A PROJECT REPORT ON MERGERS OF ICICI BANK
SUBMITTED TO
ALL INDIA MANAGEMENT ASSOCIATION
CENTRE FOR MANAGEMENT EDUCATION
MANAGEMENT HOUSE, 14 INSTITUTIONAL AREA,
LODHI ROAD, NEW DELHI-110003.
AUGUST 2008
By
SUSMITA GHOSH
REGISTRATION NO.750610210
Guided By
SRI. JAHAR BHOWMIK
FACULTY OF INSTITUTE OF BUSINESS MANAGEMENT
For the partial fulfilment of
Post Graduate Diploma in Management Acknowledgement
I take great pleasure to express my gratitude to my guide, Sri. Jahar Bhowmik, Faculty Member, Institute of Business Management, for his valuable guidance, constant encouragement and critical approaches which led to the completion of this endeavour.
I also express my sincere thanks to concerned authorities at Institute of Business Management for giving me this opportunity to undertake this project at their esteemed organization.
I remain indebted to all who have poured in constant suggestions and advices and have supported me throughout the period of my project work.
(Susmita Ghosh)
i List of Figures, Tables and Graphs
A. List of Figures
2.1 Submission of Narasimham Committee Report.
5.2 ICICI Bank, Mumbai.
6.3 Mr H.N. Sinor, and Dr K.M. Thiagarajan, at conference in Chennai.
6.5 ICICI Bank Shareholdings.
6.7 Sangli Bank, Mumbai
B. List of Tables
6.1 Comparison of financials of ICICI Bank and Bank of Madurai.
6.2 Profile of ICICI Bank and ICICI Ltd at the time of merger.
6.3 Profile of ICICI Bank and Sangli Bank at the time of merger.
7.4 Retail and Financial Services of the Group.
7.5 Individual Strengths of ICICI Ltd and ICICI Bank.
7.6 Revenue Segments.
ii C. List of Graphs
8.1 Return on Assets.
8.2 Return on Capital Employed.
8.3 Return on Shareholder’s Equity.
8.4 Earnings per Share.
8.5 Market Price per Share.
8.6 Price to Earnings Ratio.
8.7 Price to Book Value Ratio.
8.8 Capital Adequacy Ratio
8.9 Comparison with other well known banks for the year 2000
8.10 Comparison with other well known banks for the year 2001
8.11 Comparison with other well known banks for the year 2002
8.12 Comparison with other well known banks for the year 2003
8.13 Comparison with other well known banks for the year 2004
8.14 Comparison with Groups’ and All Banks’ Average
iii Contents
Acknowledgement i
List of Figures, Tables and Graphs ii
Contents iv
1. Preface 1
2. Introduction 2
2.1 Financial Management
2.2 Mergers and Acquisitions
2.2.1 Types of Merger
2.2.2 Steps in Merger
2.2.3 Reasons for Merger
2.2.4 Mergers in India
2.3 Narasimham Committee Report
2.3.1 Financial System
2.3.2 Banking Sector
3. Research Goals 13
3.1 Key Question
3.2 Objective
4. Research Methodology 14
5. About ICICI Bank 15
6. The Mergers 18
6.1 Merger with Bank of Madurai 6.1.1 Synergies
6.2 Merger with ICICI Ltd
6.2.1 Synergies
6.3 Merger with Sangli Bank
6.3.1 Synergies
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7. Analysts’ Opinion 29
7.1 Analysts’ meet held on April 26, 2001
7.2Analysts’ meet held on October 25, 2001
7.3 Analysts’ meet held on May 03, 2002
8. Results and Discussion 39
8.1 Ratio Analysis
8.1.1 Return on Assets
8.1.2 Return on Capital Employed
8.1.3 Return on Shareholders’ Equity
8.1.4 Earnings per Share
8.1.5 Market price per Share
8.1.6 Price – Earnings Ratio
8.1.7 Price – Book Value Ratio
8.1.8 Capital Adequacy Ratio 8.2 Comparison with Other Scheduled Banks
9. Conclusion 58
10.Appendices 60
11.References 75
11.1 References from books
11.2 References from Articles
11.3 References from non-print media
v 1. Preface
A number of reforms have taken place since the recommendations of the Narasimham Committee were tabled. Among them, mergers hold relative significance as they have tremendously impacted the finance sector of the country. Mergers have taken place in the Indian Banking Sectors based on synergies and business specific complementarities. Some of these mergers are Merger of ICICI BANK with Bank of Madura; Merger of HDFC Bank with Times Bank, Merger of ANZ Grindlays with Standard Chartered; United Western Bank (UWB) with Industrial Development Bank of India. More mergers are in the process of consideration, namely Merger of State Bank of India with its associates and Merger of HDFC Bank with Central Bank of Punjab. IFCI Ltd is also in the process of merging with PNB.
This project seeks to discuss one such merger which has been the limelight since the inception of the idea – the merger of ICICI Bank with Bank of Madura, ICICI Ltd and Sangli Bank. It looks into the synergies of the merger, gains from consolidation that has benefitted the growth of the company and its shareholders.
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2. Introduction 2.1 Financial Management
Financial management is an integral part of the overall management. It refers to its relationship with closely related fields of economics and accounting. In the words of J.C. Van Horne, “Financial management is concerned with the acquisition, financing, and management of assets with some overall goals in mind.” The functions of financial management go beyond the accounts of figures and aptly fit the words of Archer and Ambrosio, “Financial management is the application of planning and control functions of the finance functions.”1Corporate restructuring falls under the purview of Financial Management. A firm may decide to restructure when it finds that its present structure is not maximising the wealth of its shareholders. The restructuring may take place through expansion, contraction and change in ownership and control.
Firms can grow both internally and externally. In internal growth, the firm expands its existing activities by upgrading capacities or by bringing in new resources. However, internal growth can sometimes lead to different problems and companies resort to growth through external arrangements like mergers.
2.2 Mergers and Acquisitions
Mergers and Acquisitions refer to the outright purchase of a company already in operation by another company, where there is only one company existing after the transaction. Acquisitions are the quickest way to diversify in to a new business, as managers get to buy established brands, production facilities, trained and experienced employees, and distribution channels in one deal.
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2.2.1 Types of mergers
Mergers can be of different types. Milford B. Green has put them into four categories. They are:
1. Horizontal Merger – It is the combination of two competing firms belongs to the same industry and is at the same stage of business cycle. These mergers are aimed at achieving Economies of Scale in production eliminating duplication of facilities and operations and broadening the product line, reducing investment in working capital, eliminating competition through product concentration, reducing advertising costs, increasing market segments and exercising better control over the markets. The merger of Tata Industrial Finance Ltd with Tata Finance Ltd is an example.
2. Vertical Merger - It involves merger between firms that are in different stages of production or value chain. They are combinations of companies that usually have buyer – seller relationship. It can be Backward Integration where it merges with its suppliers or Forward Integration when it merges with its customers. Merger of Reliance Petrochemicals Ltd, with Reliance Industries Ltd. is one such example.
3. Concentric Merger – It is the merger between two firms belonging to different but related industries. The merger of ICICI Ltd with ICICI Bank can be cited as an example which has helped in cross selling of products.
4. Conglomerate Merger – It is one where companies belong to different or unrelated lines of business. The motive is to reduce risk through diversification and utilization of financial resources. The acquisition of Ahmadabad Electric Company and Surat Electric Company by Torrent group in order to diversify the risk of its existing line of Pharmaceuticals business is an example.
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2.2.2 Steps in merger
As suggested by Donald Depamphilis, the process of mergers and acquisition consists of:
1) Developing a strategic plan for the business. 2) Developing an acquisition plan related to the strategic plan.
3) Looking for companies which can be acquired.
4) Screening and prioritizing the companies.
5) Initiating contact with the target companies.
6) Refine the valuations, structuring the deals, perform due diligence and develop financial plans.
7) Develop plan for integrating the acquired process.
8) Obtaining all necessary approvals, resolve post-closing issues and implement closing.
9) Implement post-closing integration. Conduct the post closing evaluation of the acquisition.
2.2.3 Reasons for merger
In consolidation, a new firm is created after the merger, and both acquiring firm and target firm stockholders receive stock in this firm. Hence, the synergy becomes one of the most important reasons for acquisitions. Synergy can be said to be the potential additional value arrived at from combining two firms. There are two types of synergies, operating and financial.
Operating synergies are those synergies that allow firms to increase their operating income or increase growth or both. It can be of four categories, namely, economies of scale, greater pricing power, combination of different functional strengths, and higher growth in existing markets. Operating synergies can affect margins and growth. Whereas in financial synergies, the payoff can take the form of either higher cash flows or a lower cost of capital or discounted rate. These may include a combination of firms with excess cash or cash slack, debt capacity and tax benefit.
4 Synergy is a stated motive in many mergers and acquisitions. Bhide (1993) who examined the motives behind 77 acquisitions in 1985 and 1986 reported that operating synergy was the primary motive in one-third of these takeovers. If synergy is perceived to exist in a takeover, the value of the combined firm should be greater than the sum of the values of the bidding and target firms, operating independently, i.e.
V (AB) > V (A) + V (B)
Where,
V (AB) = Value of a firm created by combining A and B (synergy).
V (A) = Value of firm A, operating independently.
V (B) = Value of firm B, operating independently.
Studies of stock return around merger announcements generally conclude that the value of the combines firm increases in most takeovers and that the increase is significant. Bradley, Desai, and Kim (1988) examined a sample of 236 inter-firm’s tender offers between 1963 and 1984 and reported that, on the average, the combined value of the target and the bidder firm increased 7.48 % on the announcement of merger. However, interpretation needs to be done cautiously. A stronger test of synergy is to evaluate whether merged firms improve their performance in terms of their profitability and growth and also in relevance to their competitors, after takeovers.
The importance of merger gets reflected in the speech of Shri.V.Leeladhar, Deputy Governor, Reserve Bank of India,” Consolidation of business entities, through mergers and acquisitions, is a world-wide phenomenon. The numerous mergers and acquisitions all over the world, including in India, in the real as well as in the financial services sector, appear to be driven by the objective of leveraging the synergies arising from the process of merger and acquisition.“
5 2.2.4 Mergers in India
1. General:
Mergers in India have led to a massive upsurge in the Indian Economy. According to Economic Times CMIE Survey on M&A in 2002, there were 121 open offers of an amount of Rs. 7696 crores. As per PTI reports year 2004 saw numerous mergers In recent past, , the several sectors of the economy have undergone numerous mergers and global alliances such as Global Trust Bank Ltd with the Oriental Bank of Commerce, Tyco Global Network with Videsh Sanchar Nigam, Singapore based NatSteel with Tata Steel Ltd, South Korea based Daewoo Commercial Vehicle with Tata Motors Ltd, Reliance Industries Ltd with Trevira Gmbh & Co, Tata Consultancy Services with Phoenix Global Solutions, to name a few. However, such structural changes, particularly in the financial system, potentially have public policy implications.
2. Financial Sector:
While considering the consolidation in the financial sector in India, it is important to bear in mind that the diversity of the governing statues applicable to different entities and the various provisions make it a challenging task to incorporate any mergers in its real essence. For example, the Banking Regulation Act, 1949 governs the private sector banks and the public sector banks are governed by their respective founding statues and by the provisions of the Banking Regulation Act which have been made specifically applicable to them.
In the context of consolidation in the Indian banking sector, it may be recalled that the Report of the Committee on Banking Sector Reforms (the Second Narasimham Committee - 1998) had suggested, mergers among strong banks, both in the public and private sectors and even with financial institutions and NBFCs. The Indian banking sector has encountered the phenomenon of mergers and acquisitions since a long span of time.
6 Since 1961 till date, under the provisions of the Banking Regulation Act, 1949, there have been as many as 77 bank amalgamations in the Indian banking system, of which 46 amalgamations took place before nationalisation of banks in 1969 while remaining 31 occurred in the post-nationalisation era.
Of the 31 mergers, in 25 cases, the private sector banks were merged with a public sector bank while in the remaining six cases both the banks were private sector banks. Since the onset of reforms in 1990, there have been 22 bank amalgamations; brief particulars of these are furnished in the Annex-1. It would be observed that prior to 1999, the amalgamations of banks were primarily triggered by the weak financials of the bank being merged, whereas in the post-1999 period, there have also been mergers between healthy banks driven by the business and commercial considerations.
7 2.3 Narasimham Committee Report
Figure 1: M. Narasimham, Chairman of the Committee on Banking Reforms, submitting the report to Finance Minister Yashwant Sinha. Looking on is Minister of State for Finance R.K. Kumar
The text of the summary of the Narasimham Committee’s Report was tabled in Parliament on 17 December, 1991. We put forth some of the relevant excerpts from the Report in the subsequent paragraphs:
2.3.1 Financial system
“The committee’s approach to the issue of financial sector reform is to ensure that the financial services industry operates on the basis of operational flexibility and functional autonomy with a view to enhancing efficiency, productivity and profitability. A vibrant and competitive financial system is also necessary to sustain the ongoing reform in t5he structural aspect of the real economy.
8 We believe that ensuring the integrity and autonomy of operations at banks and DFI’s is by far the more relevant issue at present than the question of their ownership.
In regard to the structure of the banking system, the committee is of the view that the system should evolve towards a broad pattern consisting of:
a) 3 or 4 large banks (including the State Bank Of India) which could become international in character: b) 8 to 10 national banks with a network of branches throughout the country engaged in ‘universal’ banking; c) Local banks whose operations would be generally confined to a specific region; d) Rural banks (including RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities. The committee is of the view that the move towards this revised system should be market driven and based on profitability considerations and brought about through a process of mergers and acquisitions.
2.3.2 Banking Sector
“A strong and efficient financial system, functionally diverse and geographically widespread, is critical to the attainment of our objectives of creating a market-driven productive and competitive economy and to support higher investment levels and accentuate growth. The creation of such a system has been the objective that has inspired the process of financial sector reforms since 1992 as part of the broader program of structural economic reform.
As part of this process, reform of the banking sector is now under way. The banking sector is, by far, the most dominant segment of the financial sector, accounting as it does for over 80% of the funds flowing through the financial sector and it is appropriate that reform in this sector has been receiving major emphasis.
9 The reform measures taken in this area have followed the recommendations of the Committee on the Financial System (CFS) which reported in November 1991.That Report had made a number of recommendations aimed at improving the productivity, efficiency and profitability of the banking system on the one hand and providing it greater operational flexibility and functional autonomy in decision making on the other.
It covered policy aspects, accounting practices, institutional and structural issues and matters relating to organizational development. The Report itself was conceived as holistic exercise and the recommendations were accordingly symbiotically related to each other.
The financial structure is thus evolving towards a continuum of institutions rather the discrete specialization and the facilities that are being provided are to be seen as aspects of a spectrum of financial services in keeping with relationship banking, Universal banking in fact provides for a cafeteria approach if one were to vary the metaphor, it would take on the role of a one stop financial supermarket. These developments also have implications for the framework and content of regulation.
With regard to the structural framework of the banking system, there is a need to help move towards a structure, as the CFS suggested, with a few large national banks with an international character, some large national banks and the rest consisting basically or regional/local banks. There is also a need to import greater competition as between public sector banks and private sector banks.
In recent years, there have been a large number of mergers in international banking and in the process large institutions have become even larger as a response to the challenges of competition and as an aspect of synergizing operations and achieving scale economies. Mergers should be in the normal course be driven by business needs and should lead to the growth of larger banks both in public and private sector. There is general recognition now that size is an important determinant of banking strength. Mergers among strong units can be both a means of strengthening them as also providing them greater opportunities for competition.
10 A merger of strong units would indeed have, to borrow a phrase from another discipline a force multiplier effect, it is sometimes argued that mergers could providing for a strong bank taking over a weak one.
On the other hand, such mergers could well result in an adverse impact on the asset quality of the stronger unit as a result of acquiring the contaminated portfolio of the weaker unit in the absence of any system of writing off the NPAs of the latter before the merger.
It needs, however, to be recognized that mergers to be meaningful and useful should not be a mere arithmetical merger of balance sheets and staff of the banks but should yield benefit in terms of staff and branch network nationalization. Unless these benefits can become available, mergers of public sector banks would be down managements with operational issues and merely distract attention from the real issues without giving any commensurate benefits.
Mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and location and business specific complementarities of the concerned institutions and must obviously make sound commercial sense. Mergers of public sector banks should emanate from management of banks with Govt. as the common shareholder playing a supportive role. Such mergers, however, can be worthwhile if they lead to rationalization of workforce and branch network; otherwise the mergers of public sector banks would tie down the managements with operational issues and distract attention from the real issue.
11 It would be necessary to evolve policies aimed at "rightsizing" and redeployment of the surplus staff either by way of retraining them and giving them appropriate alternate employment or by introducing a VRS with appropriate incentives. This would necessitate the co-operation and understanding of the employees and towards this direction, managements should initiate discussions with the representatives of staff and would need to convince their employees about the intrinsic soundness of the idea, the competitive benefits that would accrue and the scope and potential for employees' own professional advancement in a larger institution. Mergers should not be seen as a means of bailing out weak banks. Mergers between strong banks/FIs would make for greater economic and commercial sense and would be a case where the whole is greater than the sum of its parts and have a ‘force multiplier effect’.”
12 3. Research Goals
3.1 Key Question:
In this project we make an attempt to discuss the impact of mergers of ICICI Bank with Bank of Madurai, ICICI Ltd, and Sangli Bank. It further seeks to show the benefits that the company has reaped after the mergers and its effect on the wealth of the shareholders and on the growth of the company.
3.2 Objective:
The aim of the project is:
1. To analyze the company ‘ICICI Bank’ before and after its mergers.
2. To understand the rationale behind the mergers.
3. To find out the benefits that the company and shareholders have reaped after its merger.
4. To assess the effect on the earnings of the company.
5. To summarize the growth of the company.
13 4. Research Methodology
Methodology is logic of scientific investigation. It means description, explanation, and justification of methods. Hence, research methodology is a way to systematically solve the research problem. It involves steps adopted by the researcher in studying the research problem along with the logic behind them. It considers the logic behind the methods used in the context of research study. There are different types of researches conducted by the researchers such as explanatory research, pure research, applied research, quantitative research, qualitative research, comparative research, longitudinal research.
Among these, quantitative research employs quantitative measurements and use of statistical analysis. This type of research is based on methodological principles of positivism and adheres to the standards of strict sampling and research design. In this project secondary data will be used. The widely used tool like the Ratio Analysis will be used to understand the impact of merger and the follow the progress of the company. 14 5. About ICICI Bank
Figure 2: ICICI Bank, Mumbai
ICICI Bank is India's second-largest bank with total assets of Rs. 3,997.95 billion (US$ 100 billion) as on March 31, 2008 with profit after tax amounting to Rs. 41.58 billion for the year ended March 31, 2008. It also ranks second, in terms of free float market capitalization, amongst all the companies listed on the Indian stock exchanges. Its 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). It has a network of about 1,308 branches and presence in 18 countries offering wide range of banking products and financial services to corporate as well as retail customers through a variety of delivery channels and specialized subsidiaries and affiliates. It has specialized in the areas of investment banking, life and non-life insurance, venture capital and asset management.
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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.
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.
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. After considering various corporate structuring alternatives in the context of the emerging competitive scenario in the Indian banking industry, the managements of ICICI and ICICI Bank formed considered the merger of ICICI with ICICI Bank as the optimal strategic alternative for both entities.
In February 2000, ICICI Bank was one of the first few Indian banks to raise its capital through American Depository Shares in the international market, and received an overwhelming response for its issue of $ 175 million, with a total order of USD 2.2 billion. The capital adequacy ratio of the bank was at 19.64% of risk-weighted assets, a significant excess of 9 % over RBI Benchmark.
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Thereafter, ICICI Bank was searching for private banks to merge with for the expansion both in terms of its assets, client base and geographical coverage. Though it had 21% of stake in Federal bank, it was not lucrative due to employee size (6600) and per employee business was as low as Rs. 161 lakh and with a slow technical up-gradation. On the other hand, the option of merging with Bank of Madura (BOM) was attractive.
BOM had an impressive figure of Rs. 202 lakh business per employee, a better technological edge and a vast base in southern India as compared to Federal Bank. The only concern was the cultural integration which would be a tough task ahead for ICICI Bank.
ICICI Bank then announced a merger with the 57 year old BOM, with 263 branches, out of which 82 of them were in rural areas, with most of them in southern India. As on the day of announcement of merger (09-12-2000), Kotak Mahindra group was holding about 12% stake in BOM, the Chairman BOM, Mr. K.M. Thiagarajan, along with his associates was holding about 26% stake, Spic group had about 4.7%, while LIC and UTI were having marginal holding. The merger was supposed to enhance ICICI Bank’s hold on the south Indian market and was expected to bring a gain of 20% in EPS of ICICI Bank and a decline in the bank’s comfortable Capital Adequacy Ratio from 19.64% to 17.6%. Consequent to the merger, ICICI group’s financing and banking operations, both wholesale and retail, have been integrated in a single entity. 17 6. The Mergers
6.1 The Merger with Bank of Madurai:
Figure 3: Mr H.N. Sinor, Managing Director and CEO, ICICI Bank (left) and Dr K.M. Thiagarajan, Chairman, Bank of Madura, at a news conference in Chennai.
The merger between ICICI Bank and Bank of Madura (BoM) has been a remarkable proposal from the beginning though there were different opinions. While to some this merger was a daunting problem for ICICI Bank, to others it was one of the better options in the banking sector at that moment. However, the speeches of the senior management on the event of the approval of the merger showed a great possibility as put forward in the following lines:
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"This merger is full of possibilities. The large customer base, geographical reach and infrastructure managed by trained personnel would help us accelerate our growth plans," said Mr. H. N. Sinor, Managing Director and CEO, ICICI Bank.
According to Dr K. M. Thiagarajan, Chairman of Bank of Madura, "merger with a new private sector bank, particularly a financially and technologically strong bank like the ICICI Bank should add to shareholder value and enhance the career opportunities for our employees besides providing first rate, technology-based, modern banking services to customers."
The Appointed Date of merger was proposed to be February 1; 2001.The Boards of ICICI Bank Limited and Bank of Madura Limited met at Mumbai and Chennai respectively and separately and approved the merger of Bank of Madura Limited with ICICI Bank Limited. The Scheme of Amalgamation envisaged a share exchange ratio of two shares of ICICI Bank for one share of Bank of Madura. The share exchange ratio approved by the respective Boards was based on recommendations made by M/s. Deloitte, Haskins & Sells, which acted as independent valuers to the transaction. DSP Merrill Lynch Limited acted as advisor to Bank of Madura for the transaction. Kotak Mahindra Capital Company advised ICICI Bank on the merger process.
6.1.1 Synergies
In general, combined business strength, enhanced product portfolio, improved distribution network and brand image were considered to be the synergies in this merger. The merged entity was accounted to have around 2.6 million customer accounts and an extensive network of about 350 branches spread across India, giving it the critical mass in an intensely competitive banking arena. The expanded customer base and distribution network of the merged entity was considered to provide cross-selling opportunities which would the universal banking strategy of ICICI Bank. This enlarged distribution network would also offer scope to enhance fee income particularly in core areas like cash management services, a traditional strongpoint of both banks and payment and collection services.
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The focus of both banks on developing a knowledge-oriented employee base with a strong focus on technology would facilitate the process of post merger integration. Bank of Madura had a number of branches in upcoming semi-urban and rural areas and had developed robust micro-credit systems which combined with the strong brand image of ICICI Bank would successfully leveraged to tap rural markets. The merger also offered larger amount of low cost deposits and possibility of reorienting assets profile to enable better spreads for the merged entity.
At the time Merger, Bank of Madura (BOM) was a profitable, well-capitalized, Indian private sector commercial bank operating for over 57 years. The bank had an extensive network of 263 branches, with a significant presence in the southern states of India. The bank had total assets of Rs. 39.88 billion and deposits of Rs.33.95 billion as on September 30, 2000. The bank had a capital adequacy ratio of 15.8% as on March 31, 2000.The Bank’s equity shares were listed on the Stock Exchanges at Mumbai and Chennai and National Stock Exchange of India before its merger. On the other hand, ICICI Bank was then one of the leading private sector banks in the country with a total assets of Rs. 120.63 billion and deposits of Rs. 97.28 billion as on September 30, 2000. The bank’s capital adequacy ratio stood at 17.59% as on September 30, 2000. ICICI Bank was also India’s largest ATM provider with 546 ATMs as on June 30, 2001. The equity shares of the bank were listed on the Stock Exchanges at Mumbai, Calcutta, Delhi, Chennai, Vadodara and National Stock Exchange of India. ICICI Bank’s American Depository Shares were listed on the New York Stock Exchange.
With this merger ICICI Bank Limited was to become one of the largest private sector banks in India with combined assets of Rs. 17,327 crores and total deposits of Rs. 13,460 crores as at December 31, 2000. The Board of Directors at ICICI Bank had contemplated the following synergies emerging from the merger: 1. Financial Capability: The merger will enable to have a stronger financial and operational structure, thus facilitating greater resource mobilization.
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2. Branch Network: The branch network of ICICI Bank will increase both in numbers by 263 and also its geographic coverage as well as convenience to its customers. The merged entity will have 360 branches across the country and 450 ATMs centres spread across about 100 cities in India.
3. Customer Base: The emerged largest customer base will enable the ICICI Bank to offer other banking and financial services and products to the customers of BOM and also facilitate cross selling of products and services of the ICICI group to their customers.
4. Tech Edge: The merger will enable ICICI Bank to provide ATM, phone and the Internet banking and such other technology based financial services and products to a large customer base, with expected savings in costs and operating expenses.
5. Focus on Priority Sector: The enhanced branch network will enable the bank to focus on micro finance activities through self-help groups, in its priority sector initiatives through its acquired 87 rural and 88 semi-urban branches. 6. Managing Rural Branches: Most of the branches of ICICI were in metros and major cities, whereas BOM has its branches mostly in semi urban and city segments of south India. The task ahead lying for the merged entity was to increase dramatically the business mix of rural branches of BOM. On the other hand, due to geographic location of its branches and level of competition, ICICI Bank will have a tough time to cope with.
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7. Managing Software: Another task, which stands on the way, is technology. While ICICI Bank, a fully automated entity, was using the package ’banks 2000’, BOM has computerized 90% of its businesses and was conversant with ISBS software. The BOM branches were supposed to switch over to banks 2000. Thought it is not a difficult task, 80% computer literate staff would need effective retraining which involves a cost. The ICICI Bank needs to invest Rs.50 crores, for upgrading BOM’s 263 branches.
8. Managing Human Resources: One of the greatest challenges before ICICI Bank is managing the human resources. When the head count of ICICI Bank is taken it was less than 1500 employees; on the other hand, BOM had over 2,500. The merged entity will have approximately 4000 employees which will make it one of the largest banks among the new generation private sector banks.
9. Managing Client Base: The client base of ICICI Bank, after merger, will be about 2.7 million (existing 0.5 million and 2.2 million from BOM). The nature and quality of clients is not uniform. The BOM has built up its client base over a long time, in a hard way, on the basis of personalized services. In order to deal with the BOM’s clientele, the ICICI Bank needs to redefine its strategies to suit to the new clientele. If the sentiments or a relationship of small and medium borrowers is hurt; it may be difficult for them to re- establish the relationship, which could also hamper the image of the bank.
Apart from the general and operating synergies contemplated in the merger, the financial synergy played an important role. The figures in the table below indicates that the expectant merger to be worth of approximately 1377.73 crores with a deposit base of about 13500 crores. The merger was expected to increase the equity base of ICICI Bank to Rs. 220.36 crores. ICICI Bank was to issue 235.4 lakh shares of Rs. 10 each to the shareholders of BOM. The merged entity will have an increase of asset base over Rs. 170 billion.
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(Rs. In Crores)
Parameters ICICI Bank of ICICI Bank of Bank Madura Bank Madura
Year 1999-2000 1999-2000 1998-1999 1998-1999
Net worth 1129.90 247.83 308.33 211.32
Total deposits 9866.02 3631.00 6072.94 3013.00
Advances 5030.96 1665.42 3377.60 1393.92
Net Profit 105.43 45.58 63.75 30.13 Share capital 196.81 11.08 165.07 11.08
Capital adequacy 19.64% 14.25% 11.06% 15.83% ratio
Gross less 2.54% 11.09% 4.72% 8.13% NPAs/gross
Net NPAs/net 1.53% 6.23% 2.88% 4.66% advances
Table 1 : Comparison of the Financials of ICICI Bank with Bank of Madurai
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6.2 The Merger with ICICI Ltd Figure 4: ICICI Bank Shareholdings
The merger between ICICI Bank and ICICI Ltd. in 2001 pioneered the concept of Universal Banking in India. Taking the reverse merger route ICICI Ltd. merged with its subsidiary, ICICI Bank. It was also supposed to include merger of the two ICICI subsidiaries, namely, ICICI Personal Finance Services Limited and ICICI Capital Services Limited with ICICI Bank.
In this merger, the company has decided to transfer the stake to a Special Purpose Vehicle (SPV) to be created in the form of a trust rather than extinguishing the shares which was to form about 16 per cent of the total capital of the merged entity. Analysts say ICICI wanted to merge with its banking subsidiary to obtain cheaper funds for lending, and to increase its appeal to investors so that it can raise capital needed to write off bad loans. This merger was basically a survival; more for ICICI, as its core business didn’t look too good and they needed some kind of a bank because only a bank has access to low-cost funds. Cheap Cash was another reason for merger.
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6.2.1 Synergies
The merger will help the group to ease out of the following circumstances, namely, it did not have to extinguish the capital when the cost of raising the capital was itself very high and will also help it to protect its capital adequacy ratio. Therefore the shares were decided to be transferred to the SPV at the price at which ICICI bought the shares i.e. Rs 12 per share. The swap ratio was decided at 2:1 that is 1 share of ICICI Bank for every 2 shares held in ICICI Ltd. At the time of merger, ICICI Ltd was holding (held) 46 per cent stake in ICICI Bank.
The major concerns were the Cash Reserve Ratio (CRR) at 5.5 per cent with RBI, Statutory Liquidity Ratio (SLR) of 25 per cent and the lending requirement to be maintained and fulfil which was at 40 per cent at the time of merger. ICICI required a total of Rs.18, 000 crores to fulfil this requirement. It was a huge amount and given the scenario of that time and it was difficult for the institutions to raise such an amount. Hence, the group planned to raise the required funds partly through ICICI and partly through ICICI Bank.
One of the many reasons that emphasized the merger was that financial institutions were finding it difficult to conduct their business smoothly owing to high cost of borrowing and decreasing spread with interest rates going down. To this the merger came as a relief because post merger the institution could raise current and savings deposits rather than bonds thus reducing the cost of borrowing significantly. Furthermore, the institution will be able to lend out at competitively cheaper rates which was not possible for ICICI Ltd before the merger thus increasing the customer base.
The issues that made this merger bright was post merger, the issues arising from the potential asset liability mismatches due to more stable deposit base will be better handled and with passage of time increase the fee based income which making it a strength in the balance sheet. However, there was a dark area in this merger as the assets quality of ICICI Bank would be affected. ICICI Ltd. had NPAs of 5.2 per cent for FY01 as against ICICI Bank’s NPAs of 1.4 per cent.
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Before the merger, ICICI Ltd. could claim a deduction up to 40 per cent of its profits from its long term lending by transferring the amount to special reserve. Post merger, this benefit was to stand withdrawn in the case of incremental loans.
Particulars ICICI Ltd ICICI Bank
MP at the time of merger (Rs.) 51 101
EPS (Rs.) 15.4 11.9
Book Value (Rs.) 102.8 65.5
MP/ Book Value 0.50 1.54
PE RATIO 3.3 8.5 Table 2 : Profile of the companies at the time of merger
During the merger the Earning per Share (EPS) for ICICI Ltd was 15.4 as compared to the 11.9 of the ICICI Bank. CRR would get a return of 6.5 per cent and amount in SLR would generate a return of about 9.5 per cent post merger. Though new funds will be raised, the cost of borrowing will be higher than its returns which will again affect the shareholders’ return. The average cost of borrowing for ICICI Ltd. for financial year 2001 was 11.71 per cent with Gross yield at 13.54 per cent. However, post merger, the ICICI Ltd will have to hit the bottom as will have to bring down its loan portfolio and divert its funds for the reserve requirement.
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6.3 The Merger with Sangli Bank Particulars ICICI Bank Sangli Bank Advances 155,400 888 Deposits 190,000 2,004 Net NPAs (%) 0.9 2.3 CAR (%) 14.3 1.6 Branches 713 198
Figure 5: Sangli Bank, Mumbai
The proposal of amalgamation of Sangli Bank with ICICI Bank Ltd was put on the table on December 9, 2006 and came into existence in the month of April of the following year. Sangli Bank, set up by the Raja of Sangli State in 1916, has a major presence in Maharashtra and thin outfits in Karnataka, Gujarat, Andhra Pradesh, Tamil Nadu, Delhi and Goa. Though the bank had 198 branches, it was knee deep in financial trouble and was an ailing bank in Maharashtra.
The bank's capital adequacy ratio (CAR) plummeted to 1.64 per cent as on March 31, 2006; against 9.30 per cent in the previous year (minimum requirement mandated by the RBI is 9 per cent). It posted a net loss of Rs 29.27 crores as on March 31, 2006 with net non-performing assets at Rs 20.79 crores. The deposits stand at Rs 2,004.23 crores and advances were Rs 888.29 crores as on March 31, 2006. It has staff strength of 1923 employees as of March, 2002 with a capital base of only 23.56 crores.
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6.3.1 Synergies
(In Rs. Crores)
Table 3: Profile of ICICI Bank and Sangli Bank at the time of merger The amalgamation of Sangli Bank with ICICI Bank was a highlighting point for the shareholders of the ailing Sangli Bank, though with not much of affect in the incomes of the ICICI Bank’s shareholders. The shareholders of Sangli Bank are getting one share of ICICI Bank for every 9.25 shares held by them and look forward to the bright prospective growth of the ICICI Bank.
For ICICI Bank, the only gain will perhaps be the 198 branches of Sangli Bank and the diversified rural portfolio, thus strengthening the all over customer base. Other than this, this merger is not anticipated to be of much prospect as ICICI Bank has a deposit base of about Rs 190,000 crores, which is about 95 times that of Sangli and advances at about Rs 155,000 crores are close to 170 times that of Sangli.
However, acquiring Sangli Bank will be at a cost as ICICI Bank will have to absorb 1800 employees of the Sangli Bank which is to increase not only the employee base, but also the wage costs. Along with it Sangli Bank has bad loans of about Rs 40 crores and Rs 60 crores in accumulated losses. Whereas, post-amalgamation, the equity base of ICICI Bank will expand by 0.4 per cent only, this is unlikely to result in earnings dilution. On the whole, the impact of the exercise is going to be neutral for ICICI Bank.
28 7. Analysts’ Opinion
In this segment we put across the different opinions that have come up in the analyst’s meets in the year 2001 and 2002 following the merger of ICICI Bank with Bank of Baroda and ICICI Ltd. Here, the senior officials observed several things and analysts have highlighted the current positions, strategies, gains from the mergers, their impact on the business, growth of the business and have the set the pace for the strategies for the coming year. 7.1 Analysts’ meet held on 26 April, 2001
The analysts’ meet held on April 26, 2001 opened with the observation that ICICI Bank, which announced a 114 per cent growth in customer assets in the year to March 31, 2001, expects to grow its assets by a more modest 35 per cent in the current financial year. The slower growth is due to the larger base created by the merger of Bank of Madura with it. Addressing analysts soon after the bank's board passed the annual accounts, managing director H.N.Sinor and senior officials of the bank had the following additional observations to make:
A. After strong asset growth in the previous year and following the Bank of Madura merger, the capital adequacy ratio has come down to 11.57 per cent. Most of it is Tier-I capital - around 10.5 per cent. The bank will consider raising Tier-II capital depending on asset growth needs during the latter half of 2001-02.
B. The integration process of the two banks' branches and operations would be completed in five phases, with the first three covering over 50 per cent of the branches scheduled for completion by July-end. Around 25 branches where ICICI Bank and Bank of Madura have a location overlap may be relocated.
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C. ICICI Bank will be spending around Rs 90 crore on the post-merger integration process - Rs 60 crore on technology and another Rs 30 crore on refurbishing Bank of Madura branches.
D. ICICI Bank has disclosed an Rs 75 crore exposure in loans to brokers and another Rs 135 crore in guarantees. The bank does not see any losses on this front based on current collateral and margin coverage. E. The wage bill of the merged bank will go up by Rs 20-30 crore during 2001- 02. The bank, however, sees no need for any VRS to pare down its staff. F. The bank proposes to continue its frenetic pace of investment in technology. To its existing ATM tally of 510, 2001-02 will see an addition of another 250-300, much of it in the Bank of Madura branches. Going forward, the bank is adopting a four-pronged strategy for the current year. It plans to extract more value from current business and investments in technology, enhance fee income, improve asset quality, and impose stringent cost control.
The other highlights disclosed at the analysts' meeting on April 26, 2001 are:
1. Business growth during 2000-01: While total assets have grown by 63 per cent to Rs 19,737 crore, deposits are up by 66 per cent to Rs 16,378 crore. The share of retail deposits has doubled from 31 per cent to 61 per cent. Customer assets are up by 114 per cent to Rs 10,756 crore.
The retail branch network has grown from 97 to 378, thanks to the Bank of Madura merger. Customer accounts are similarly up from 6.37 lakh to 3.2 million, while internet accounts have quintupled from 1.1 lakh to 5.5 lakh accounts. ATMs have tripled from 175 to 510. In the credit card arena, the bank has grown the card base from 10,656 to 217,023 - and claims to account for the largest spend on Visa cards in India.
2. Spreads: With net interest income rising 118 per cent to Rs 404 crore, spreads have risen to 2.88 per cent from 2.3 per cent. The net interest margin has soared from 2.46 per cent to 3.55 per cent. The core fee income has doubled from Rs 87 crore to Rs 171 crore.
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3. Non- Performing Assets: The bank's gross non-performing assets (NPAs) have more than quadrupled due to the BoM merger, from Rs 99 crore to Rs 421 crore. However, net NPAs have risen less sharply from Rs 57 crore to Rs 154 crore. Due to higher provisioning, the net NPA ratio is, however, only 1.44 per cent - up from 1.14 per cent of advances in 2000-01. 4. Returns: The bank's return on average assets was a healthy 1.34 per cent, and return on net worth 12.98 per cent. The earnings per share were Rs 8.13.
7.2 Analyst’s meet held on 25 October, 2001
The analysts’ meet on October 25, 2001 focused on the following points:
A. Business Highlights:
Pursuant to the RBI in its recently announced Credit Policy clearing the way for merger of FIs with Banks under the emerging concept of Universal Banking ICICI Group has been quick enough to capitalise on this opportunity and has announced reverse merger of the main ICICI with the Bank with effect from March 2002 and swap ratio of 2:1, for every 2 shares of ICICI, 1 share of the Bank will be allotted. Also ICICI will not cancel its present 46% stake in the Bank upon merger but will hold it in trust to be privately placed in FY 2003.
In fact the merger vindicates culmination of virtual structure built around the 2 entities over the past 5 years to result in a behemoth with Universal Banking at the forefront backed by IT amidst growing global competition. In fact the proposed merger at ICICI is termed as “Agenda for the New Millennium”.
Since the beginning of 90s and more particularly over the past 5 years, globally the financial sector is undergoing a major transformation with the fundamental changes taking place in this sector’s business models.
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These are driven by IT innovations, Globalisation, Liberalisation, demanding and sophisticated customers and return on higher shareholder returns.
Change in business models have lead to the emergence of integrated universal banks as evidenced by international precedents such as Citigroup, Deutsche Bank, UBS, HSBC, JPMorgan Chase, etc. The merger will result in following gains leading to the development of more robust financial system.
1. Economies of scale through volumes in operating costs and technology development. 2. Economies of scope through large product suite and cross selling potential 3. Optimisation of human and financial capital
In fact ICICI has already harnessed some of the above gains by transforming itself into a virtual universal bank over past 5 years rendering Retail and Corporate Financial Services though the gamut of the following key building blocks present across the Group on one hand and powered by Internet and Technology Platforms on the other hand –
Retail Financial Services Corporate Financial Services ICICI ICICI ICICI Bank ICICI Bank ICICI Capital ICICI Securities ICICI Prudential ICICI Brokerage ICICI Web Trade ICICI Venture ICICI PFS ICICI InfoTech ICICI Home ICICI Lombard
Table 3 : Retail and Financing Services of the ICICI Group
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Throughout 90s, ICICI Group has nurtured the following Building Blocks that have in fact have served as the Group’s strategy for success –
1. Organisation Values. 2. Human Capital. 3. Speed Capital. 4. Brand Identity. 5. Knowledge Capital. 6. Technology Capital. 7. The above supplemented by organisational changes have created the right combination for achieving leadership.
B. ICICI'S Leadership:
The above blocks have helped ICICI in building –
1. Strong brand identity. 2. Technology enabled delivery channels as reflected in the largest ATM network in India and the highest no. of Internet banking registrations. 3. Large product suite – largest auto financier, largest incremental issuer of credit, debit and ATM cards. 4. Amongst the first banks in India to commence lead generation for insurance products.
C. Current Operating Environment:
1) Very thin demarcation amongst financial intermediaries with increasing competitive pressures. 2) Universal banking provides competitive advantages in the present times through large product suite, diversified resource base, scale and scope economies and optimisation of human and financial capitals.
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3) The above provide a strong business logic for merging ICICI and ICICI Bank that are strong complementary organisations with the following features and having similar operating architecture, people and processes –
ICICI ICICI Bank Large capital base Largest private sector bank Diversified and de-risked assets Strong retail franchise Strong brand IT leadership Well established corporate relationship Table 4 : Strengths of ICICI Ltd and ICICI Bank
4) The merged co. is consequently well positioned to harness synergistic advantages and thereby providing gains to both with key competitive advantages and more efficient provider of capital.
D. Merger Gains for ICICI Bank:
1) Forward leap in the hierarchy of Indian banks. 2) Achieve size and scale of operations by leveraging ICICI’s capital and client base for higher fee income and higher profitability by leveraging on technology and low cost structure and access to its talent pool. 3) Offer a complete product suite with immense cross-selling opportunities through ICICI’s presence in retail finance, insurance, investment banking and venture capital.
E. Merger Gains for ICICI Ltd:
1) Improved ability to further diversify asset portfolio and business revenues. 2) Lower funding costs through ability to accept / offer checking accounts, availability of float money through active participation in payment system and raising diversified funds through access to retail funds.
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3) Increased fee income opportunities facilitated by the ability to offer all banking products. 4) Competitive advantages of the merged bank with an asset base of nearly Rs. 1 lakh crores and being the 2nd largest bank next only to SBI will be –
a. Vast talent pool. b. Technology enabled distribution architecture. c. Low operating costs. d. Extensive customer relationships and strong brand franchise. e. Complete product suite. f. Large capital base. g. ICICI’s retail operations (ICICI PFS and ICICI Capital Services) will be merged with ICICI Bank. h. To summarise, the merger will create a strong entity that will redefine banking in the highly competitive era of globalisation and liberalisation.
7.2 Analyst’s meet held on May 03, 2002
In this segment, the statements highlighted in the analyst’ meet post merger held on May 3, 2002 has been put forth in the following points:
1. `Retail will be the thrust for ICICI Bank and provide a boost to future revenues`, said K V Kamath, managing director (MD) and chief executive officer (CEO) of ICICI Bank, at Mumbai on Friday while announcing the bank’s results for the fourth quarter and fiscal ended March 31, 2002. Retail operations contributed 40 per cent to total revenues of ICICI Bank for fiscal 2001-02. He expects retail to give a 15- 20 per cent growth in book value for current fiscal.
35
(Rs. In crores)
Segment Revenue Mar-02 %(Change) Retail 1485 40.4 Corporate 1383 37.62 Treasury and Corporate Offices 755 20.54 Others 53 1.44 Totals 3676 100
Table 5 : Revenue Segments 2. ICICI Bank has a highly diversified asset base with a balance sheet size of over Rs 1,04,000 crores, it has 34 per cent in cash and government securities, short-term corporate finance loans of 23 per cent and retail loans of 8 per cent and long-term project finance loans of 23 per cent. The balance assets consist of investments of 5 per cent and other miscellaneous assets. 3. ‘The bank has no acquisition plans at the moment. But, it might think of it, in case a strategic need arises. ICICI Bank acquired Bank of Madura to scale up its distribution network,’ he added. 4. As per him, Directed lending could not affect the profit and loss account of ICICI Bank as housing loans would account for 35 per cent of consolidated lending which comes under priority sector lending (50 per cent of residual net bank credit) without adversely affecting margins or the bank’s spread. 5. Around 50 per cent business transactions are routed through ATMs, 35 per cent through outlets and 15 per cent through Internet banking and tele-banking. 6. With the completion of all requirements for the merger of ICICI Ltd and two of its wholly-owned subsidiaries with ICICI Bank, the combined entity came into existence effective May 3, 2002. The appointed date for the merger, however, continues to remain March 30, 2002, as provided in the scheme of amalgamation.
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7. ICICI Bank’s profit after tax as per audited unconsolidated Indian GAAP increased 60.20 per cent to Rs 258 crores in fiscal ended March 31, 2002, from Rs 161 crores in the previous year. As the merger has come into effect only on March 30, 2002, ICICI Bank’s profit of Rs 258 crores includes only two days profit of ICICI and its merging subsidiaries, amounting to about Rs eight crores. 8. The profit is, therefore, largely comparable to FY2001. Net interest income increased 46.70 per cent to Rs 593 crores from Rs 404 crores and core fee income increased 65.50 per cent to Rs 283 crores from Rs 171 crores. Average cost of deposits declined to 7.3 per cent from 7.80 per cent. 9. Profit for the fourth quarter ended March 31, 2002, was Rs 57 crores compared to Rs 50 crores in corresponding quarter last year. Profit has been affected due to higher deposit mobilization and substantial addition to the statutory liquidity ratio (SLR) portfolio to meet reserve requirements of the merged entity. However, core fee income increased 62.30 per cent.
The other highlights of this meet are as below:
1. Tier-I capital adequacy ratio (CAR) at 7.10 per cent. 2. Car loans account for 25 per cent of total lending at Rs 2,500 crores. 3. Overall cost of deposit 7.30 per cent for fiscal 2001-02. 4. For incremental capital for statutory liquidity ratio (SLR) requirement, rate of interest does not exceed 8 per cent. 5. Fair valuation of the consolidated entity does not include upside provided by subsidiary companies. 6. It has no plans to raise capital as CAR is high and healthy. 7. The company has investment fluctuation reserve of Rs 40 crore. 8. It will adopt the monthly billing system to adhere to the Reserve Bank of India`s (RBI) 90-day requirement for bad debt recognition.
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9. ICICI Bank will protect its spread/margins as it already has a high market share. 10. ICICI Bank has written off assets of ICICI worth Rs 3,780 crore. The bank enjoys CAR of 11.44 per cent (Tier-I of 7.47 per cent) as against the regulatory requirement of 9 per cent. 11. Since October 31, 2001, when the merger decision was taken, the bank has added Rs 15,000 crores of deposits, which accounts for a market share of 20 per cent in incremental deposits in the banking system. 38 8. Results and Discussions
The analysts have put across their opinions which suggest that the mergers undertaken in the year 2001 were beneficial in some of the aspects such as diversification, however, have not reaped much growth and leading to lowering many of the key financials of the company. In the following discussion, we will seek how the mergers have impacted the growth of the company in general and specifically effected the financial part of the company through the analysis of the different trends with the help of ‘Ratio Analysis’, a key tool of financial analysis and depicting them in the form of graphs for easier understanding.
8.1 Ratio Analysis
Ratio analysis is defined as the systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and financial conditions can be determined. The term ‘ratio’ refers to the numerical or quantitative relationship between two items or variables. In the subsequent paragraphs, we attempt to present some of this progress through different ratios.
8.1.2 Importance of Ratio Analysis
The importance of ratio analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of a firm. Ration analysis is relevant in assessing the performance of a firm in respect of the following aspects:
1. Liquidity Position,
2. Long Term Solvency,
3. Operating efficiency,
4. Over-all profitability,
5. Inter-firm comparison, and
6. Trend Analysis.
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The above aspects can be discussed as in the subsequent paragraphs:
1. Liquidity Position: With the help of ratio analysis conclusions can be drawn regarding the liquidity position of the firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations, when they become due. A firm can be said to have the ability to meet its short- term liabilities if it has sufficient liquid funds to pay the interest on its short- maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratios of a firm.
2. Long-term Solvency: Ratio analysis is equally useful for assessing the long – term financial viability of a firm. The long term solvency is measured by the leverage or capital structure and profitability ratios which focus on earning power and operating efficiency. The leverage ratios indicate whether a firm has a reasonable proportion of various sources of finance or whether heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly various profitability ratios reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved.
3. Operating Efficiency: The various activity ratio measures this kind of operational efficiency. In fact, the solvency of a firm is dependent upon the sales revenue or income generated by the use of its assets.
4. Overall – Profitability: Unlike the outside parties which are interested in one aspect of the financial position of a firm, the management is constantly concerned about the overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short – term as well as long- term obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilisation of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.
40 5. Trend Analysis: Ratio analysis enables a firm to take the time dimensions in to account or it helps to let people know whether the financial position of the firm is improving or deteriorating over the years. This is made possible by the trend analysis. The significance of the trend analysis lies in the fact that the analysts can know the direction of the movement.
8.1.3 Limitations of Ratio Analysis
The ratio analysis is a widely used tool of financial analysis. Yet, it suffers from various limitations. The operational implication is that the conclusions should not be taken on their face value.
Some of these limitations can be enumerated as below:
1. Reliability of ratios depends on the reliability of the original data or information collected. They are dangerous if incorrectly drawn.
2. Increase or decrease and constant changes in the prices or the economic conditions distort the comparison over a period of years.
3. The benefits of a ratio analysis depend on correct interpretations.
4. A ratio analysis is not the ultimate yardstick to assess the performance of the firm and cannot be the only basis of conclusion.
5. If there is window dressing, then the ratios calculated would fail to give the correct picture and it will be mismanagement.
6. Accounting figures are on a particular date; hence the short run changes are not reflected.
7. Accounting data is based on certain principles, which may be differing from company to company depending upon the management needs. 41
8.1.4 Return on Assets(ROA)
It is a profitability ratio which is measured in terms of the relationship between net profits and assets. It may also be called profit -to-asset ratio. It is also a yardstick of measuring managerial efficiency in relation to the utilisation of assets. It can be calculated as:
ROA = Net Profit after Tax but before Interest / Total Assets * 100
With reference to the data in annex – 9 and 10, the graph below shows a fluctuating trend as represented in the graph. A higher return on assets is an indicator of high profitability and a good overall efficiency. There is no ideal norm; the average standard followed in the industry is taken as acceptable norm. The return on assets is based on average daily asset. A higher ratio will indicate a higher return on profit. In the year 2001 the ratio is 1.34 which rises to 1.44 in 2004 after a drop in 2002 and again comes down to 1.1 in 2007 and continues to remain so.
1.4
1.2 ) %
( 1.0
s t e s
s 0.8 A
n o
0.6 n r u t
e 0.4 R
0.2
0.0 2001 2002 2003 2004 2005 2006 2007 2008 Financial Year Graph 1: Return on Assets
42
8.1.5 Return on Capital Employed (ROCE)
It is used to analyse the profitability of the firm from the point of view of funds employed. It explains the relationship between the profits and the total capital employed. A higher return on return on capital employed achieved for a few consecutive years indicates that the firm has a stable financial position. It can be calculated as:
ROCE = Net profit after taxes but before interest or EBIT / Average total capital employed * 100
25 ) % (
d 20 e y o l p
m 15 E
l
a t i p
a 10 C
n o
n
r 5 u t e R 0 2001 2002 2003 2004 2005 2006 2007 2008 Financial Year
Graph 2: Return on Capital Employed
In the above graph, it can be seen that the return has dropped significantly in 2002 post mergers and has gradually risen to the highest in 2004 to fall again in the following years but continues to bring a stable return. This has been drawn as per reference in annex – 9 and 10. 43
8.1.6 Return on Shareholders’ Equity (ROE)
It explains the return available to the equity shareholders as a percentage of their claim to the firm. The better the return, the satisfied are the shareholders. It can be calculated as:
ROE = Net profit after taxes / Average total equity * 100
20 ) % ( 15 y t i u q E
n 10 o
n r u t e 5 R
0 2001 2002 2003 2004 2005 2006 2007 2008 Financial Year
Graph 3: Return on Shareholders' Equity
The shareholders got the highest return in the year 2004 at 21.81% and since then it has been diminishing and stood at 11.1% at the end of year 2008. Referring to the data in annex – 9 and 10, it has to be noted that in 2006 an additional capital of 80.01 billion was raised. Moreover, the ROE in 2007 includes profit of banking subsidiaries and excluding investment in insurance subsidiaries which was 15.5%. Furthermore, the figure of 2008 was reached after considering the equity issue in July 2008. 44
8.1.7 Earnings per Share (EPS)
It measures the profit available to the equity shareholders on a per share basis, that is, the amount that they can get on every share held. Though it is a widely used ratio, it should be used cautiously as it does not recognise the effect of increase in equity capital as a result of retention of earnings, i.e., even if EPS has increased over the years, it does not necessarily follow that the firm’s profitability has improved because the increased profits to owner may be the effect of an enlarged equity capital as a result of profit retention, though the number of ordinary shares outstanding still remains constant. The earnings per share over the years can be plotted as below:
40
35 ) . s R
( 30
e r a
h 25 S
r e p
20 s g n i
n 15 r a E 10
5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Financial Year
Graph 4: Earnings per Share
As per the data in annex – 9 and 10, the EPS increases post merger to Rs.11.61 in 2002 and further increases to 32.15 in 2006 and has been 39.15 in the year 2008. This shows that the income of the shareholders has consistently grown. 45
8.1.8 Market Price per Share (MPS)
A share price is the price of a single share of a company's stock. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share. When viewed over long periods, the share price is directly related to the earnings and dividends of the firm. Over short periods, especially for younger or smaller firms, the relationship between share price and dividends can be quite irrational.
1400
1200 ) . s R
( 1000
e r a
h 800 S
r e
p
e 600 c i r P
t 400 e k r a 200 M
0 01.01.200201.04.200301.07.200401.10.200501.01.200701.04.2008 Date
Graph 5: Market Price per Share
The market price of the shares has increased over time from Rs. 148.50 in January 2001 to Rs. 1230.95 in January 2008 and has fallen to Rs. 756.55 in April 2008, refer to annex - 12. The significant rise and fall in the price of the shares is also due to the fluctuations in the Sensex which has kept the shareholders who have invested in the companies listed in Bombay Stock Exchange and National Stock Exchange on the edge. 46
8.1.9 Price to Earnings Ratio (P/E)
It reflects the price currently being paid by the market for each rupee of currently reported EPS. Thus it measures investor’s expectations and the market appraisal of the performance of the firm. It is closely related to the earnings yield as it is reciprocal of it. It is used to analyse the activity, managerial efficiency, profitability and return on owners; investments and to ascertain the true value of each equity share. It can be calculated by dividing the market price of the share by the EPS, i.e.
P/E ratio = Market Price of the share / EPS
As per the reference in data in Annex – 9 and 10, it has been plotted as below:
26
24
22
20
18 o i
t 16 a
R 14 E /
P 12
10
8
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Financial Year
Graph 6: Price to Earnings Ratio 47
A higher price earnings ratio indicates a fall in earning per share or an increase in market price per share. A high P/E ratio resulting from increased market price per share is beneficial to the shareholders. It indicates managerial efficiency, high profitability and good market reputation. P/E ratio increased from 20.34 in 2001 to 24.48 over the years after numerous fluctuations. 48
8.1.10 Price to Book Value Ratio (P/BV)
The price to book value ratio is the ratio of the market value of equity to the book value of the equity, i.e., the measure of the shareholders’ equity in the balance sheet. Book value is the accounting value of the firm. It can be calculated as:
P/BV = Market Value of Equity / Book Value of Equity
A low ratio indicates investor’s belief that the firms’ assets have been overvalued on its financial statements. And represents that there is something wrong with the company as the ratio indirectly tells the shareholders what they will get if the company was to wind up.
3.5
3.0
2.5 o i t a R
V 2.0 B / P
1.5
1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Financial Year
Graph 7: Price to Book Value Ratio Referring to annex – 9 and 10, the ratio has grown from 2.77 in 2001 to 3.16 in 2007 and again took a plunge of 43% approximately and reached 1.8 at the end of the year 2008.
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8.1.11 Capital Adequacy Ratio (CAR)
Capital adequacy ratio is a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures. For the purpose of capital adequacy measurement, bank capital is divided into Tier I and Tier II. Tier I capital is primary capital which can absorb losses without a bank being required to cease trading, and Tier II capital is supplementary capital which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors Capital adequacy ratio is defined as
CAR = Capital/ Risk
Where, Risk can either be weighted assets or the respective national regulator's minimum total capital requirement.
Capital adequacy has traditionally been regarded as a sign of strength of the financial system in India. Consequent upon the recommendations of the Committee on Financial Sector Reforms (Chairman: Shri Narasimham), a capital to risk-weighted assets system was introduced for banks in India since April 1992, largely in conformity with international standards, under which banks were required to achieve a 8 per cent capital to risk-assets ratio. According to the study conducted by an ASSOCHAM Eco Pulse (AEP) on “Indian Banks and Basel Accord II”, the financial health of Indian banking system has improved significantly in terms of capital adequacy ratio (CAR) during the third quarter of the fiscal 2007-08. In comparison to the mandated limit of 9 per cent CAR posed by the Basel II, the average capital adequacy ratio of commercial banks went up to 13 per cent in FY 08 from 12 per cent in the previous year. In terms of capital adequacy ratio, Axis bank had the maximum rise up to 16.88 per cent in Q3, FY 2007-08 from 11.83 per cent a year earlier. ICICI Bank appeared at the second position with an increase from 13.37 per cent to 15.82 per cent in the current financial year.
50
The capital adequacy ratio for the bank can be presented through the following graph which shows that ICICI Bank always stayed above the statutory rate of 9 per cent as suggested by Reserve Bank of India. Typically saying, the higher the ratio, the better is the position.
14.5
14.0
13.5 o i t
a 13.0 R
y
c 12.5 a u q
e 12.0 d A
l 11.5 a t i p
a 11.0 C 10.5
10.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Financial Year
Graph 8: Capital Adequacy Ratio
With reference to the data in Annex – 9, 10 and 11, it can be noted that the CAR at 11.57 % in 2001 has gradually risen to 13.97 % in 2008 over a period of eight years even after the application of Basel – II Accord. 51
8.2 Comparison with Other Scheduled Commercial Banks
When compared to other scheduled commercial banks, the report published by Reserve Bank of India indicates that ICICI Bank has maintained a high position.
In the following graph, some of the financials of different leading banks have been compared over a period of four years to see the trend of the banks with reference to annex – 14 and 15.
1200
1000
800
HDFC BANK 600 ICICI BANK IDBI BANK
400 UTI BANK
200
0 Capital Reserve Total Income Profit
Graph 9: Comparison for the year 2000
In the year 2000, we find that ICICI Bank has the highest reserve of Rs. 952.68 crores compared to the other banks. The same trend follows in total income where ICICI Bank has an income of Rs. 1046.92 crores. The variation in trend takes place in capital and profit where HDFC Bank has taken the lead.
52
In the year 2001, the ICICI Bank continues its journey to lead in Reserves and total income, with being marginally below the HDFC Bank as seen in the following figure (Graph - 10):
1600
1400
1200
1000 HDFC BANK 800 ICICI BANK IDBI BANK 600 UTI BANK
400
200
0 Capital Reserve Total Income Profit
Graph 10: Comparison for the year 2001
On one hand, ICICI Bank leads the reserve front with Rs. Rs.1092.25 crores, it loses out to HDFC Bank in capital by Rs.23.25 crores. But it exceeds all the four banks in total income aggregating to Rs. 1462.13 crores. 53
In the year 2002, the ICICI Bank exceeds the other banks in the mentioned four fields as shown in the graph below:
6000
5000
4000
HDFC BANK 3000 ICICI BANK IDBI BANK
2000 UTI BANK
1000
0 Capital Reserve Total Income Profit
Graph 11: Comparison for the year 2002
In the above graph, it can be noted that ICICI begins its journey to surpass its well known competitors with an estimated income of Rs. 2726.59 and capital of Rs. 220.35 crores. It closes behind HDFC Bank in profit lagging only by Rs. 38.74 crores.
ICICI Bank begins to lead the path and continues to thrive in the following years as seen in the following two graphs for the year 2003 and 2004 and this projected trend has remain unchallenged in the next coming years. 54
14000
12000
10000
8000 HDFC BANK ICICI BANK 6000 IDBI BANK UTI BANK 4000
2000
0 Capital Reserve Total Income Profit
Graph 12: Comparison for the year 2003 25000
20000
15000 HDFC BANK ICICI BANK
10000 IDBI BANK UTI BANK
5000
0 Capital Reserve Total Income Profit
Graph 13: Comparison for the year 2004
55
Not only ICICI Bank has recorded upward trend in the four aspects of capital employed, reserves, total income and profit, it has also left its mark in the following aspects (Refer annex – 13):
1. No. of Employees: When the group had an average of 5756 employees and all banks’ average was 11051 in 2006-2007, ICICI Bank had human resource strength of 33321.
2. No. of offices: Not only employees, but the number of offices that the bank had in 2006 – 2007 was 713, a difference of vast margin with Group average tallying to 296 .
3. Business per employee: ICICI Bank exceeded the banks in its group by large margins as far as the business per employee was concerned with Rs.1027 lakh in 2006- 2007 as compared to Rs.697.75 lakh for the group and Rs. 522.29 lakh for the all banks’ average.
4. Profit per employee: As shown in the graph below, the profit per employee of the ICICI Bank was almost twice the group’s average of Rs. 4.69 lakh at Rs. 9 Lakh and almost 60 per cent higher than the all banks’ average of Rs. 3.49 lakh.
5. Cost of Funds: The cost of funds raised by the ICICI Bank was Rs. 5.34 crores, higher than the group’s average of RS.5.16 crores and all banks’ average at Rs. 4.85 crores to the disadvantage of the bank.
6. Return on Assets: The return on assets of the ICICI Bank was higher than the group’s average and all banks’ average at Rs. 1.03 crores. The group had a return average of Rs. 1.03 crores and all banks’ average was Rs. 1.05 crores.
56
7. Wages Proportion: Though ICICI Bank maintained a vast pool of employee, yet its figures of wages as a percentage of total expenses have been lower than the group’s average of 10.93 and all banks’ average of 17.2. ICICI spending only 7.01 percentages of total expenses on its wages, it can on one hand be attributed to the efficiency of the management; on the other hand can be a concern for its employees. 8. Capital Adequacy Ratio: Further indicator the strengthened financial position of ICICI Bank is its capital adequacy ratio at 11.69, close to the groups; average of 12.1 and all banks’ average of 12.3 in the fiscal year 2006 – 2007.
Some of the above enumerated points have been plotted in graph below to have a visual understanding of the data stated in the above paragraphs:
20
18
16
14
12
10 ICICI Bank Group Avg 8 All Bank Avg 6
4
2
0 Profit per Cost of Funds Capital Adequacy Wages as % of employee Ratio total expense
Graph 14: Comparison with Group’s and All Banks’ Average
57 9. Conclusion
Over the years, there has been considerable progress in consolidation in India in the private sector banks and the mergers have happened not only between the weak and the healthy banks but also, of late, between healthy and well-functioning banks as well. The RBI has been supportive of the initiatives for consolidation and there have been no cases so far where the approval for merger of banks was denied by the RBI, since the proposals conformed to the requirements and guidelines of the RBI. The RBI, as the regulator and supervisor of the banking system, would continue to play a supportive role in the task of banking consolidation based on commercial considerations, with a view to further strengthening the Indian financial sector and support growth while securing the stability of the system. Many banks like HDFC Bank, IDBI Bank, and others have outlaid their success stories. Among them ICIC Bank has reached out to become a Universal Bank of all times.
This project has revealed the impact of the mergers undertaken by ICICI Bank in the form of merger with Bank of Madurai and ICICI Ltd on the growth of the bank. It is satisfying to observe that the mergers have provided a positive result to the growth of the company as seen in the financials of the fiscal year 2001. However, the benefits evened out leading to a drop in the figures in the next year. But it has not halted the growth of the company as they continue to rise in the following years with the increase in not only profits and business but also strengthening their financial position and maximising the returns to the shareholders’ wealth.
However, the merger of ICICI Bank with that of Sangli Bank was of neutral effect as it solely concentrated on exploring to different rural regions of the southern part of the country. The merger did not add to the capital structure much or to the profits. Yet, it was not much of concern with the strong financial back up and high technological gains. It further diversified in to different products and in to different sections of business, thus increasing its customer base further. And it got reflected through the market price of the shares which kept on going up.
58
With the passing years, it has excelled the previous records and looks to achieve higher results. Furthermore, it has stood its ground among the other scheduled commercial banks operating in the country. The results published by the Reserve Bank of India reveals the fact that the bank has done better than many banks and have closely matched the groups’ average and all banks’ averages and have even superseded them on some of the aspects. The ratios have helped in evaluation of different aspects of the bank and followed the growth in a successful manner. Yet this project suffers from some limitations which can be put down as:
1. The project has used only secondary data. The lack of originality brings contention regarding its reliability.
2. Due to lack of data, many ratios could not be calculated.
3. Due to lack of time, the various external factors such as market conditions, change in policies, inflation, etc, could not be taken into consideration. Though these factors tremendously impact the business.
Furthermore, ratios cannot be said to be the ultimate measure of evaluation. It is so because the ratios are only the measures for comparisons, hence they set the trends but do not prove anything. Further studies with the help of different mathematical tools and hypothesis tests can better substantiate the results of the financials of the bank.
Nonetheless, ratio continues to be widely used financial tool and continues to be the helping hand to the analysts in projecting and understanding the data in a simplified manner which may be part of any books of accounts of any company or organisation.
59 10. Appendices Annex – 1: List of Indian commercial banks merged since January 1990 under the provisions of the Banking Regulation Act 1949
Serial Name of the Transferor Name of the Date of No. Bank Transferee Bank amalgamation 1 Bank of Tamilnadu Ltd. Indian Overseas Bank 20.02.1990 2 Bank of Thanjavur Ltd. Indian Bank 20.02.1990 3 Parur Central Bank Ltd. Bank of India 20.02.1990 4 Purbanchal Bank Ltd. Central Bank of India 29.08.1990 5 Kashi Nath Seth Bank Ltd State Bank of India 01.01.1996 Oriental Bank of 6 Bari Doab Bank Ltd. 08.04.1997 Commerce Punjab co-operative Bank Oriental Bank of 7 08.04.1997 Ltd. Commerce 8 Bareilly Corporation Bank Bank of Baroda 03.06.1999 9 Sikkim Bank Ltd. Union Bank of India 22.12.1999 10 Times Bank Ltd. HDFC Bank Ltd. 26.02.2000 11 Bank of Madura Ltd. ICICI Bank Ltd. 10.03.2001 12 Benaras State Bank Ltd. Bank of Baroda 20.06.2002 13 Nedungadi Bank Ltd. PNB 01.02.2003 South Gujarat Local Area 14 Bank Of Baroda 25.06.2004 Bank Ltd. Oriental Bank Of 15 Global Trust Bank Ltd. 14.08.2004 Commerce 16 Bank of Punjab Ltd Centurion Bank 01.10.2005 17 IDBI Bank Ltd. IDBI Ltd 02.04.2005 The Ganesh Bank of 18 The Federal Bank Ltd. 02.09.2006 Kurundwad Ltd. 19 United Western Bank Ltd. IDBI Ltd 03.10.2006 20 Bharat Overseas Bank Indian overseas Bank 31.3.2007 ICICI Bank Ltd. 21 The Sangli Bank Ltd 19.4.2007 (Voluntary) Centurion Bank of 22 Lord Krishna Bank Ltd. 29.8.2007 Punjab Ltd.
Source: Reference numbered as 10
60
Annex – 2: Balance Sheet for the financial year 2001 - 2003
(Rs. in ‘000s) Particulars Mar 31, 2001 Mar 31, 2002 Mar 31, 2003
CAPITAL AND LIABILITIES Capital 22,03,587 96,30,314 96,26,600 Reserves and Surplus 1,09,22,593 5,63,55,431 6,32,06,538 Deposits 16,37,82,078 32,08,51,111 48,16,93,063 Borrowings 1,03,27,936 49,21,86,592 34,30,24,203 Other Liabilities & Provisions 1,01,29,709 16,20,75,756 1,70,59,258
TOTAL 19,73,65,903 1,04,10,99,204 1,06,81,19,662
ASSETS Cash and Balances with RBI 1,23,16,629 1,77,44,682 4,88,61,445
Balances with Banks and money at call and short notice 2,36,20,254 11,01,18,817 1,60,28,581 Investments 8,18,68,626 35,89,10,797 35,46,23,002 Advances 7,03,14,562 47,03,48,661 53,27,94,144 Fixed Assets 38,47,487 4,23,93,443 4,06,07,274 Other Assets 53,98,345 4,15,82,804 7,52,05,216
TOTAL 19,73,65,903 1,04,10,99,204 1,06,81,19,662
Contingent Liabilities 13,84,80,077 39,44,65,858 89,43,85,070 Bills for Collection 1,22,97,987 1,32,34,184 1,33,67,843
Source: Reference numbered as 13, 14 and 15
61
Annex – 3: Balance Sheet for the financial year 2004 - 2005
(Rs. in ‘000s) Particulars Mar 31, 2004 Mar 31, 2005
CAPITAL AND LIABILITIES Capital 96,64,012 1,08,67,758 Reserves and Surplus 7,39,41,561 11,81,31,954 Deposits 68,10,85,845 99,81,87,775 Borrowings 30,74,02,393 33,54,44,960 Other Liabilities & Provisions 18,01,94,930 21,39,61,606
TOTAL 1,25,22,88,741 1,67,65,94,053
ASSETS Cash and Balances with RBI 5,40,79,966 6,34,49,004
Balances with Banks and money at call and short notice 3,06,26,378 6,58,50,719 Investments 42,74,28,614 50,48,73,525 Advances 62,09,55,196 91,40,51,517 Fixed Assets 4,05,64,141 4,03,80,361 Other Assets 7,86,34,446 8,79,88,927
TOTAL 1,25,22,88,741 1,67,65,94,053
Contingent Liabilities 2,02,94,19,027 2,68,15,37,382 Bills for Collection 1,51,09,352 2,39,20,922
Source: Reference numbered as 17 and 18
62
Annex – 4: Balance Sheet for the financial year 2007 - 2008 (Rs. in ‘000s)
Particulars Mar 31, 2007 Mar 31, 2008
CAPITAL AND LIABILITIES Capital 1,24,93,437 1,46,26,786 Reserves and Surplus 23,41,39,207 45,35,75,309 Deposits 23,05,01,863 2,44,43,10,502 Borrowings 51,25,60,263 65,64,84,338 Other Liabilities & Provisions 38,22,86,356 42,89,53,827
TOTAL 3,44,65,81,126 3,99,79,50,762
ASSETS Cash and Balances with RBI 18,70,68,794 29,37,75,337
Balances with Banks and money at call and short notice 18,41,44,452 8,66,35,952 Investments 91,25,78,418 1,11,45,43,415 Advances 1,95,86,55,996 2,25,61,60,827 Fixed Assets 3,92,34,232 4,10,88,975 Other Assets 16,48,99,234 20,57,46,256
TOTAL 3,44,65,81,126 3,99,79,50,762
Contingent Liabilities 5,62,95,99,060 11,51,34,90,113 Bills for Collection 4,04,65,610 4,27,82,842
Source: Reference numbered as 19 and 20
63 Annex – 5: Profit & Loss for the financial year 2001 - 2002
(Rs. in ‘000s)
Particulars Mar 31, 2001 Mar 31, 2002
I. INCOME Interest earned 1,24,21,316 2,15,19,297 Other income 22,03,402 51,46,598 TOTAL 1,46,24,718 2,72,65,895
II.EXPENDITURE Interest expended 83,76,723 1,55,89,235 Operating expenses 33,46,264 66,25,770 Provisions and Contingencies 12,90,757 28,67,900 TOTAL 1,30,13,744 2,46,82,905
III.PROFIT/LOSS Net profit for the year 16,10,974 25,82,990 Profit brought forward 7,990 8,294 TOTAL 16,18,964 25,91,284
IV.APPROPRIATIONS/TRANSFER Statutory Reserve 8,00,000 6,50,000 Investment Fluctuation Reserve 6,50,000 1,60,000 Special Reserve 1,40,000 Revenue and Other Reserves 2,60,000 9,60,000 Proposed Dividend 4,40,717 - Interim Dividend Paid - 4,40,717 Corporate Dividend Tax 44,953 44,953 Balance carried over to next balance sheet 8,294 1,95,614 TOTAL 16,18,954 25,91,284
Source: Reference numbered as 15 64
Annex – 6: Profit & Loss for the financial year 2003 - 2004
(Rs. in ‘000s)
Particulars Mar 31, 2003 Mar 31, 2004
I. INCOME Interest earned 9,36,80,561 8,89,40,406 Other income 1,96,77,741 3,06,49,228 Profit on sale of shares of ICICI Bank Ltd held by erstwhile ICICI Ltd 1,19,10,517 - TOTAL 12,52,68,819 11,95,89,634
II.EXPENDITURE Interest expended 7,94,39,989 7,01,52,492 Operating expenses 2,01,16,900 2,57,12,325 Provisions and Contingencies 1,36,50,139 73,53,754 TOTAL 11,32,07,028 10,32,18,571
III.PROFIT/LOSS Net profit for the year 1,20,61,791 1,63,71,063 Profit brought forward 1,95,614 50,520 TOTAL 1,22,57,405 1,64,21,583
IV.APPROPRIATIONS/TRANSFER Statutory Reserve 30,20,000 40,93,000 Transfer from Debenture Redemption Reserve (1,00,000) - Capital Reserve 20,00,000 26,50,000 Investment Fluctuation Reserve 10,00,000 27,60,000 Special Reserve 5,00,000 2,50,000 Revenue and Other Reserves 6,00,000 - Proposed Equity Share Dividend 45,97,758 54,40,592 Proposed Preference Share Dividend 35 35 Interim Dividend Paid - - Corporate Dividend Tax 5,89,092 6,97,080 Balance carried over to next balance sheet 50,520 5,30,876 TOTAL 1,22,57,405 1,64,21,583
Source: Reference numbered as 16 and 17 65
Annex – 7: Profit & Loss for the financial year 2005 - 2006
(Rs. in ‘000s)
Particulars Mar 31, 2005 Mar 31, 2006
I. INCOME Interest earned 9,40,98,944 13,78,44,958 Other income 3,41,61,439 4,98,31,394 TOTAL 12,82,60,383 18,76,76,325
II.EXPENDITURE Interest expended 6,57,08,876 9,59,74,483 Operating expenses 3,29,91,475 4,47,95,170 Provisions and Contingencies 95,08,016 2,15,05,952 TOTAL 10,82,08,367 16,22,75,605
III.PROFIT/LOSS Net profit for the year 2,00,52,016 2,54,00,747 Profit brought forward 5,30,876 18,82,221 TOTAL 2,05,82,892 2,72,82,968
IV.APPROPRIATIONS/TRANSFER Statutory Reserve 50,20,000 63,60,000 Reserve Fund - 222 Capital Reserve 2,00,000 6,80,000 To Investment Fluctuation Reserve - 59,00,000 From Investment Fluctuation Reserve - (1,32,03,350) Special Reserve 2,50,000 27,50,000 Revenue and Other Reserves 60,00,000 1,32,03,350 Proposed Equity Share Dividend 63,29,609 75,93,526 Proposed Preference Share Dividend 35 35 Corporate Dividend Tax 9,01,027 10,64,969 Balance carried over to next balance sheet 18,82,221 29,34,416 TOTAL 2,05,82,892 2,72,82,968
Source: References numbered as 18 and 19 66
Annex – 8: Profit & Loss for the financial year 2007 - 2008
(Rs. in ‘000s)
Particulars Mar 31, 2007 Mar 31, 2008
I. INCOME Interest earned 22,99,42,916 3,07,88,429 Other income 5,92,91,686 8,81,07,628 TOTAL 28,92,34,602 39,59,91,057
II.EXPENDITURE Interest expended 16,35,84,984 23,48,42,423 Operating expenses 6,69,05,564 8,15,41,819 Provisions and Contingencies 2,76,41,854 3,80,29,536 TOTAL 25,81,32,402 35,44,13,778
III.PROFIT/LOSS Net profit for the year 3,11,02,200 4,15,77,279 Profit brought forward 29,34,416 99,82,741 TOTAL 3,40,36,616 5,15,60,020
IV.APPROPRIATIONS/TRANSFER Statutory Reserve 78,00,000 1,04,00,000 Reserve Fund 1,168 3,138 Capital Reserve 12,10,000 12,70,000 To Investment Fluctuation Reserve - - From Investment Fluctuation Reserve - - Special Reserve 45,00,000 17,50,000 Revenue and Other Reserves - - Proposed Equity Share Dividend 90,11,694 1,22,77,018 Proposed Preference Share Dividend 35 35 Corporate Dividend Tax 15,30,978 14,96,670 Balance carried over to next balance sheet 99,82,741 2,43,63,159 TOTAL 3,40,36,616 5,15,60,020
Source: Reference numbered as 20 and 21 67
Annex – 9: Key financial ratios and figures for the year 2001 – 2004
Particulars 2001 2002 2003 2004 Return on Assets (%) 1.34 1.1 1.15 1.44
Operating Profit / EBIT ( Rs in billions) 2.9 5.45 13.8 23.72 Total Capital (Rs in billions) 14.47 90.12 91.46 94.01 Return on Capital Employed (%)* 20.04 6.04 15.08 25.23 Return on Equity (%) 12.98 17.74 18.3 21.81
Earnings per Share (Basic) (Rs)…... (1) 8.13 11.61 19.68 26.66 Earnings per Share (Diluted) (Rs) 8.13 11.61 19.65 26.44 Share Price on 01 April (Rs)... (2) 165.4 126.75 134.8 300.65 P/E Ratio (2)/(1) 20.34 10.91 6.85 11.27
Book Value (Rs.) … (3) 59.57 102.04 113.1 127.3
P/BV Ratio (2)/(3) 2.77 1.24 1.19 2.36 Capital Adequacy Ratio (%) 11.57 11.44 11.1 10.36
Cost to income (%) 53.53 53.32 49.88 41.9
Source: References numbered 13 – 21 and 35 and Particulars marked (*) are own calculations 68
Annex – 10: Key financial ratios and figures for the year 2005 – 2008
Particulars 2005 2006 2007 2008 Return on Assets (%) 1.4 1.3 1.1 1.1 Operating Profit / EBIT ( Rs in billions) 29.56 46.91 58.74 79.61 Total Capital (Rs in billions) 159.03 278.43 338.96 502.55 Return on Capital Employed (%)* 18.59 16.84 17.32 15.84 Return on Equity (%) 17.9 16.4 13.4 11.1
Earnings per Share (Basic) (Rs)…... (1) 27.55 32.49 34.84 39.38 Earnings per Share (Diluted) (Rs) 27.33 32.15 34.64 39.15
Share Price on 01 April (Rs)... (2) 405.6 589.25 853.1 756.55
P/E Ratio (2)/(1) 14.72 18.13 24.48 19.21 Book Value (Rs.) … (3) 168.6 248.6 269.8 417.5 P/BV Ratio (2)/(3)* 2.4 2.37 3.16 1.8 Capital Adequacy Ratio (%) 11.78 13.35 11.69 13.97 Cost to income (%) 42.2 39.9 40.2 40.4
Source: References numbered 13 – 21 and 35 and Particulars marked (*) are own calculations 69
Annex – 11: Capital Adequacy Ratio
Particulars Mar 31, 2001 Mar 31, 2002 Mar 31, 2003
Rs. In Rs. In billion % billion % Rs. In billion % Tier -I Capital 13.02 13.02 58.87 7.47 58.07 7.05 Tier - II Capital 1.45 1.45 31.25 3.97 33.39 4.05 Total Capital 14.47 11.57 90.12 11.44 91.46 11.1 Risk weighted Assets 125.05 787.73 823.81
Particulars Mar 31, 2004 Mar 31, 2005 Mar 31, 2006
Rs. In Rs. In Rs. In billion % billion % billion % Tier - I Capital 55.25 6.09 102.46 7.59 191.82 9.2 Tier - II Capital 37.76 4.27 56.57 4.19 86.61 4.15 Total Capital 94.01 10.36 159.03 11.78 278.43 13.35 Risk weighted Assets 907.34 1350.17 2085.94
Particulars Mar 31, 2007 Mar 31, 2008 Basel 1 Basel 2 Rs. In Rs. In Rs. In billion % billion % billion % Tier - I Capital 215.03 7.42 381.34 11.32 421.72 11.76 Tier - II Capital 123.93 4.27 121.21 3.6 78.86 2.2 Total Capital 338.96 11.69 502.55 14.92 500.59 13.97 Risk weighted 2899.9 Assets 3 3367.55 3584.57
Source: Reference numbered as 13 -21
Note:
1. Tier – I capital as on Mar 31, 2003 has been calculated by netting off the deferred tax assets of Rs. 4.88 billion as per RBI regulations. 2. Tier – II capital includes general provision of Rs. 1.54 billion in the fiscal year 2002 and Rs. 3.08 billion in fiscal year 2003.
70
Annex – 12: Market Price per Share from January 2001 – April 2008
Year Date Share Price (in Rs.) 2001 01-Jan 148.5 01-Apr 165.4 01-Jul 127.85 01-Oct 72.4 2002 01-Jan 89.55 01-Apr 126.75 01-Jul 138.25 01-Oct 144.85 2003 01-Jan 140.4 01-Apr 134.8 01-Jul 148.95 01-Oct 204.3 2004 01-Jan 302.05 01-Apr 300.65 01-Jul 247.75 01-Oct 289.45 2005 01-Jan 370.75 01-Apr 405.6 01-Jul 421.3 01-Oct 600.35 2006 01-Jan 584.7 01-Apr 589.25 01-Jul 487.4 01-Oct 699.05 2007 01-Jan 890.4 01-Apr 853.1 01-Jul 955.3 01-Oct 1058.05 2008 01-Jan 1230.95 01-Apr 756.55 Source: Reference numbered as 35
71
Annex – 13: Profile of ICICI Bank
(Amount in rupees crores)
Particulars ICICI Bank Group All Banks’ 2002- 2003- 2004- 2005- 2006- Averag Averag Items 03 04 05 06 07 e e 2006-07 2006-07 No. of offices 392 419 515 569 713 296 725 1154 1360 1802 No. of employees 4 9 9 25384 33321 5756 11051 Business per employee (Rs. In lakh) 1120 1010 880 905 1027 697.75 522.29 Profit per employee (Rs. In lakh) 11 12 11 10 9 4.69 3.49
Capital and reserves 1290 & surplus 7284 8360 0 22556 24663 2095 2704 4816 6810 9981 16508 23051 Deposits 9 9 9 3 0 22921 33273 3546 4343 5048 Investments 2 6 7 71547 91258 8914 11729 5327 6264 9140 14616 19586 Advances 9 8 5 3 6 17239 24447
Interest income 9368 9002 9410 14306 22994 2123 2927 Other income 3159 3065 3416 4181 5929 463 480 Interest expended 7944 7015 6571 9597 16358 1365 1776 Operating expenses 2012 2571 3299 5001 6691 636 818
Cost of Funds (CoF) 3.25 3.59 3.02 4.01 5.34 5.16 4.85 Return on advances adjusted to CoF 8.74 6.94 5.75 4.58 4.08 4.37 4.08 Wages as % to total expenses 4.05 5.7 7.47 7.41 7.01 10.93 17.2 Return on Assets 1.13 1.31 1.48 1.3 1.09 1.03 1.05 CRAR 11.1 10.36 11.78 13.35 11.69 12.1 12.3 Net NPA ratio 5.21 2.21 1.65 0.72 1.02 1 1
Source: Reference numbered as 22
72
Annex – 14: Comparison with other well known banks for the year 2000- 2004
(Amount in Rs. Crores) Particulars HDFC BANK ICICI BANK IDBI BANK UTI BANK Capital 406.86 196.81 140 131.9 Reserve 508.24 952.68 119.56 107.64 Total Income 805.22 1046.92 478.92 574.42 Profit 120.04 105.29 60.98 50.92
For the year 2000
Particulars HDFC BANK ICICI BANK IDBI BANK UTI BANK Capital 243.6 220.35 140 131.9 Reserve 669.49 1092.25 128.12 169.55 Total Income 1444.99 1462.13 608.67 1052.63 Profit 210.12 161.09 19.35 86.12
For the year 2001
Particulars HDFC BANK ICICI BANK IDBI BANK UTI BANK Capital 281.37 963.03 140 191.88 Reserve 1851.29 5655.1 221.83 501.59 Total Income 206.24 2726.59 631.86 1595.4 Profit 297.04 258.3 52.42 134.14
For the year 2002
73
Particulars HDFC BANK ICICI BANK IDBI BANK UTI BANK Capital 282.05 962.66 140.08 230.19 Reserve 2325.82 6325.7 289.16 810.38 Total Income 2496.07 12526.88 763.14 1875.28 Profit 387.6 1206.18 71.1 192.8
For the year 2003 Particulars HDFC BANK ICICI BANK IDBI BANK UTI BANK Capital 284.79 966.4 214.24 231.58 Reserve 2813.86 7447.25 482.59 1088.57 Total Income 3028.96 11958.95 947.02 22126.86 Profit 509.5 1637.09 132.46 278.31
For the year 2004
Source: Reference numbered as 39
74 11. References 11.1 References from books:
1. Paresh P. Shah, (2006), Financial Management, New Delhi, biztantra, an Imprint of Dreamtech Press, Pg -11 2. Vipin Gupta, Kamala Gollakota and R. Srinivasan,(2007), Business Policy and Strategic Management, Concepts and Application, Prentice Hall of India Pvt Ltd.,Pg-188 3. Milford B. Green, (1990), Mergers and acquisitions: geographical and spatial perspectives. London ; New York : Rout ledge, Pg – 13 4. Donald Depamphilis, ( 2002), Mergers, Acquisitions and Other Restructuring Activities 5. Aswath Damodaran, (2006), Corporate Finance (2nd Edition), Singapore, John Wiley & Sons (ASIA) Pte Ltd., Pg – 834 – 842 6. Debraj Dutta and Mahua Dutta, (2006), Marketing Management, Vrinda Publications Pvt Ltd, Pg - 54 7. M.Y.Khan and P.K.Jain, (2004), Management Accounting, Tata McGraw Hill Publishing Company Limited, Pg – 4.1 - 4.71
11.2 References from articles:
8. Article by Ajay Shah, MEDIAPAGE 9. Article by N.S. Vageesh, Business Line, Financial Daily, Hindu Publication, December 10, 2008 10. Consolidation in the Indian Financial Sector, Special address delivered by Shri V. Leeladhar, Deputy Governor, Reserve Bank of India on April 17, 2008 in Mumbai on the occasion of the International Banking & Finance Conference 2008 organised by the Indian Merchants’ Chamber, Mumbai. 11. Gains from Consolidation By S. Vaidya Nathan
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11.3 Reference from non-print media:
12. http://www.icicibank.com/pfsuser/aboutus/overview/overview.htm 13. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/pdf/2 001-2002%5Car(18-44).pdf 14. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/pdf/2 001-2002/a_r2k2(69-80).pdf 15. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/pdf/2 001-2002/ar_2k2(001-005).pdf 16. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/pdf/a r2k3.pdf 17. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/icicib ank/annualreport_04.htm 18. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/icicib ank/annualreport_05.htm 19. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/icicib ank/annualreport_06.htm 20. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/icicib ank/annualreport_07.htm 21. http://www.icicibank.com/pfsuser/aboutus/investorelations/annualreport/icicib ank/annualreport.htm 22. http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=A%20Profile %20of%20Banks 23. http://www.rbi.org.in/rbi-sourcefiles/annualdata/bs_annualdata.aspx 24. http://www.financialexpress.com/news/Sangli-Bank-merges-with-ICICI- Bank/186137/ 25. http://www.mayin.org/ajayshah/MEDIA/2000/icicibank-bankofmadura.html
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26. http://www.thehindubusinessline.com/2006/12/11/stories/2006121101251400. htm 27. http://www.hinduonnet.com/businessline/2000/12/10/stories/141008uu.htm 28. http://www.karvy.com/articles/icicibom.htm 29. http://myiris.com/shares/company/reportShow.php?url=AMServer %2F2001%2F04%2FICICIBCO_20010426.htm#strategies 30. http://myiris.com/shares/company/reportShow.php?url=AMServer %2F2001%2F10%2FICICIBCO_20011025.htm 31. http://myiris.com/shares/company/reportShow.php?url=AMServer %2F2002%2F05%2FICICIBCO_20020503.htm 32. http://www.hinduonnet.com/businessline/2001/10/25/stories/14250801.htm 33. http://www.hinduonnet.com/businessline/iw/2001/11/04/stories/0204b052.htm 34. http://www.financialexpress.com/news/Sangli-Bank-merges-with-ICICI- Bank/186137/ 35. http://www.moneycontrol.com/stocks/companydetails/hist_graph.php 36. http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/16016.pdf 37. http://www.banknetindia.com/banking/80319.htm 38. http://www.thehindubusinessline.com/2006/12/09/stories/2006120905850100. htm 39. http://www.rbi.org.in/rbi-sourcefiles/annualdata/bs_annualdata.aspx
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