily on account of the uneven distribution and delay in rainfall.
Fiscal 2007 witnessed an increase in inflation primarily on account of a sharp increase in the prices of primary articles, due to a decline in growth of agricultural production. The annual average rate of inflation as measured by the Wholesale Price Index (WPI) was 5.3% for fiscal 2007 as compared to 4.4% for fiscal 2006, with continuing fiscal and monetary policy interventions aimed at controlling price levels. The year-on-year rate of inflation peaked at 6.7% for the week ended January 27, 2007 before declining to 5.7% for the week ended March 31, 2007. Global oil prices eased, reducing inflationary pressures experienced on this account in the previous fiscal. International crude oil prices increased from US$ 66.63 per barrel at March 31, 2006 to a peak of US$ 76.35 per barrel at August 9, 2006 before declining to US$ 64.00 per barrel at May 28, 2007. In view of rising inflation, and the liquidity situation following rapid growth in credit and large capital inflows, Reserve Bank of India (RBI) increased the reverse repo rate from 5.50% to 6.00%, the repo rate from 6.50% to 7.75% and the Cash Reserve Ratio (CRR) from 5.0% to 6.5% during fiscal 2007. The annual rate of inflation as measured by the WPI declined to 5.3% at May 12, 2007. The investment pipeline and demand for credit continue to be robust, and inflation conditions, global developments and external inflows will be key factors impacting liquidity and interest rates during the current year. India’s exports were US$ 124.6 billion during fiscal 2007, a growth of 23.9% over the previous year. During April–November 2006, exports of agriculture and allied products recorded a growth of 23.5% and exports of engineering goods recorded a growth of 38.5%. According to RBI, invisibles receipts reached US$ 82.6 billion during the first nine months of fiscal 2007, a growth of 29.9% over the corresponding period in the previous year. Growing import demand from a resurgent manufacturing sector has led to a deficit in the current account (US$ 11.8 billion during first nine months of fiscal 2006). Net Foreign Direct Investment (FDI) into India was US$ 5.8 billion during the first nine months of fiscal 2007 while net portfolio investment was US$ 5.2 billion. Foreign exchange reserves continued to grow, reaching US$ 199.2 billion on March 30, 2007. The resilience displayed by the economy in fiscal 2007 is evidence of the broad-based and sustainable nature of India’s growth momentum. With the resurgence of the
manufacturing sector and robust growth in the services sector the growth prospects for fiscal 2008 appear favourable. Investment in infrastructure, reorienting education and skill-building to the needs of the new economic drivers and holistic development of the agricultural sector and the rural economy are the key imperatives to realize India’s full potential in the long run. Financial Sector Overview The financial sector mirrored the developments in the Indian economy. Credit growth was robust, given the increase in economic activity. Non-food credit increased by 28.0% in fiscal 2007 compared to 30.8% in fiscal 2006. Based on data published by RBI, during April-December 2006, industry accounted for 38.5% of non-food credit, retail credit for 26.4%, agriculture and allied activities for 12.2%, trade for 6.1%, real estate for 2.4% and other sectors for the balance 14.4%. The credit-deposit ratio increased from about 70.0% in April 2006 to about 74.0% in March 2007. The incremental credit-deposit ratio was about 86.0% for fiscal 2007 compared to about 102.0% for fiscal 2006, on account of robust growth in deposits during fiscal 2007. Deposits of the banking system grew by Rs. 5,130.05 billion, or 24.2%, in fiscal 2007 compared to 17.4% in fiscal 2006. In response to the increase in the cash reserve ratio and the reverse repo rate and the liquidity conditions, banks have increased their lending and deposit rates. The average yield on 10-year Government securities increased from 7.1% in fiscal 2006 to 7.8% in fiscal 2007. Growth in both the life and non-life insurance markets was significant. First year retail premium underwritten in the life insurance sector recorded a growth of 91.9% (on weighted received premium basis) to reach Rs. 402.77 billion in fiscal 2007 with the private sector’s retail market share (on weighted received premium basis) increasing from 34.2% in fiscal 2006 to 35.5% in fiscal 2007. Gross premium in the non-life insurance sector (excluding Export Credit Guarantee Corporation of India Limited) grew by 22.4% to Rs. 250.02 billion in fiscal 2007 with the private sector’s market share increasing from 26.6% in fiscal 2006 to 34.9% in fiscal 2007. Total assets under management of mutual funds grew by 40.8% from Rs. 2,318.62 billion at March 31, 2006 to Rs. 3,263.88 billion at March 31, 2007.
The banking sector witnessed several important regulatory developments. In April 2007, RBI issued final guidelines for the implementation of a revised Basel II capital adequacy framework that would be effective year-end fiscal 2008 for banks like us. The guidelines include an increase in the minimum Tier-I CAR from 4.5% to 6.0% and introduction of capital for operational risk. The guidelines prescribe a 75.0% weight for retail credit exposure and rating based differential risk weights for other credit exposures, including on undrawn commitments. During the fiscal year, RBI increased the general provisioning requirement on standard advances in specific sectors to 1.0% from 0.4%. In January 2007, RBI further increased the general provisioning requirement for real estate sector loans (excluding residential housing loans), credit card receivables, loans and advances qualifying as capital market exposure, personal loans and exposures to non-deposit taking systemically important non-banking financial companies to 2.0%. In April 2007, RBI issued revised guidelines on lending to the priority sector. The guidelines are effective fiscal 2008 and link priority sector lending targets to adjusted net bank credit. In April 2007, RBI issued draft guidelines aimed at permitting banks and primary dealers to begin transactions in credit default swaps. RBI also issued modified consolidated supervision norms limiting a bank’s consolidated capital market exposure limit at 40.0% of its consolidated net worth and restricting direct exposure to 20.0% of the consolidated net worth. The Indian financial sector is rapidly moving towards international benchmarks, with increasing efficiency, transparency and dynamism. Given the robust growth prospects in India, the financial sector has a crucial role to play in the development of the economy. Broad-based reforms have made the banking sector competitive and have positioned it well to support sustained economic growth. ORGANISATION STRUCTURE: Its organisation structure is designed to be flexible and customer-focused, while seeking to ensure effective control and supervision and consistency in standards across the organisation and align all areas of operations to overall organisational objectives. The organisation structure is divided into six principal groups – Retail Banking, Wholesale Banking, International Banking, Rural, Micro-Banking and Agri-Business, Government Banking and Corporate Centre.
ICICI Bank’s Organisation Structure
Retail Banking Group
Wholesale Banking Group
International Banking Group
Rural, MicroBanking and AgriBusiness Group
Government Banking Group
Corporate Centre Group
The Retail Banking Group is responsible for our products and services for retail customers and small enterprises including various credit products, liability products, distribution of third party investment and insurance products and transaction banking services. The Wholesale Banking Group is responsible for our products and services for large and medium-sized corporate clients, including credit and treasury products, investment banking, project finance, structured finance and transaction banking services. The Rural, Micro-Banking & Agri-Business Group is responsible for envisioning and implementing our rural banking strategy, including agricultural banking and microfinance. The Government Banking Group is responsible for our government banking initiatives. The International Banking Group is responsible for our international operations, including our operations in various overseas markets as well as our products and services for non-resident Indians and our international trade finance and correspondent banking relationships.
The Corporate Centre comprises the internal control environment functions (including operations, risk management, compliance, audit and legal); finance (including financial reporting, planning and strategy, asset liability management, investor relations and corporate communications); human resources management; and facilities management & administration. In addition to the above, the Global Principal Investments & Trading Group is responsible for taking proprietary positions in the Indian and international markets. The Global Markets Group is responsible for the global client-centric treasury operations. The Structural Rate Risk Management Group is responsible for taking interest rate views and determining interest rate risk positions for the Bank as a whole, with oversight over banking subsidiaries as applicable. The Bank also has certain specialised groups namely, Technology Management Group (TMG) which is responsible for enterprise-wide technology initiatives, Organisational Excellence Group (OEG) which is responsible for quality initiatives and Social Initiatives Group (SIG) which is responsible for our social and community development activities. VERTICALS’ REVIEW: The bank maintained its leadership position in retail credit, achieved robust growth in their fee income from both corporate and retail customers, grew its deposit base and significantly scaled up their international operations and rural reach. Retail Banking Their retail strategy is centered on a wide distribution network, leveraging their branches & offices, direct marketing agents, dealer & real estate developer relationships; comprehensive & competitive product suite; technology-enabled back-office processes; and a robust credit and analytical framework.
Key statistics as on 31 March 2007 Total retail disbursements Total retail portfolio Retail customer accounts Branches and extension counters ATM network
777 billions 1,277.03 billion 25 million 755 3,271
Cross-selling new products and also the products of life and general insurance subsidiaries to their existing customers is a key focus area for the Bank. In fiscal 2007, about 18% of ICICI Prudential Life Insurance Company’s new business was generated through ICICI Bank. Small and Medium Enterprises In this segment their strategy has been focused around customer convenience in transaction banking services, and working capital loans to suppliers or dealers of large corporations and clusters of small enterprises that have a homogeneous profile. During fiscal 2007, their customer base increased by more than 50% to over 900,000 transaction banking customers. These customers are serviced by over 580 branches of the Bank, covering over 200 locations. Corporate Banking They offer a complete range of corporate banking products including ? ? ? ? ? Rupee and foreign currency debt working capital credit structured financing syndication and transaction banking products and services
Corporate banking group has been re-organised into two groups, the Global Clients Group, which is responsible for corporate clients having significant international presence and/or international investment plans, and the Major Clients Group, which is responsible for all other corporate clients. They have created an integrated Global Investment Banking Group, which is responsible for working with the Global Clients Group and the Major Clients Group and their international subsidiaries and branches,
for origination, structuring and execution of investment banking mandates on a global basis. Project Finance In order to sustain India’s growth momentum, infrastructure development is a key requirement. The investment requirement in the infrastructure sector is expected to increase significantly over the next five years. There is tremendous potential in the infrastructure and manufacturing sectors which is borne out by the large projects which are currently being developed and implemented. In the transportation sector, the road sector development is now being undertaken across both the national highways and the state highways. The proposed modernisation, upgradation and expansion of metro and non-metro airports are expected to continue to provide significant business opportunities in the future. In addition to the Delhi and Mumbai airports which have already been transferred to the private developers, the airports at Kolkata and Chennai are also proposed to be modernised through a suitable model. The telecom sector is expected to see continued growth given the relatively low teledensity and consequently large investments in networks by telecom service providers. Rural banking and agri-business They offer a range of financial products and services that cater to the rural masses in all the important sectors like infrastructure, horticulture, food processing, dairy, poultry, seeds, fertiliser and agrochemical industries. They have developed a hybrid distribution channel strategy, a combination of branch and non-branch channels (credit access points). They have embarked on a ‚no white spaces? strategy wherein they aim to setup an ICICI Bank touch point within 10 km of any customer. The amalgamation of Sangli Bank would extend their outreach in rural areas. The rural initiative exposes them to increased risks including credit risk, increased operational risk and increased fraud risk. During fiscal 2007, a provision of Rs. 0.9 billion (USS$ 22 million) was made on account of identified frauds in warehouse receipt financing business of agricultural credit. International Banking ICICI Bank has established a strong franchise among non-resident Indians (NRI). They have established strong customer relationships by offering a comprehensive product suite, technology-enabled access for overseas customers, wide distribution network in
India and alliances with local banks in various markets. They have over 450,000 NRI customers. Their market share in inward remittances into India has increased to over 25%. They have created a holistic product suite across the entire risk spectrum starting from deposits and bonds to the more complex structured derivative products, private equity and real estate. RISK MANAGEMENT: They have three dedicated groups, the Global Risk Management Group (GRMG), the Compliance Group and the Internal Audit Group which are responsible for assessment, management and mitigation of risk in ICICI Bank. In addition, the Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence to regulations, policies and internal approvals. Credit Risk Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. They measure, monitor and manage credit risk for each borrower and also at the portfolio level. They have standardized credit approval processes, which include a well established procedure of comprehensive credit appraisal and rating. They have developed internal credit rating methodologies for rating obligors. The rating serves as a key input in the approval as post-approval credit processes. Credit rating, as a concept, has been internalised within the Bank. Industry knowledge is constantly updated through field visits and interactions with clients, regulatory bodies and industry experts. In their retail credit operations, all products, policies and authorisations are approved by the Board or a Board Committee or pursuant to authority delegated by the Board. Credit approval authority lies only with their credit officers who are distinct from the sales teams. Credit scoring models are used in the case of certain products like credit cards. External agencies such as field investigation agencies and credit processing agencies are used to facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers. Before disbursements are made, the credit officer conducts a centralised check on the delinquencies database and review of the
borrower’s profile. They continuously refine their retail credit parameters based on portfolio analytics. They also draw upon reports from the Credit Information Bureau (India) Limited (CIBIL). Market Risk Market risk is the risk of loss resulting from changes in interest rates, foreign currency exchange rates, equity prices and commodity prices. Their exposure to market risk is a function of their trading and asset liability management activities and their role as a financial intermediary in customer-related transactions. Market risk policies include the Investment Policy and the Asset-Liability Management (ALM) Policy. The policies are approved by the Board of Directors. The Asset-Liability Management Committee (ALCO) of the Board of Directors stipulates liquidity and interest rate risk limits, monitors adherence to limits, articulates the organisation’s interest rate view and determines the strategy in light of the current and expected environment. These policies and processes are articulated in the ALM Policy. The Global Market and Operational Risk Management Group exercises independent control over the process of market risk management and recommends changes in processes and methodologies for measuring market risk. ? Interest rate risk is measured through the use of re-pricing gap analysis and duration analysis. ? Liquidity risk is measured through gap analysis. The Treasury Middle Office Group monitors the asset-liability position under the supervision of the ALCO. It also monitors the treasury activities and adherence to regulatory / internal policy guidelines. The Treasury Middle Office Group is also responsible for processing treasury transactions, tracking the daily funds position and complying with all treasury-related management and regulatory reporting requirements.
Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risks in the Bank are managed through a comprehensive internal control framework. The control framework is categorized into 1) Front Office comprising business groups 2) Mid office, comprising credit and treasury mid-offices 3) Back office, comprising operations and 4) Corporate and support functions All the key process, risks and controls are documented and risk and control assessments are carried out on a periodic basis. As part of compliance with RBI guidelines, an operational risk management policy was approved by their Board of Directors. The policy is applicable across the Bank including overseas offices and aims to ensure that there is clear accountability, responsibility and mitigation of operational risk
CSR - PROMOTING SUSTAINABLE DEVELOPMENT:
The work in the area of development is focused on facilitating wider participation by India’s poorer communities in social and economic processes. This is done basically through the following ways: 1. Partnership based Initiatives 2. Market based direct initiatives Partnership Based Initiatives The core strategy has been to identify partners and work with them to build competencies and effectiveness on the field. The principal interventions in this category are being carried out through four sharply focused efforts: 1. Social Initiatives Group
The foundations of ICICI Bank’s most recent approach towards human and social development were laid with the setting up of the Social Initiatives Group (SIG), a nonprofit resource group within the Bank in 2000. The group selected early child health, elementary education and access to financial services as the key areas of focus. SIG seeks to catalyze change by supporting innovation and research, influencing policy and reforming mainstream practices. SIG’s work is carried out through the following specialized groups: ? ? ? ICICI Centre for Child Health and Nutrition (ICCHN) Elementary Education Practice Microfinance Practice
2. Technology Finance Group TFG has been instrumental in ushering in new technology, innovative projects, processes and products. Projects supported under this scheme include collaborative R&D, post-harvest agri-business, energy research, child and reproductive health, pollution prevention and control, clean technologies and energy efficiency through dedicated programmes in association with international agencies and organizations. 3. ICICI Knowledge Park ICICI Knowledge Park (IKP) in Hyderabad, promoted by ICICI Bank and the Government of Andhra Pradesh, seeks to ensure that the companies of today have the requisite infrastructure and advantages of world-class technology available at crucial moments in their development. This will enable them to produce innovative results comparable with the best global companies the world over. This work is being carried out through the following centres: ? ? ? The Biotech Park ICICI Centre for Technologies in Public Health (ICTPH) ICICI Centre for Advancement of Agricultural Practice (ICAAP)
4. The ICICI CSO Platform
Well-functioning Civil Society Organizations (CSOs) help create a climate and consensus for change and an enabling environment for best practices to flourish in. The current set of partners includes: ? ? ? GiveIndia Mitra Foundation Infochange
Market Based Initiatives The broad approach taken is to build access to markets as a strategy to alleviate poverty. The key components of this strategy comprise: 1. Universal access to basic financial services Almost all regions of India have a set of economically-viable occupations that even the very poor can engage in without the need for any specialized inputs. The only external input required to leverage these economic opportunities is access to basic financial services, which include savings, credit, insurance and tools for risk management. The basic approach followed has been the development of a network of community-based financial institutions, which have the ability to provide the requisite services. In order to facilitate the creation of such a network, through our uniquely designed ‚partnership model? we provide partner microfinance institutions financial resources for on-lending, access to mezzanine finance for growth, financial engineering (securitization) and product development (health insurance, rainfall insurance, savings, risk management) and direct links with capital markets as the entities mature. We have also participated in the creation of an enabling environment that can support the continued growth in the number of entities. The steps that have been taken are: ? ? ? Partnership with Venture Capital Funds engaged in the task of identifying and providing equity finance Launch of FINO (www.fino.co.in), an Application Services Provider that seeks to provide frontend, back-end and information services. Supporting institutes such as Institute of Financial Management and Research
Following this approach, we have catalyzed the creation of over 210 micro finance partners and have been able to go from US$1.2 million (Rs. 48 million) in micro-loans extended to about 20,000 clients to over US$470 million (Rs. 18.80 billion) being provided to over 3 million clients in four years. 2. Bridging the missing markets gap Taking clients to the next level of economic activity needs a much more concerted effort; one that builds on the reality that a large population of economically-active poor now have access to basic financial services and have shown their preference for certain economic activities through actual choices of occupations once they are freed from credit constraints. Since the skills required to meet this goal are not core to the bank, the following steps have been taken: • Building a partnership with social venture capitalists to create a series of specialized Network Enterprises (NEs) that will be able to build specialized capabilities in specific sectors and links between the poor and larger markets • Assisting the NEs in building partnerships between grass-roots organizations and large companies. • Identifying and facilitating the work of specialized entities so that they can work closely with MFIs and other grass-roots organizations on health and productivity interventions. 3. Creation of complementary infrastructure The third step is the creation of larger-scale infrastructure that will change the economic environment of the poor through the provision of better roads, healthcare infrastructure, government and private schools, electricity, clean water, etc. This work is being done in collaboration with local self-governments, district and state level administration and the private sector. Many of the initiatives mentioned above are in the nature of long-term investments and will yield the desired results over a period of time.
CORPORATE GOVERNANCE REPORT: ICICI Bank has established a tradition of best practices in corporate governance. The corporate governance framework in ICICI Bank is based on an effective independent Board, the separation of the Board’s supervisory role from the executive management and the constitution of Board Committees, generally comprising a majority of independent Directors and chaired by an independent Director, to oversee critical areas. ICICI Bank’s corporate governance philosophy encompasses not only regulatory and legal requirements, such as the terms of listing agreements with stock exchanges, but also several voluntary practices aimed at a high level of business ethics, effective supervision and enhancement of value for all stakeholders. PERFORMANCE REVIEW: ‘Profit before Provisions’ and ‘Creation of higher provisions on standard assets’ It has been observed that ‘Profit before provisions and tax’ increased 51.1% to Rs. 58.74 billion in fiscal 2007 from Rs. 38.88 billion in fiscal 2006 primarily due to the following reasons: i. An increase in net interest income by 40.9% to Rs. 66.36 billion in fiscal 2007 from Rs. 47.09 billion in fiscal 2006 ii. An increase in non-interest income by 39.4% to Rs. 59.14 billion in fiscal 2007 from Rs. 42.42 billion in fiscal 2006 (offset, in part, by an increase in non-interest expenses by 33.8% to Rs. 66.91 billion in fiscal 2007 from Rs. 50.01 billion in fiscal 2006). It has been seen that ‘Provisions’ increased significantly during fiscal 2007 because of the reasons given below: i. Due to higher provisions created on standard assets ii. Lower level of write-backs Profit before general provisioning and tax increased 27.4% to Rs. 43.79 in fiscal 2007 from Rs. 34.36 billion in fiscal 2006 and Profit after tax increased 22.4% to Rs. 31.10 billion in fiscal 2007 from Rs. 25.40 billion in fiscal 2006.
Impact of revised RBI guidelines on ‘Provisions and Contingencies’ Provisions and contingencies (excluding provision for tax) increased to Rs. 22.26 billion in fiscal 2007 from Rs. 7.92 billion in fiscal 2006 because of the reasons explained below: i. Higher provisions of about Rs. 3.92bn created on standard assets in accordance with the revised guidelines issued by RBI ii. Higher level of specific provisioning on retail loans due to change in the portfolio mix towards non collateralized loans (where credit losses are higher, but the higher losses are more than offset by the higher yield on such loans) and seasoning of the loan portfolio iii. Lower level of write-backs in fiscal 2007 compared to about Rs. 6.62 billion writebacks in fiscal 2006, provision of about Rs. 1.05 billion on account of frauds in rural portfolio, primarily in ICICI’s warehouse receipt financing business and a higher level of specific provisioning on retail and other loans Impact of RBI guidelines on Accounting for securitization of Assets In February 2006, the Reserve Bank of India (RBI) issued guidelines for accounting for securitisation of standard assets. In accordance with these guidelines, with effect from February 1, 2006, ICICI will account for any loss arising on securitisation immediately at the time of sale and the profit/premium arising on account of securitisation is amortized over the life of the asset. Prior to February 1, 2006, profit arising on account of securitisation has been recorded upfront at the time of sale. Income from sell-down of loans was approximately 8.6% of net interest income in fiscal 2006 as against a loss in fiscal 2007, due to the impact of the aforesaid guidelines requiring amortization of profit on securitisation from February 1, 2006 and the prevailing liquidity and interest rate scenario. Net interest income and spread analysis The following table sets forth, for the periods indicated the net interest income and spread analysis.
Net interest income increased 40.9% to Rs. 66.36 billion in fiscal 2007 from Rs. 47.09 billion in fiscal 2006, reflecting mainly the following: ? ? An increase of Rs. 856.70 billion or 49.8% in the average volume of interestearning assets; and Net interest margin of 2.6% in fiscal 2007 compared to 2.7% in fiscal 2006.
i. Until the year end fiscal 2006, ICICI Bank deducted commission paid to direct marketing agents of automobile loans from the interest income. For fiscal 2007, ICICI have reported all direct marketing agency expenses, on automobile loans and other retail loans separately under ‚non-interest expense?. These commissions are expensed upfront and not amortised over the life of the loan. The necessary reclassifications have been made for the prior years. ii. The average volume of interest-earning assets increased by Rs. 856.70 billion in fiscal 2007 primarily due to the increase in average advances by Rs. 500.28 billion, and an increase in average investments by Rs. 256.03 billion. The increase in the average advances was mainly due to increased disbursements of retail finance loans, offset, in part, by securitisation of loans and repayment of existing loans, and the increase in average investments was mainly due to increased investment in Government securities. iii. Retail advances, net of provisions and write-off, increased by 38.5% to Rs.1,277.03 billion at year-end fiscal 2007 from Rs. 921.98 billion at year-end fiscal 2006.Interest income increased by 60.7% to Rs. 229.94 billion in fiscal 2007 from Rs. 143.06 billion in fiscal 2006 primarily due to an increase of 49.8% in the average interest-earning assets to Rs. 2,577.27 billion in fiscal 2007 from Rs. 1,720.57 billion in fiscal 2006. iv. Yield on average interest-earning assets increased to 8.9% in fiscal 2007 compared to 8.3% in fiscal 2006, primarily due to the increase in the yield on
advances portfolio to 9.9% in fiscal 2007 from 9.1% in fiscal 2006. The yield on advances has increased despite the significant decline in income from sell-down of loans due to an increase in lending rates in line with the general increase in interest rates and increase in the volumes of certain high yielding loans. v. ICICI Bank’s benchmark prime lending rate had increased by 300 basis points from March 31, 2006 to April 1, 2007 and home loan rates have increased by 350 basis points on the outstanding floating rate portfolio during the same period. vi. Interest expense increased by 70.4% to Rs. 163.58 billion in fiscal 2007 from Rs. 95.97 billion in fiscal 2006, primarily due to an increase of 49.8% in the volume of average interest-bearing liabilities to Rs. 2,484.99 billion for fiscal 2007 from Rs. 1,658.73 billion for fiscal 2006 and increase in the cost of funds by 0.8% to 6.6% for fiscal 2007 from 5.8% in fiscal 2006. vii. Total deposits at year-end fiscal 2007 constituted 76.5% of ICICI’s funding (i.e. deposits, borrowings and subordinated debts) compared to 77.2% at year-end fiscal 2006. Total deposits increased 39.6% to Rs. 2,305.10 billion at year-end fiscal 2007 from Rs. 1,650.83 billion at year-end fiscal 2006. This is commensurate with ICICI’s focus of increasing funding through deposits. viii. As a result of the higher cost of funds and decrease in the gains on securitisation/sell down of assets, net interest margin decreased to 2.6% in fiscal 2007 from 2.7% in fiscal 2006. Net interest margin is expected to continue to be lower than other banks in India until we increase the proportion of retail deposits in ICICI’s total funding. The net interest margin is also impacted by the relatively lower net interest margin earned by ICICI’s foreign branches, which is offset by the higher fee income that we are able to earn by leveraging ICICI’s international presence and ICICI’s ability to meet the foreign currency borrowing requirements of Indian companies. Various other incomes have also been affected as explained below: a. Fee income: Fee income increased by 45.4% to Rs. 50.12 billion in fiscal 2007 from Rs. 34.47 billion in fiscal 2006 primarily due to growth in retail products and services, including fee arising from retail assets products and retail liability related fee income like account servicing charges and third party distribution
fees. Fees from corporate banking and international business also witnessed a strong growth. b. Treasury income: The gross treasury income increased to Rs. 10.14 billion in fiscal 2007 from Rs. 7.40 billion in fiscal 2006 primarily due to higher level of gains from equity divestments, offset in part by 24.6% increase in premium amortization on Government securities to Rs. 9.99 billion in fiscal 2007 from Rs. 8.02 billion in fiscal 2006 and lower profits on proprietary trading as a result of the sharp fall in the equity markets in May 2006 and adverse conditions in debt markets. c. Lease & other income: Lease income decreased by 34.1% to Rs. 2.38 billion in fiscal 2007 from Rs. 3.61 billion in fiscal 2006 primarily because of a decrease in leased assets to Rs. 10.03 billion at year-end fiscal 2007 compared to Rs. 11.74 billion at year-end fiscal 2006 since they are not entering into new lease transactions. Other income increased by 53.0% to Rs. 6.64 billion for fiscal 2007 compared to Rs. 4.34 billion in fiscal 2006 primarily due to increase in income by way of dividend from ICICI’s subsidiary companies and increase in profit on sale of land, buildings and other assets. Non-interest expense: The following table sets forth, for the periods indicated, the principal components of non-interest expense.
i. Total non-interest expense: It increased by 33.8% to Rs. 66.91 billion in fiscal 2007 from Rs. 50.01 billion in fiscal 2006, primarily due to a 49.4% increase in employee expenses and 41.9% increase in other administrative expenses. ii. Employee expenses: It increased 49.4% to Rs. 16.17 billion in fiscal 2007 from Rs. 10.82 billion in fiscal 2006 primarily due to a 31.3% increase in the number of employees to 33,321 at year end fiscal 2007 from 25,384 at year end fiscal 2006, annual increase in the salaries and facilities available to employees at concessional rates of interests and other employee benefits. The increase in employees was commensurate with the growth in ICICI’s retail and other businesses. iii. Depreciation: Depreciation on own property increased by 2.7% to Rs. 3.57 billion from Rs. 3.47 billion. There was a 4.0% increase in premises and other fixed assets to Rs. 29.20 billion at year-end fiscal 2007 from Rs. 28.07 billion at year-end fiscal 2006. Depreciation on leased assets decreased to Rs. 1.88 billion in fiscal 2007 from Rs. 2.77 billion in fiscal 2006 primarily due to reduction in leased assets to Rs. 10.03 billion at year-end fiscal 2007 from Rs. 11.74 billion at year-end fiscal 2006. iv. Other administrative expenses: They increased by 41.9% to Rs. 30.03 billion in fiscal 2007 from Rs. 21.16 billion in fiscal 2006 primarily due to increased volume of business, particularly in retail banking, and includes maintenance of ATMs, credit card expenses, including promotional expenses on cash back scheme, insurance premium, collection expenses and other expenses. Reclassification of Commission expenses: ICICI uses marketing agents, called direct marketing agents or associates, for sourcing ICICI’s automobile loans. Until the year end fiscal 2006, the company deducted commission paid to direct marketing agents of automobile loans from the interest income. For fiscal 2007, it has reported all direct marketing agency expenses, on automobile loans and other retail loans separately under ‚non-interest expense?. These commissions are expensed upfront and not amortized over the life of the loan also making the necessary reclassifications have been made for the prior years.
Impact of interest rate changes nullified by higher Deposits: Total deposits increased 39.6% to Rs. 2,305.10 billion at year-end fiscal 2007 from Rs. 1,650.83 billion at year-end fiscal 2006. This is commensurate with the company’s focus of increasing funding through deposits. Its cost of deposits has increased by 1.2% to 6.2% in fiscal 2007 from 5.0% in fiscal 2006 consequent to general increase in interest rates reflecting tight systemic liquidity scenario, particularly in the second half of fiscal 2007 and resulting in an increase in deposit rates for retail and other customers. The cost of borrowings increased marginally to 7.7% in fiscal 2007 from 7.6% in fiscal 2006 primarily due to increase in borrowings of foreign branches at higher rates, including raising of subordinated bonds. INVESTMENTS: Total investments at year-end fiscal 2007 increased by 27.5% to Rs. 912.58 billion compared to Rs. 715.47 billion at year-end fiscal 2006 primarily due to 31.9% increase in investment in Government and other approved securities in India to Rs. 673.68 billion at year-end fiscal 2007 from 510.74 billion at year-end fiscal 2006 in line with the increase in the company’s net demand and time liabilities (NDTL). Banks in India are required to maintain a specified percentage, currently 25.0%, of their net demand and time liabilities by way of liquid assets. Other investments (including debentures and bonds) increased by 16.7% to Rs. 238.90 billion at year-end fiscal 2007 compared to Rs. 204.73 billion at year-end fiscal 2006, reflecting an increase in investments in insurance and international subsidiaries, pass through certificates and credit linked notes. Total assets (gross) of overseas branches (including overseas banking unit in Mumbai) increased by 90.2% to Rs. 524.71 billion at year-end fiscal 2007 from Rs. 275.86 billion at year-end fiscal 2006. Capital Adequacy and BASEL-II norms:
ICICI’s total capital adequacy ratio calculated in accordance with the RBI guidelines at year-end fiscal 2007 was 11.69%, including Tier I capital adequacy ratio of 7.42% and Tier II capital adequacy ratio of 4.27%. In accordance with the RBI guidelines, the risk-weighted assets at year-end fiscal include home loans to individuals at a risk weightage of 75%, other consumer loans and capital market exposure at a risk weightage of 125%. Commercial real estate exposure and investments in venture capital funds have been considered at a risk weightage of 150%. Deferred tax asset amounting to Rs. 6.10 billion and unamortised amount of expenses on Early Retirement Option Scheme amounting to Rs. 0.50 billion at year-end fiscal 2007, have been reduced from Tier I capital while computing the capital adequacy ratio. In April 2007, the RBI issued final guidelines for the implementation of a Basel-II capital adequacy framework that would be effective year-end fiscal 2008 for the company. The guidelines for the capital adequacy framework include an increase in the minimum Tier I CAR from 4.5% to 6.0% and, the introduction of capital for operational risk as per Basel II. Further, the risk weight for consumer credit and residential mortgages will continue to remain at 125.0% and 75.0% (risk weights for residential mortgage loans of less than Rs. 2.0 million with loan-to-value ratio of less than 75.0% would be 50.0%). The capital adequacy norms stipulate a capital charge on undrawn commitments. The norms also increase the risk-weightage for domestic corporates (for loans greater than Rs. 100.0 million) without a solicited external rating to 150.0% in a phased manner as compared to 100% currently. Similarly, nonresident corporates (for loans greater than
Rs. 100.0 million) without a rating from an international rating agency would attract 150.0% risk weightage in a phased manner compared to 100% currently. Retail Finance and Portfolio Management- strategizing to increase the proportion of retail loans: ICICI follows a policy of portfolio diversification and evaluates its total financing in a particular sector in light of its forecasts of growth and profitability for that sector. ICICI identified retail finance as an area with potential for growth and sought to increase its financing to retail finance. The company believes that retail finance offers significant risk diversification benefits as the credit risk is spread over a large number of relatively small individual loans. The growth of ICICI’s retail finance portfolio has been the principal driver of ICICI’s portfolio diversification strategy. ICICI’s loans and advances to retail finance constituted 65.2% of its total loans and advances at year-end fiscal 2007 compared to 62.9% at year-end fiscal 2006 and 60.9% at year-end fiscal 2005. ICICI’s Credit Risk Management Group monitors all major sectors of the economy and specifically follows sectors to which it has loans outstanding. It seeks to respond to any economic weakness in an industrial segment by restricting new exposures to that segment and any growth in an industrial segment by increasing new exposures to that segment, resulting in active portfolio management. The following tables set forth, at the dates indicated, the composition of ICICI’s gross advances (net of write-offs).
ICICI Bank’s Financials
Income Statement Summary (Rs cr): Particulars (Y.E. Mar 31) Net Interest Income Other Income Net Income Operating Expenses Pre Provision Profit Provisions except tax Profit Before Tax Income Tax Tax Rate Profit After Tax FY 07 6,635.79 5,929.17 12,564.96 6,690.56 5,874.40 2,226.37 3,648.04 537.82 14.74% 3,110.22 FY 06 4,708.68 4,180.89 8,889.57 5,001.15 3,888.42 791.81 3,096.60 556.53 17.97% 2,540.07 FY 05 2,839.00 3,416.14 6,255.14 3,299.15 2,955.99 428.80 2,527.20 522.00 20.66% 2,005.20
It has been observed that ‘Profit before provisions and tax’ increased 51.08% to Rs. 58.74 billion in fiscal 2007 from Rs. 38.88 billion in fiscal 2006 primarily due to the following reasons: i. An increase in net interest income by 40.9% to Rs. 66.36 billion in fiscal 2007 from Rs. 47.09 billion in fiscal 2006. ii. An increase in other income by 41.81% to Rs. 59.29 billion in fiscal 2007 from Rs. 41.81 billion in fiscal 2006.
Balance Sheet Summary (Rs cr): Particulars (Y.E. Mar 31) Equity Share Capital Preference Share Capital Reserves and Surplus Net Worth Deposits Borrowings Other liabilities & provisions Total Liabilities Cash and Bank Investments Advances Fixed Assets Others Total Assets FY 07 FY 06 899.34 889.83 350.00 350.00 23,413.92 21,316.16 24,663.26 22,555.99 230,510.19 165,083.17 51,256.03 38,521.91 38,228.64 25,227.88 344,658 251,389 37,121.32 17,040.22 91,257.84 71,547.39 195,865.60 146,163.11 3,923.42 3,980.71 16,489.92 12,657.51 344,658 251,389 FY 05 736.78 350.00 11,813.20 12,899.98 99,818.78 33,544.50 21,396.16 167,659 12,929.98 50,487.35 91,405.15 4,038.04 8,798.89 167,659
?
Deposits increased by 39.63% to Rs. 230,510.19 crores in fiscal 2007 from Rs. 165,083.17 crores in fiscal 2006 reflecting a huge confidence in the people’s minds on the company.
?
Advances increased by 34% to Rs. 195,865.60 crores in fiscal 2007 from Rs. 146,163.11 crores in fiscal 2006 showing proportionate rise in deposits and advances. ICICI bank’s retail portfolio advances are growing at the fastest pace in the industry due to its aggressive lending policy.
Growth Ratios (%): Particulars (Y.E. Mar 31) Net Interest Income Other Income Net Income Operating Expenses Pre Provision Profit Provisions Profit Before Tax FY 07 40.93% 41.82% 41.34% 33.78% 51.07% 105.01% 17.81% FY 06 65.86% 22.39% 42.12% 51.59% 31.54% 41.81% 22.53%
Income Tax Tax Rate Profit After Tax
-3.36% -17.97% 22.45%
6.62% -12.99% 26.67%
Operating Ratios (%): Particulars (Y.E. Mar 31) Yield on Advances Yield on Investments Net Interest Margins Cost of Funds Cost of Deposits Cost of Borrowings Spread Cost-income Tax Rate FY 07 9.4 7.4 2.7 6.6 5.9 7.8 2.3 53.2 14.74% FY 06 8.6 6.0 2.6 5.8 4.4 8.3 2.5 58.7 17.97%
Balance Sheet Ratios: Particulars (Y.E. Mar 31) Credit Growth Deposit Growth Gross NPA Ratio (%) Net NPA Ratio (%) Capital Adequacy Ratio - Tier I (%) FY 07 34.0 39.6 2.03 0.98 11.7 7.4 FY 06 59.9 65.4 1.50 0.71 13.4 9.2
Ratios (ROA Decomposition) (%): Particulars (Y.E. Mar 31) NII/Assets Net Revenues/Assets Operating Expn/Assets Provisions/Assets Taxes/Assets FY 07 2.4 4.5 (2.4) (0.8) (0.2) FY 06 2.7 4.8 (2.8) (0.4) (0.3) FY 05 2.2 4.5 (2.6) 0.1 (0.4)
Total Costs/Assets RoA Equity/Assets RoE
(3.4) 1.1 8.3 13.4
(3.5) 1.3 8.9 16.8
(2.9) 1.6 8.0 19.5
Incremental ROE on unsecured loans The ROE on unsecured credit portfolio is about 25%, even after factoring in the higher loss rates.
Particulars ( % ) Yield Cost of funds NIM Fees Total operating revenue Operating cost Operating profit NPA provision PBT Tax PAT Equity/assets ROE
Personal Loans Credit Cards Micro Banking 20.0 27.0 38.0 9.5 9.5 9.5 10.5 17.5 28.5 3.0 10.0 4.0 13.5 27.5 32.5 6.1 14.6 11.4 7.4 12.9 21.1 4.5 9.5 17 2.9 3.4 4.1 1.0 1.2 1.5 1.9 2.2 2.7 8.0 8.0 8.0 23.0 28.0 33.0
Mortgage 12.0 9.5 2.5 1.0 3.5 1.6 1.9 0.3 1.7 0.6 1.1 7.0 15.0
DU-PONT Analysis: % of Average Asset Interest Income Interest Expenses Net Interest Income Non interest income Total Income Operating Expenses Pre-provision Profit FY 07 7.7 5.5 2.2 2.3 4.6 2.2 2.3 FY 06 6.6 4.3 2.2 2.4 4.6 2.4 2.2
Provision Pre tax ROA Tax ROA Equity / Assets ROE
1.1 1.2 0.2 1.04 6.8 15.3
0.8 1.5 0.3 1.2 7.6 16
Valuations Metrics: Particulars (Y.E. Mar 31) EPS (Diluted) (Rs) EPS Growth (%) Book Value (Rs) P/E Ratio (x) (TTM) P/BV (x) (TTM) Dividend Yield (%) (TTM) FY 07 34.64 7.74% 270.34 37.00 3.22 1.05% FY 06 32.15 17.64% 249.55 21.54 2.36 0.90% FY 05 27.33 3.37% 170.34 15.12 2.31 0.90%
SEGMENTAL INFORMATION: ICICI Bank’s operations are classified into the following segments: 1. Consumer and Commercial Banking segment and 2. Investment Banking segment. The consumer and commercial banking segment provides medium-term and long-term project and infrastructure financing, securitisation, factoring, lease financing, working capital finance and foreign exchange services to clients. Further, it provides deposit and loan products to retail customers. The investment banking segment includes treasury operations. Consumer & Commercial Banking Segment Review: Profit before tax of the consumer and commercial banking segment was Rs. 23.38 billion in fiscal 2007 as compared to Rs. 26.55 billion in fiscal 2006 primarily due to an increase in provisions and contingencies and increase in non-interest expense, offset, in part by an increase in net interest income and non-interest income.
Provisions and contingencies were Rs. 21.97 billion in fiscal 2007 as compared to Rs. 7.32 billion in fiscal 2006 primarily due to higher provisions created on standard assets, in accordance with the revised guidelines issued by RBI, a higher level of specific provisioning on retail loans due to change in the portfolio mix towards noncollateralised loans and seasoning of the loan portfolio and lower level of write-backs on corporate portfolio. General provision on standard assets increased by 115.6% to Rs. 7.31 billion in fiscal 2007 from Rs. 3.39 billion in fiscal 2006. Net interest income, increased by 32.3% to Rs. 56.53 billion in fiscal 2007 from Rs. 42.73 billion in fiscal 2006, primarily due to an increase in the interest income on advances, offset, in part, by an increase in the interest expense on deposits. Non-interest income increased by 36.5% to Rs. 50.73 billion in fiscal 2007 from Rs. 37.17 billion in fiscal 2006, primarily due to growth in fee income from retail products and services, including fee arising from retail assets products and retail liability related income like account servicing charges and third party distribution fees. Fees from corporate banking and international business also witnessed a strong growth. Non-interest expenses increased by 34.5% to Rs. 61.92 billion in fiscal 2007 from Rs. 46.03 billion in fiscal 2006, primarily due to an increase in employee expenses and the growth in the retail franchise, including maintenance of ATMs, credit card expenses, call center expenses and technology expenses. Employee expenses increased primarily due to increase in the number of employees, annual increase in the salaries and higher cost due to monetisation of benefits on loan facilities available to employees at concessional rates of interests and other employee benefits. The increase in employees was commensurate with the growth in our retail businesses. Investment Banking Segment Review: Profit before tax of investment banking segment increased to Rs. 13.48 billion in fiscal 2007 from Rs. 4.80 billion in fiscal 2006 primarily due to increase in non-interest income and net interest income, offset in part, by an increase in the non-interest expenses. Net interest income was Rs. 9.83 billion in fiscal 2007 compared to Rs. 4.36 billion in fiscal 2006 primarily due to a 54.8% increase in interest income from Government securities, offset, in part, by an increase in interest on inter-bank borrowings.
Non-interest income increased by 84.5% to Rs. 8.56 billion in fiscal 2007 from Rs. 4.64 billion in fiscal 2006 primarily due to higher level of gains from equity divestments, offset in part by 24.5% increase in premium amortisation on Government securities to Rs. 9.99 billion in fiscal 2007 from Rs. 8.02 billion in fiscal 2006 and lower profits on proprietory trading as a result of the sharp fall in the equity markets in May 2006 and adverse conditions in debt markets. Non-interest expenses increased by 28.1% to Rs. 4.61 billion in fiscal 2007 from Rs. 3.60 billion in fiscal 2006 primarily due to increase in payments to and provisions for employees and other administrative expenses.
Particulars Revenue Growth Revenue contribution to Total Income Profit Before Tax Growth PBT contribution to Total PBT Segment Assets Utilisation Ratio
Consumer and Commercial Banking 31.03.07 31.03.06 52.38% 39.87% 76.87% -11.93% 64.10% 10.85% 78.70% 40.13% 85.74% 9.37%
Investment Total Banking 31.03.07 31.03.06 31.03.07 31.03.06 69.44% 60.79% 56.45% 46.32% 23.13% 180.86% 36.95% 5.70% 21.30% -28.46% 15.50% 4.97% 17.81% 8.98% 22.53% 7.88%
ICICI Bank’s Investments: (As on 31.03.2007) (Rs in ‘000s) I. Investments in India [net of provisions] i) Government securities ......................................................................... 673,681,742 ii) Other approved securities................................................................... 601
iii) Shares (includes equity and preference shares) ........................... 19,372,558 iv) Debentures and bonds ...................................................................... 24,628,194
v) Subsidiaries and/or joint ventures ................................................... vi) Others (commercial paper, mutual fund units, pass through
26,071,831
certificates, security receipts etc.) .................................................. 123,785,241 TOTAL INVESTMENTS IN INDIA ...................................................... 867,540,167 II. Investments outside India [net of provisions] i) Government securities ..................................................................... ii) Subsidiaries and/or joint ventures abroad (includes equity and preference shares) ........................................................................... 14,650,476 iii) Others ............................................................................................. 27,422,038 TOTAL INVESTMENTS OUTSIDE INDIA ........................................ 45,038,251 TOTAL INVESTMENTS ......................................................................... 912,578,418 III. Investments in India Gross value of investments................................................................. 873,108,274 Less: Aggregate of provision/depreciation...................................... 5,568,107 2,965,737
Net investments ................................................................................. 867,540,167
IV. Investments outside India Gross value of investments ................................................................ 45,052,750 Less: Aggregate of provision/depreciation .................................... 14,499
Net investments .................................................................................. 45,038,251 TOTAL INVESTMENTS ........................................................................ 912,578,418
Purchase of investments: During the year ended March 31, 2007, the Bank purchased certain investments from its subsidiaries and joint ventures amounting to Rs. 14,186.8 million (March 31, 2006: Rs. 15,255.5 million) and from its associates amounting to Rs. 944.7 million (March 31, 2006: Rs. Nil). During the year ended March 31, 2007, the Bank invested in the equity share capital of its subsidiaries amounting to Rs. 13,584.7 million (March 31, 2006: Rs. 8,217.3 million). Sale of investments: During the year ended March 31, 2007, the Bank sold certain investments to its subsidiaries and joint ventures amounting to Rs. 8,569.2 million (March 31, 2006: Rs. 6,757.7 million) and to its associates amounting to Rs. Nil (March 31, 2006: Rs. 1,545.0 million). On the sales made to subsidiaries and joint ventures, the Bank accounted for a gain of Rs. 186.4 million (March 31, 2006: Gain of Rs. 16.7 million) and on the sale made to associates, the Bank accounted for no gain (March 31, 2006: Gain of Rs. 10.1 million). Income on Investments: During the year ended March 31, 2007, the Bank earned Rs. 59,885,435,000 (March 31, 2006: Rs. 36,927,577,000) from income on investments. Yield Analysis: YoY change (bps) 169 42 89 124 (35) 115 137 (22) QoQ change (bps) 85 4 29 71 (42) 34 70 (36)
Particulars Yield on Advances* Yield on Investments* Yield on Assets* Costs of Funds* NIM* Yield on Assets – Reported Costs of Funds – Reported NIM - Reported
Q1 FY 08 11.06 7.63 9.15 7.08 2.07 10.10 7.80 2.30
Q1 FY 07 9.37 7.21 8.26 5.84 2.42 8.95 6.43 2.52
Q4 FY 07 10.21 7.58 8.86 6.37 2.49 9.76 7.10 2.66
NIM – Reported #
2.30
2.45
2.53
(15)
(23)
Source: Company, Emkay Research
* Calculated on basis of average quarterly balances # adjusted for interest on CRR balances Lower CASA mix – Repricing of term deposits hits hard: ICICI Bank has one of lowest Current Account and Saving Account (CASA) mix amongst the Indian bank, which has hurt severely during the quarter. The repricing of the term deposits has resulted in 210 bps yoy and 110 bps sequential rises in the deposit cost despite bank having kept the proportion of CASA deposits at the same level. CASA Mix: Particulars (Rs bn) Total Deposits Savings Account Current Account CASA as % of total Term Deposits Cost of Deposits (%)
Source: Company
Q1 FY 08 2,308 320 200 22.5 1,788 7.90
Q1 FY 07 1,830 240 160 21.9 1,430 5.80
Q4 FY 07 2,305 290 220 22.1 1,795 6.80
% YoY change 26.1 33.3 25.0 25.0 210 bps
% QoQ change 0.1 10.3 -9.1 -0.4 110 bps
International Business and Retail Portfolio see sharp growth: ICICI Bank’s strong advances book growth of 34.7% was led by almost 2.5x increase in the international loan portfolio and 31.2% growth in the retail loan portfolio. The international loan book is expected to continue to grow at 50%+ CAGR over FY07-10 and increase to 20% of the total portfolio over the same period. The rural lending will also be another key driver of the advances book and grow at 30%+ over the same period. International business offers a strong potential In just four years of international operations ICICI Bank has build the largest international banking presence among all Indian banks with a US$17bn asset book – about 19% of its consolidated banking assets.
The international loan book has reached a CAGR of about 153% over FY04-07, as Indian companies raised finance overseas for their investments in India and abroad - including financing of overseas acquisition by Indian companies - trade finance and personal finance services for non resident Indians. An appreciating rupee and rising interest rates in the domestic economy has also encouraged Indian corporate to raise debt internationally. Portfolio Mix: % of Q1 FY 08 1,274 325 141 1,983 Q1 FY 07 971 134 114 1,472 Q4 FY 07 1,280 244 202 1,959 total portfolio 64.3 16.4 7.1 -
Particulars (Rs tn) Retail International Rural Total Advances
% YoY change 31.2 142.7 24.3 34.7
% QoQ change -0.5 33.2 -29.9 1.2
Source: Company, Emkay Research
Retail Loan Mix: % YoY change 30.0 1.1 47.8 93.1 96.8 30.5 6.8 31.2 Change in bps YoY -2 -445 150 282 159 -27 -117 QoQ 4 41 -116 -71 29 101 11 -
Particulars 2 – wheelers Cars CV Personal Loans Credit Cards Mortgages Others Total
Rs bn 26,000 190,000 170,000 112,000 61,000 650,000 65,160 1,274,160
Proportion 2.0 14.9 13.3 8.8 4.8 51.0 5.1 100.0
Source: Company, Emkay Research
Robust other income and … The fee income continued its robust growth, up 35.4% yoy to Rs14.3bn. During the first quarter of FY 08, the treasury gains also grew 10-fold driven by equity gains, thereby driving the other income to Rs17.2bn, a growth of 70%.
Fee Income: % YoY change 35.4 983.3 59.8 -12.0 69.7 % QoQ change 0.1 -56.3 44.1 -11.7 -6.5
Particulars (Rs mn) Fee Income Treasury Lease/Dividend Amortisation Total
Q1 FY 08 14,280 1,950 3,270 -2,350 17,150
Q1 FY 07 10,550 180 2,046 -2,670 10,106
Q4 FY 07 14,270 4,460 2,270 -2,660 18,340
Source: Company, Emkay Research
… Stable operating expenses help Aided by much slower growth in the direct marketing agency (DMA) expenses, the operating expenses grew by much slower 28.5% yoy. In Q1FY07, The lower DMA expenses are result of slower growth auto loans coupled with renegotiated DMA charges.
Particulars (Rs mn) Staff Expenses DMA Expenses Other Operating Expenses Total Expenses
Q1 FY 08 5,218 3,827 10,008 19,053
Q1 FY 07 3,568 3,908 7,739 15,215
Q4 FY 07 4,408 4,229 10,569 19,206
% YoY change 46.3 -2.1 29.3 25.2
% QoQ change 18.4 -9.5 -5.3 -0.8
Source: Company, Emkay Research
Asset Quality: Asset quality remains a concern for ICICI Bank due to its aggressive lending to non collateralised borrowers. Gross NPAs have risen to INR 60.4 bn during the quarter, primarily due to rise in retail NPA. Net retail NPAs currently are at INR 19.4 bn, 46% of which comprises non-collateralised loans. These slippages can be attributed to rates hardening and to the fact that personal lending is largely an unseasoned book. We retain our cautious view on asset quality due to slowdown in retail business.
Gross NPA increase is driven by changing loan mix An increasing proportion of unsecured loans reflect the changing risk profile of ICICI Bank’s loan book. Concerns about the bank’s rising gross NPAs are overstated. About 50% of the increase can be attributed to the rising proportion of unsecured loans, which are priced for higher defaults. ICICI Bank’s unsecured loan portfolio grew 100% YoY in 1QFY08 to Rs210bn and now accounts for 16% of the bank’s retail loan book and about 11% of the total loan book. Unsecured loans being high yielding yet high risk are priced for higher loss rates. Unsecured loans include personal loans, outstanding credit-card payments and microbanking personal loans. Micro-banking loans are personal loans given to the lower middle class strata of the society, without any collaterals and at yields of >36%. With unsecured loans being of a shorter tenure versus other retail loans such as mortgages and auto loans, the reported gross NPA ratio rises significantly if the bank doesn’t technically ‚write off? the gross NPAs.
Comparing the Asset Quality: Particulars ( FY 07 ) (Rs mn) Gross loans Write offs Adjusted gross loans Reported gross NPAs NPAs including write offs Loan loss reserves (LLR) LLR including write offs Reported Gross NPAs/loans (%) Underlying NPAs/loans (%) LLR to loans – Actual (%) LLR to loans (incl write offs) (%) NPA coverage – stated (%) Adjusted NPA coverage (%)
Source: CLSA Asia-Pacific Region
ICICI Bank 1,980,154 6,800 1,986,954 41,680 48,480 (34,448) (41,248) 2.1 2.44 1.74 2.08 82.6 85.1
HDFC Bank 469,448 13,938 483,386 6,578 20,516 (7,988) (21,926) 1.4 4.24 1.7 4.54 121.4 106.9
Axis Bank 370,289 1,200 371,489 4,187 5,387 (3,344) (4,544) 1.13 1.45 0.9 1.22 79.9 84.4
Sangli Bank acquisition blends with bank’s rural acquisition strategy: In Dec-06, ICICI Bank acquired Sangli Bank, a Maharashtra-based old private sector bank, with an asset base of Rs21bn. Sangli bank had about 190 branches of which 80% were in the state of Maharashtra and had a strong presence in rural credit. Apart from helping ICICI Bank ramp up its liability base, we believe the network could also aid it in its rural initiative by: ? Providing it with the skill set (in form of former Sangli Bank’s employees) to tap into some of the rural markets and ? Providing a strong presence in the rural and semi urban areas allowing it to tap into that market more effectively. Impact of hike in Cash Reserve Ratio on home loan sector: Rising interest rates and high property prices have led to a slowdown in property sales. The 200bps hike in Cash Reserve Ratio done by RBI in past six months has forced banks to raise lending rates for mortgage loans. However housing finance companies are not impacted by hike in CRR requirements and have not raised rates as much as banks. As a
result, ICICI bank has, in the past two quarters, lost market share to its main competitor HDFC.
Unsecured loans are driving retail growth: Unsecured loans have been the fastest-growing retail segment for ICICI Bank; its share of unsecured loans in total retail loans has steadily increased from 6% in FY06 to 11% in 1QFY08.
Restriction on ECB borrowing to increase demand for domestic credit: RBI recently issued restrictions on raising of new External Commercial Borrowings (ECBs) with ECB of >US$20m allowed only if the expenditure is in foreign currency. In last one year, Indian companies have raised >US$20bn through ECBs. Given the recent restriction on raising ECB, many large corporate are likely to fund their incremental credit demand by borrowing from Indian banking system, especially in the absence of a developed bond market.
ICICI is well capitalised / positioned to leverage the opportunity With its recent fundraising, ICICI Bank now has the highest net-worth among all Indian banks and has thus augmented its ability to take on big-ticket exposure required for large projects (banks are not allowed to lend > 15% of their net-worth to a single project). Banks can take exposure up to 15% of net worth Name of Bank (Rs bn) ICICI Bank SBI HDFC Bank PNB Axis Bank Net worth 472 355 130 121 82 Max exposure 70.80 53.25 19.50 18.15 12.30
ICICI Bank’s P/E ratio and Price/Book Value performance:
Source: CLSA Asia-Pacific Markets
KEY DOMESTIC SUBSIDIARIES: ICICI Prudential Life Insurance Company ICICI Prudential Life Insurance Company (ICICI Life) continued to maintain its market leadership among private sector life insurance companies with a retail market share of about 28% in the private sector in fiscal 2007 (on weighted received premium basis).
While the growing operations of ICICI Life had a negative impact of Rs. 4.80 billion on the Bank’s consolidated profit after tax in fiscal 2007 on account of the above reasons, the company’s unaudited New Business Achieved Profit (NBAP) for fiscal 2007 was Rs. 8.81 billion as compared to Rs. 5.28 billion in fiscal 2006. Largest private sector insurance player ICICI Prudential Life insurance (IPLI) (74% stake held by ICICI Bank), is largest private sector insurance player in India with a market share of 30%. In seven years of operation, IPLI has built the largest distribution network (among private players) of about 680 branches and an agency force of more than 235,000. IPLI’s new business premium (APE) has grown at 90% CAGR over the past three years to Rs44bn in FY07, total customer base has expanded to more than four million and total AUM have increased to about Rs160bn.
Source: CLSA Asia-Pacific Markets
ICICI Lombard General Insurance Company ICICI Lombard General Insurance Company (ICICI General) enhanced its leadership position with a market share of 34% among private sector general insurance companies and an overall market share of about 12.4% during fiscal 2007. ICICI General’s gross written premium grew by 89% from Rs. 15.92 billion in fiscal 2006 to Rs. 30.04 billion in
fiscal 2007. ICICI General is required to expense upfront, on origination of a policy, all sourcing expenses related to the policy. While ICICI General’s profit after tax for FY 2007 was Rs. 680 million, its combined ratio was 97%. The combined ratio is the sum of net claims and expenses as a percentage of premiums and indicates the surplus generated on an annualised basis from the business written during a period (excluding investment income). The surplus based on the combined ratio and investment income aggregated Rs. 1.80 billion on a pre tax basis. 34% market share in the general insurance industry ICICI Lombard General insurance (ILGI) is a joint venture (74:26) between ICICI Bank and Fairfax Holdings of Canada. It is the largest private sector general insurance company with a market share of about 34% among private players. ILGI’s gross written premium has grown at a CAGR of 57% over last two years with >50% business being from retail segment. Despite the strong growth in general insurance industry for past few years, the market continues to be under penetrated with a total premium to GDP less than 0.7% versus regional benchmarks of 2-3%.
Source: CLSA Asia-Pacific Markets
ICICI Prudential Asset Management Company ICICI Prudential Asset Management Company (ICICI AMC) was the second largest mutual fund in India at April 30, 2007 with assets under management of over Rs. 420.00
billion. Prudential ICICI AMC achieved a profit after tax of Rs. 0.48 billion in fiscal 2007 compared to Rs. 0.31 billion in fiscal 2006. ICICI Venture Funds Management Company Limited ICICI Venture Funds Management Company Limited (ICICI Venture) strengthened its leadership position in private equity in India, with funds under management of about Rs. 98.00 billion at year-end fiscal 2007. ICICI Venture achieved a profit after tax of Rs. 0.70 billion in fiscal 2007 compared to Rs. 0.50 billion in fiscal 2006. ICICI Securities Limited and ICICI Securities Primary Dealership Limited The securities and primary dealership business of the ICICI group have been reorganised. ICICI Securities Limited has been renamed as ICICI Primary Dealership Limited. ICICI Brokerage Services Limited has been renamed as ICICI Securities Limited and has become a direct subsidiary of ICICI Bank. Erstwhile ICICI Webtrade Limited was amalgamated with ICICI Securities Limited during fiscal 2007. ICICI Securities achieved a profit after tax of Rs. 0.63 billion and ICICI Securities Primary Dealership achieved a profit after tax of Rs. 1.33 billion, in fiscal 2007. CONCERNS / RISKS FOR ICICI BANK: ? Diseconomies of scale: While ICICI Bank’s branch and employee efficiency compares favourably against its peers in the private and public sector banking space, the rapid expansion in franchise and employee base has led to the bank compromising in terms of efficiency. Going forward, as the bank’s growth rate gets moderated, efficiency ratios might improve. The heavy employee intake in the last four fiscals (average 30% growth per year) has escalated the cost to income ratio to 53% in FY07. However, excluding the DMA (direct marketing agents) and lease depreciation costs, the bank has reported a cost to income ratio of 40% in this fiscal. ? Slippages likely: The aggressive growth in retail assets seems to have shown a red signal to the bank in FY07, as there has been a visible growth in incremental delinquencies in absolute terms. The accretion of Sangli Bank’s NPAs (which ICICI Bank acquired in FY07) has also added to the bank’s gross NPA levels (2.5% in FY07 from 1.6% in FY06). The same has, however, got partially
camouflaged in percentage terms due to the higher growth in advances. The bank’s net NPAs (as percentage of total advances) increased to 1% in FY07, from 0.7% in FY06. This was seemingly a result of incremental delinquencies (slippages in asset quality) in the retail portfolio. The gross and net NPAs in retail portfolio were 2.4% and 1.2% respectively in FY07. The net NPAs in the home loan portfolio stood at 0.7%. Also, the bank clarified that 54% of the NPAs were from non-collateralised assets such as personal loans and credit cards. Importantly, despite the consistent rise in net NPAs over the past fiscal, the provisioning cover has continued to decline, which calls for additional risk mitigation. SHARE PRICE PERFORMANCE OF ICICI BANK:
The above chart shows the relative performance of ICICI Bank’s share price and the movement in BSE SENSEX index over a period of last three years. It is evident that the Bank’s share price has consistently outperformed the market index. Currently, the share is trading at its life-time high.
doc_638594973.docx