FINANCIAL
MANAGEMENT
ASSIGNMENT
FINANCIAL STATEMENT ANALYSIS
OF
COMPARATIVE STUDY
FINANCIAL YEARS
2004-05 AND 2003-04
Submitted By,
Rupesh Nahata (05BS2864)
Nitin Chowdhry (05BS4078)
Gautam B. Dash (05BS1230)
Varun K. Jain (05BS3758)
Rahul Singh (05BS2607)
Overview
ICICI Bank is India's second-largest bank with total assets of about
Rs.1,67,659 crore at March 31, 2005 and profit after tax of Rs. 2,005 crore for
the year ended March 31, 2005 (Rs. 1,637 crore in fiscal 2004). ICICI Bank
has a network of about 560 branches and extension counters and over 1,900
ATMs. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery
channels and through its specialised subsidiaries and affiliates in the areas of
investment banking, life and non-life insurance, venture capital and asset
management. ICICI Bank set up its international banking group in fiscal 2002
to cater to the cross border needs of clients and leverage on its domestic
banking strengths to offer products internationally. ICICI Bank currently has
subsidiaries in the United Kingdom, Canada and Russia, branches in
Singapore and Bahrain and representative offices in the United States, China,
United Arab Emirates, Bangladesh and South Africa.
ICICI Bank's equity shares are listed in India on the Stock Exchange, Mumbai
and the National Stock Exchange of India Limited and its American
Depositary Receipts (ADRs) are listed on the New York Stock Exchange
(NYSE).
As required by the stock exchanges, ICICI Bank has formulated a Code of
Business Conduct and Ethics for its directors and employees.
At April 4, 2005, ICICI Bank, with free float market capitalization* of about
Rs. 308.00 billion (US$ 7.00 billion) ranked third amongst all the companies
listed on the Indian stock exchanges.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian
financial institution, and was its wholly-owned subsidiary. ICICI's shareholding
in ICICI Bank was reduced to 46% through a public offering of shares in India
in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in
fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock
amalgamation in fiscal 2001, and secondary market sales by ICICI to
institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955
at the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to create a
development financial institution for providing medium-term and long-term
project financing to Indian businesses. In the 1990s, ICICI transformed its
business from a development financial institution offering only project finance
to a diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like
ICICI Bank. In 1999, ICICI become the first Indian company and the first bank
or financial institution from non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context
of the emerging competitive scenario in the Indian banking industry, and the
move towards universal banking, the managements of ICICI and ICICI Bank
formed the view that the merger of ICICI with ICICI Bank would be the optimal
strategic alternative for both entities, and would create the optimal legal
structure for the ICICI group's universal banking strategy. The merger would
enhance value for ICICI shareholders through the merged entity's access to
low-cost deposits, greater opportunities for earning fee-based income and the
ability to participate in the payments system and provide transaction-banking
services. The merger would enhance value for ICICI Bank shareholders
through a large capital base and scale of operations, seamless access to
ICICI's strong corporate relationships built up over five decades, entry into
new business segments, higher market share in various business segments,
particularly fee-based services, and access to the vast talent pool of ICICI and
its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI
Bank approved the merger of ICICI and two of its wholly-owned retail finance
subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited, with ICICI Bank. The merger was approved by shareholders
of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at
Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai
and the Reserve Bank of India in April 2002. Consequent to the merger, the
ICICI group's financing and banking operations, both wholesale and retail,
have been integrated in a single entity.
*Free float holding excludes all promoter holdings, strategic investments and
cross holdings among public sector entities.
Financial Statement Analysis
A financial statement analysis consists of the application of analytical tools
and techniques to the data in financial statements in order to derive from them
measurements and relationships that are significant and useful for decision
making.
Uses of Financial Statement Analysis
Financial Statement Analysis can be used as a preliminary screening tool in
the selection of stocks in the secondary market. It can be used as a
forecasting tool of future financial conditions and results. It may be used as
process of evaluation and diagnosis of managerial, operating or other problem
areas.
Sources of Financial Information
The financial data needed in the financial analysis come from many sources.
The primary source is the data provided by the company itself in its annual
report and required disclosures. The annual report comprises of the income
statement, the balance sheet, and the statement of cash flows.
Tools of Financial Analysis
In the analysis of financial statements, the analyst has a variety of tools
available to choose the best that suits his specific purpose. In this report we
will confine ourselves to Ratio Analysis based on information provided from
financial statements such as Balance Sheet and Profit & Loss Account.
Ratio Analysis
(A)Liquidity Ratios
The term liquidity means ability of the business to pay its short term liabilities.
This ability can be measured by the use of liquidity ratios. Short term liquidity
involves the relationship between current assets and current liabilities but in
case of banking sector it is not applicable.
(B)Turnover Ratios
Turnover ratios measure the liquidity of a firm in an indirect way. Turnover
ratios include Debtor’s Turnover Ratio and Inventory Turnover Ratio but in
case of banking sector it is not applicable.
(C)Profitability Ratios
This ratios measure the efficiency of the firm’s activities and its ability to
generate profits.
2005 2004
1. Net Profit Margin Ratio:
Net Profit 16.23% 14.14%
Net Sales(Operating income)
ICICI has improved on its profit margin over the year by 2.09% from 14.14%
to 16.23%.
2. Asset Turnover Ratio:
Net Sales(Operating income) 0.075 0.092
Total Assets
This ratio signifies that ICICI, over the year has degraded the asset turnover
ratio from 0.092 to 0.075 which is negative.
3. Earning Power Ratio:
EBIT 1.53% 1.51%
Total Assets
This ratio signifies that ICICI has been able to increase its Earning Power
Ratio marginally which is positive but there is no significant improvement in its
performance.
4. Return on Equity:
Net Income 17.9% 21.8%
Equity Share Capital
It is seen from the data available that company is able to generate 17.9% of
income from shareholder’s funds. ICICI has degraded over the past year by
3.9%.
(D)Ratios for evaluating operating performance
1. Net interest margin (NIM):
For banks, interest expenses are their main costs (similar to manufacturing
cost for companies) and interest income is their main revenue source. The
difference between interest income and expense is known as net interest
income. It is the income, which the bank earns from its core business of
lending. Net interest margin is the net interest income earned by the bank on
its average earning assets. These assets comprises of advances,
investments, balance with the RBI and money at call.
Interest income – Interest expenses 2.4% 1.9%
Average earning assets
ICICI has significantly improved its performance from 1.9% to 2.4%.
2. Operating profit margins (OPM):
Banks operating profit is calculated after deducting administrative expenses,
which mainly include salary cost and network expansion cost. Operating
margins are profits earned by the bank on its total interest income. For some
private sector banks the ratio is negative on account of their large IT and
network expansion spending.
Net interest income (NII)–operating expenses -0.13% 3.42%
Total interest income
The negative % implies operating expenses superceding the net interest
income. Hence it can be implied that ICICI has degraded over the past 1year.
3. Cost to income ratio:
Controlling overheads are critical for enhancing the bank’s return on equity.
Branch rationalization and technology upgradation account for a major part of
operating expenses for new generation banks. Even though, these expenses
result in higher cost to income ratio, in long term they help the bank in
improving its return on equity. The ratio is calculated as a proportion of
operating profit including non-interest income (fee based income).
Operating expenses 42.2 41.9
NII + non interest income
This shows that it operating expenses have marginally increased compared to
interest income.
4. Other income to total income:
Fee based income account for a major portion of the bank’s other income.
The bank generates higher fee income through innovative products and
adapting the technology for sustained service levels. This stream of revenues
is not depended on the bank’s capital adequacy and consequently, potential
to generate the income is immense. The higher ratio indicates increasing
proportion of fee-based income. The ratio is also influenced by gains on
government securities, which fluctuates depending on interest rate movement
in the economy.
26.63% 25.4%
(E)Other key financial ratios (Banking Sector specific)
1. Credit to deposit ratio (CD ratio):
The ratio is indicative of the percentage of funds lent by the bank out of the
total amount raised through deposits. Higher ratio reflects ability of the bank to
make optimal use of the available resources. The point to note here is that
loans given by bank would also include its investments in debentures, bonds
and commercial papers of the companies (these are generally included as
part of investments in the balance sheet).
87.16% 90.17%
A decrease in the CD ratio shows the decrease in the rate of lending.
2. Capital adequacy ratio (CAR):
A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or
weighted) assets. The RBI has set the minimum capital adequacy ratio at
10% as on March 2002 for all banks. A ratio below the minimum indicates
that the bank is not adequately capitalized to expand its operations. The ratio
ensures that the bank do not expand their business without having adequate
capital.
Tier I capital + Tier II capital 10.36 11.78
Risk weighted assets
3. NPA ratio:
The net non-performing assets to Net customer assets ratio is used as a
measure of the overall quality of the bank’s loan book. Net NPAs are
calculated by reducing cumulative balance of provisions outstanding at a
period end from gross NPAs. Higher ratio reflects rising bad quality of loans.
Net non-performing assets 2.0% 2.9%
Net customer assets
The ratio of net non-performing assets to net customer assets decreased to
2.0% at March 31, 2005 from 2.9% at March 31, 2004 which is positive.
4. Return On Asset Ratio (ROA):
Returns on asset ratio is the net income (profits) generated by the bank on its
total assets (including fixed assets). The higher the proportion of average
earnings assets, the better would be the resulting returns on total assets.
Similarly, ROE (returns on equity) indicates returns earned by the bank on its
total net worth.
Net profits 1.4 1.4
Avg. total assets
It is seen that the Returns on asset ratio has remained constant for the two
years.
(F)Ownership Ratios
Ownership ratios will help the stockholder to analyze their present and future
investment in a firm. Ownership ratios compare the investment value with
factors such as debt, earnings, dividend, etc.
1. Earning Per Share :( EPS)
PAT Rs. 27.6 Rs. 26.7
Number of Shares
ICICI has improved in one year by raising its EPS by Rs. 0.9. It is almost 3.4%
higher than previous year’s EPS.
2. Price Earning Ratio: (P/E)
Market Price of Share 14.24 11.08
EPS
P/E Ratio shows how much confidence the investors hold in the share of a
company. In 2004 investors were willing to invest Rs.11.08 for each rupee
earned by the company, which has now increased to 14.24 which shows
investors confidence in ICICI’s future prospects.
(G)Leverage Ratio
When we extend the analysis to the long term solvency of a firm we have two
types of leverage ratios. They are structural ratios and coverage ratios.
1. Debt-Equity Ratio:
Debt 3.24 4.77
Equity Funds
The debt proportion with respect to equity funds has substantially reduced
from 4.77 to 3.24 over the year. As such ICICI has less amount of short term
liability at the end of financial year 2005. This can be mainly attributed to the
IPO of ICICI Bank in 2004-05.
2. Debt-Asset Ratio:
Debt 0.25 0.32
Total Assets
In year 2004 each unit of an asset was financed 32% by debt and rest by
equity, which has come down to 25%. It means that ICICI has improved and it
is less dependant on the debt funds to finance its assets.
(H)Dividend Ratios
A stockholder is very much concerned about the firm’s policy regarding the
payment of cash dividends. The firm must be liquid and profitable to pay
consistent and adequate dividends. These ratios are dividend payout ratio
and dividend yield ratio.
1. Dividend Pay-Out Ratio:
Dividend per Share 30.8% 28.09%
Earning per Share
ICICI has been consistent over past two years in paying off dividend to its
shareholders. Company has been paying off approximately 30% of its earning
as dividends to its share holders.
2. Dividend Yield:
Dividend per Share 2.2% 2.53%
Market Price of Share
This ratio gives current return on one’s investment. This is mainly of interest to
the investors who are desirous of getting income in the form of dividends.
Summary of Ratios
Ratio 2004-05 2003-04
A. Liquidity Ratios NA NA
B. Turnover Ratios NA NA
C. Profitability Ratios
Net Profit Margin Ratio 16.23% 14.14%
Asset Turnover Ratio 0.075 0.092
Earning Power 1.53% 1.51%
Return on Equity 17.9% 21.8%
D. Ratios for evaluating operating
performance
Net interest margin (NIM): 2.4% 1.9%
Operating profit margins (OPM): -0.13% 3.42%
Cost to income ratio: 42.2 41.9
Other income to total income: 26.63% 25.4%
E. Other key financial ratios
Credit to deposit ratio (CD ratio): 87.16% 90.17%
Capital adequacy ratio (CAR): 10.36 11.78
NPA ratio: 2% 2.9%
Return On Asset Ratio : 1.4 1.4
F. Ownership Ratios
Earning per Share Rs. 27.6 Rs. 26.7
Price Earning Ratio 14.24 11.08
G. Leverage Ratios
Debt-Equity Ratio 3.24 4.77
Debt-Asset Ratio 0.25 0.32
H. Dividends Ratios
Dividend Pay-Out Ratio 30.8% 28.09%
Dividend Yield 2.2% 2.53%