AN EMPIRICAL STUDY OF FINANCIAL PERFORMANCE OF ICICI BANK- A COMPARATIVE ANALYSIS. Ms. Shikha Gupta

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1 AN EMPIRICAL STUDY OF FINANCIAL PERFORMANCE OF ICICI BANK- A COMPARATIVE ANALYSIS Ms. Shikha Gupta Assistant Professor (Finance & Marketing), Institute of Innovation in Technology and Management, Janakpuri. New Delhi. - shikhagupta.iitm@gmail.com ABSTRACT In today s financial world, financial performance is a mundane amongst the perspective of various stakeholders, be it in the management, lenders, owners and investors perspective. And it is out of analysis of financial statements. Financial performance is crucial for taking financial decisions related to planning and control. Hence, it forms the basis as one of the paramount importance for taking financial decisions effectively. Banking Sector plays an important role in economic development of a country. The banking system of India is featured by a large network of bank branches, serving many kinds of financial services of the people Industrial Credit and Investment Corporation of India (ICICI) Bank today is a leading player in Indian banking industry and is deeply engaged in human and economic development at the national level. The Bank works closely with ICICI Foundation across diverse sectors and programs. As of 2014 it is the second largest bank in India in terms of assets and market capitalization. ICICI bank emerged as a pioneer venture on the horizon of offering an expanded range of banking products and financial services for corporate and retail customers through its diverse delivery channels and specialized subsidiaries in the areas of investment banking, asset management, venture capital and insurance. In the light of its strategic importance in the nation interest, it is crucial to evaluate the financial performance of the ICICI Bank. And the present study focused on operational control, profitability and solvency etc. This research paper is aimed to analyse and compare the Financial Performance of ICICI Bank and offer suggestions for the improvement of efficiency in the bank. Keywords: Advances, ICICI, financial performance, Solvency, Investment banking, Leverage Ratio

2 INTRODUCTION Today a large section of people, who have minimal financial literacy, are keen to know the financial performance status of the banks where their deposits are vested. They may be as an investor, manager, employee, owner, lender, customer, government and public at large. Financial performance is not airily available from the records and files in any organisation. It has to be derived by the usage of financial statement analysis techniques. The selection and usage of technique is subject to the option of the user. Some of the important and commonly used techniques are: Ratio Analysis, Cross section analysis Comparative statement analysis, Time series analysis, Common size analysis, and DuPont Analysis. The usefulness of ratios depends on skilful interpretation and intelligence of the user. The present study is devoted to analyse the financial performance of ICICI Bank by using ratio analysis with a view to give meaningful interpretations for the stakeholders of the selected company. Industry profile: An efficient banking system is recognized as basic requirement for of any economy as they play crucial role in the economic development of an economy. Banks mobilize the savings of community into productive channels. The Indian banking system is featured by a large network of bank branches, serving many kinds of financial needs of the people. It is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of massive manpower, excessive Non Performing Assets (NPAs), while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. PSB s share is 78 and 79 percent in total deposits and advances respectively. Over the last four years their deposits and advances have grown 2.2 and 2.3 times respectively.(the Indian Express Sep ). Company Profile: ICICI Bank was originally promoted in 1994 by the Industrial Credit and Investment Corporation of India (ICICI), an Indian financial institution, as a wholly owned subsidiary. ICICI Limited, an Indian financial institution, and was its whollyowned subsidiary. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The bank was initially known as the Industrial Credit and Investment Corporation of India Bank, before it changed its name to the abbreviated ICICI Bank. The parent company was later merged with the bank. ICICI Bank launched internet banking operations in 1998 ICICI Bank Ltd is a major banking and financial services organization in India. The Bank is the second largest bank in India and the largest private sector bank in India by market capitalization. They are a publicly held banking

3 company engaged in providing a wide range of banking and financial services including commercial banking and treasury operations. The Bank and their subsidiaries offers a wide range of banking and financial services including commercial banking, retail banking, project and corporate finance, working capital finance, insurance, venture capital and private equity, investment banking, broking and treasury products and services. They offer through a variety of delivery channels and through their specialised subsidiaries in the field of investment banking, life and non-life insurance, venture capital and asset management. The Bank has a network of 2,035 branches and around 5,518 ATMs in India and presence in 18 countries. They have subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. ICICI Bank is India's largest private sector bank with total assets of Rs. 5, billion (US$ 99 billion) at March 31, 2014 and profit after tax Rs billion (US$ 1,637 million) for the year ended March 31, In 2000, ICICI Bank became the first Indian bank to list on the New York Stock Exchange with its five million American depository shares issue generating a demand book 13 times the offer size. The bank has contributed to the set up of a number of Indian institutions like National Stock Exchange of India (NSE), Credit Rating Information Services of India Limited (CRISIL), National Commodity & Derivatives Exchange Limited (NCDEX), Entrepreneurship Development Institute of India (EDII) etc. to establish financial infrastructure in the country over the years. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). Company s Vision: ICICI Bank s vision is To be the leading provider of financial services in India and a major global bank. In other words, its vision is to be the preferred bank for total financial and banking solutions for both corporate and individuals. For over five decades, the ICICI Group has partnered India in its economic growth and development. Promoting inclusive growth has been a priority area for the Group from both a social and business perspective. The ICICI Group strives to make a difference to its customers, to the society and to the nation s development directly through its products and services, as well as through development initiatives and community outreach. ICICI Foundation for Inclusive Growth (ICICI Foundation) was founded by the ICICI Group in early 2008 to carry forward and build upon its legacy of promoting inclusive growth. ICICI Foundation works within public systems and

4 specialised grassroots organisations to support developmental work in four identified focus areas Company s Mission: ICICI Bank s Mission is to leverage their people, technology, speed and financial capital to: Be the banker of first choice for their customers by delivering high quality, world-class products and services. Expand the frontiers of their business globally. Play a proactive role in the full realisation of India s potential. Maintain a healthy financial profile and diversify their earnings across businesses and geographies. Maintain high standards of governance and ethics. Contribute positively to the various countries and markets in which they operate. Create value for their stakeholders. I. REVIEW OF LITERATURE Reddy K. Sriharsha (2012) analysed relative performance of banks in India using CAMEL approach. It is found that public sector banks have appreciably improved indicating positive impact of the reforms in liberalizing interest rates, rationalizing directed credit and Investments and increasing competition. Joseph Jelsy and Vetrivel, (2012) have studied the financial performance in connection with Activity Based Costing, and concluded that better cost predictions, loss making products are identified. The ABC can be used for cost reduction, DSS( Decision Support System) budgeting and better performance measurement in order to improve the financial performance of the companies. Aggarwal Nisha, Gupta Neeti - ICICI provides full assistance to the creation, expansion and modernization of industrial enterprises within the private sector in India and encourages the participation of private capital, both internal and external, in such enterprises. Khan M. Y.- Recently ICICI Ltd. (along with two of its subsidiaries, ICICI Personal Finance Services Ltd. and ICICI Capital Services Ltd.) has been merged with ICICI bank Ltd; effective from May3, The erstwhile DFI has thus ceased to exist. Its main objective is to encourage and promote private ownership of industrial investment and expansion of investment markets. Singh A.B., Tondon P. (2012) examined the financial performance of SBI and ICICI Bank, public sector and private sector respectively. The study found that SBI is performing well and financially sound than ICICI Bank but in context of deposits and expenditure ICICI bank has better managing efficiency than SBI.

5 Srinivas K., Saroja L.(2013) compared and analyzed the Financial Performance of HDFC and ICICI Bank. For the purpose of analysis of comparative financial performance of the selected banks using CAMELS model with t- test. The result showed that there is no significance difference between the ICICI and HDFC bank s financial performance but the ICICI bank performance is slightly less compared with HDFC. STATEMENT OF PROBLEM No research is completed until it has formulated a specific problem. The problem of the study is to analyze the financial status of ICICI Bank Ltd. Objectives of the study: To know the growth rate of the company in terms of turnover, share capital, PAT, net worth, nets assets and investments during the study period. To assess the profitability To assess short and long-term solvency To judge the utilization of its resources. II. RESEARCH METHODOLOGY The period of evaluating financial performance of ICICI bank ranging from to i.e. for five years. Secondary data is collected from annual reports of the company in Table 4 (Dion Global Solutions Limited) and online database. To analyze the data the standard tool ratio analysis is applied for the study. For evaluating the financial performance and better controlling the activities of the ICICI bank, the ideal norms are industry average ratios. III. DATA ANALYSIS AND FINDINGS The growth rate of the selected company in terms of PAT, turnover, share capital, net worth, investments, total assets are furnished in table 2. It is observed from the table 2 that the growth rate of profit, share capital and reserve & surplus over last five years are %, 3.58% and 42.66% respectively. The interest earned is 44,178.15cr as compared to 41,155.53cr, 30,641.16cr, 8,767.12cr and 8,253.53cr of HDFC Bank, Axis Bank, Kotak Mahindra and IndusInd Bank respectively for Mar,14. The financial performance of the ICICI Bank has been analyzed by grouping the financial ratios in four broad categories viz; Liquidity ratios, profitability ratio and activity ratio as it is an important technique of financial statement analysis. They are useful for understanding the financial position of the company. Liquidity Ratios: Ratios provide in a summarized and concise form of fairly good idea

6 about the financial position of a unit. They are important tools for financial analysis. Liquidity ratios measure the availability of cash to pay maturing current obligations. Current Ratio: The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year. The ideal current ratio is 2:1 i.e. current assets must be twice of current liabilities. In case this ratio is less that the ideal ratio of 2:1, the short term financial position is not supposed to be very sound. And in case it is more than the ideal one, than it shows idleness of working capital. The current ratio is presented in table 3. From the table 3 it has been observed that there is ups and down during the study period. The current ratio of ICICI bank is lower than the standard norm (2:1) throughout the study period and shows the bank s ability to pay its current liabilities is not sound enough. The current Ratio or liquid ratio of the bank for the study period are; 0.09, 0.98, 0.12, 0.07, 0.14 respectively. There is high modulation in liquidity ratio of the bank. Hence, the analysis gives the exact result and provides a way to the management to take remedial steps to control and improve the extreme deviations the solvency position of the company. Quick Ratio/ Acid test ratio: The Quick Ratio attempts to measure the ability of the firm to meet its obligations relying solely on its more liquid Current Asset accounts such as Cash and Accounts Receivable. This ratio is calculated by dividing Current Assets less Inventories by Current Liabilities. The ideal quick ratio is 1:1 i.e, liquid assets must be ideally equal to the current liabilities. In case the ratio falls short of 1:1 than it depicts weak short term financial position and vice versa. The current ratio of ICICI Bank for the study period is shown in Table 3. From the table 3 it is eminent that the acid test ratio of ICICI is in multiples of standard norm i.e. 1:1 during the study period. The quick ratio of ICICI Bank is 11.31, 10.53, 9.37, 15.86, and respectively during the study period. This reveals the healthy sign in its solvency position and if look at the other side it symbolize the ineffective financial management. Leverage ratios: The ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. The Debt Ratio, Debt-Equity Ratio, and Equity Multiplier are essentially three ways of looking at the same thing: the firm's use of debt to finance its assets. The most well known financial leverage ratio is the debt-to-

7 equity ratio (Total Debt to Owners Fund) viz. used in the current study. company. The processed information regarding EPS has been furnished in Table 3. Total Debt to Owners Fund (DER): A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. It measures the long term solvency of the firm. Normally DER of 2:3 or 0.67 is considered as satisfactory. The Total Debt to Owners Fund is shown in Table 3. From the table 3, The Total Debt to Owners Fund of ICICI Bank is 4.53, 4.39, 4.23, 4.10 and 3.91 respectively for the study period. By analysing these figures it is clear that the bank is highly levered. A higher proportion is not considered as good and it s an indication of early warning signal for insolvency of the firm. By observing the data it is clear that the bank uses too much debt in its capital structure. Profitability Ratio: A profitability ratio is a measure of profitability, which is a way to measure a company's performance. It can be derived by either on sales or investments. Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income. It includes profit margin, ROI, ROA, ROE, Net profit after tax to net worth. In this study EPS has been used to assess the profitability of the EPS (Earning Per Share): Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio i.e. whether the company is able to use its equity share capital effectively while comparing with other companies in the industry. It is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. From table 3, it is observed that the growth of profit after tax is excellent throughout the study period. And EPS has amplified from to Hence it can be inferred that the bank s overall performance is quite good over the years in effective utilization of its equity share capital. While looking at EPS of the bank, it is clear that it is increasing progressively during the study period. Dividend Payout Ratio: The DP ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. It is the percentage of earnings paid to shareholders in dividends. The ratio has great importance to the shareholders and management. The higher the ratio, the better it is. The processed information pertaining to the ICICI Bank is given in Table 3.

8 From the table 3, it is observed that the range of DP Ratio is 27.07, 27.71, 29.41, 31.30, and respectively. The DP ratio is declining over the years and reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend-paying stocks. Activity Ratio: Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources. These includes Debtor turnover ratio, inventory turnover ratio and total assets turnover ratio. But in this paper Asset Turnover Ratio and Total Assets Turnover Ratio were applied to test the effectiveness of the bank. Asset Turnover Ratio: The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets. In other words, the amount of sales or revenues generated per unit of assets. It can be said that the higher the ratio, the better it is, since it implies the company is generating more revenues per unit of assets. The statistics regarding Asset turnover ratio is enlisted in table 3. From table 3, it is observed that the range of Asset Turnover Ratio of ICICI bank is 0.08, 0.08, 0.08, 0.07 and 0.10 respectively which is quite stable and a good sign. Total Assets Turnover Ratios: The Total Assets Turnover Ratio is a financial ratio that measures the efficiency of a company's use of its assets in making sales revenue. This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets. The lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more sluggish the firm's sales. This may indicate a problem with one or more of the asset categories composing total assets - inventory, receivables, or fixed assets. The Total Assets Turnover Ratio of ICICI bank is shown in table 3. From the table 3, it is clear that the Total Assets Turnover Ratio if the bank is 0.07, 0.07, 0.06, 0.08 and 0.09 respectively for the study period. Initially it was surged from 0.09 to 0.06 in two years but has revived again. This means the efficiency of the management has been improved a lot. Findings: After the study of the components of current assets & current liabilities and the trends of working capital, it was found that: The liquidity position of the bank is not good. The current ratio is below 1 (current liabilities exceed current assets)

9 for the study period, then the bank may have problems paying its bills on time. However, low values do not indicate a critical problem but should concern the management. The DER is quite high viz. worrisome, as it indicates a precarious amount of leverage. To address this concern, bank can also analyze the firm's interest coverage ratio, which is the company's operating income divided by debt service payments. A high operating income will allow even a debt-burdened firm to meets its obligations. A consistent improvement in the EPS figure year after year from to is the indication of continuous improvement in the earning power of the bank. This increasing EPS is the sign of higher earnings, strong financial position and, therefore, a reliable firm to invest money. Asset turnover ratio should be looked at together with the company's financing mix and its profit margin for a better analysis. A lower turnover ratio means that the company is not using its assets optimally. Total asset turnover ratio is a key driver of return on equity which is quite constant. There should be a steady stream of sustainable dividends from a company, the dividend payout ratio analysis is important. A consistent trend in this ratio is usually more important than a high or low ratio. Bank has fallen a percentage each year for the last five years might indicate that the company can no longer afford to pay such high dividends. This could be an indication of poor operating performance. SUGGESTIONS & CONCLUSION The bank has to take an appropriate measure to keep current ration and Quick ratio on par with the norms. The NPAs of the ICICI bank is more than one per cent, hence should control NPAs otherwise it affects the asset quality in long run. Proper control over leverage should be taken in order to magnify DP ratio. The spread of the ICICI bank should control otherwise the income of the bank is eaten away by the interest expenses in the long-run. The Earning per share is however long standing. Table 1: Share capital of ICICI Bank as on 31 st March, 2014 Details Amount (Rs. Crores) Authorised Share capital 1275 Issued and paid up capital

10 Source: Annual reports of the company Table 2: Growth of ICICI Bank (Rs. Crores) Years Total Assets 594, , , , , Equity Share Capital 1, , , , , Reserves & surplus 72, , , , , P/L Before Tax 13, , , , , Tax 4, , , , , P/L After Tax from Ordinary Activities 9, , , , , EPS Investments 177, , , , , Net Worth Table 3: Various Ratios of ICICI Bank Years Current Ratio Quick Ratio Total debt to owner s fund(der) EPS Dividend Payout Ratio Asset Turnover Ratio Total Assets Turnover Ratios Table 4: Standalone Profit & Loss account in Rs. Cr Mar '14 Mar '13 Mar '12 Mar '11 Mar '10 Income Interest Earned 44, , , , , Other Income 10, , , , , Total Income 54, , , , , Expenditure

11 Interest expended 27, , , , , Employee Cost 4, , , , , Selling and Admin Expenses , Depreciation Miscellaneous Expenses 12, , , , , Preoperative Exp Capitalised Operating Expenses 10, , , , , Provisions & Contingencies 6, , , , , Total Expenses 44, , , , , Net Profit for the Year 9, , , , , Extraordionary Items Profit brought forward 9, , , , , Total 19, , , , , Preference Dividend Equity Dividend 2, , , , , Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Transfer to Statutory Reserves 3, , , , , Transfer to Other Reserves Proposed Dividend/Transfer to Govt 2, , , , , Balance c/f to Balance Sheet 13, , , , , Total 19, , , , , Source : Dion Global Solutions Limited Standalone Balance Sheet in Rs. Cr Mar '14 Mar '13 Mar '12 Mar '11 Mar '10 Capital and Liabilities: Total Share Capital 1, , , , , Equity Share Capital 1, , , , , Share Application Money Preference Share Capital Reserves 72, , , , , Revaluation Reserves Net Worth 73, , , , ,618.37

12 Deposits 3,31, ,92, ,55, ,25, ,02, Borrowings 1,54, ,45, ,40, ,09, , Total Debt 4,86, ,37, ,95, ,35, ,96, Other Liabilities & Provisions 34, , , , , Total Liabilities 5,94, ,36, ,89, ,06, ,63, Assets Cash & Balances with RBI 21, , , , , Balance with Banks, Money at Call 19, , , , , Advances 3,38, ,90, ,53, ,16, ,81, Investments 1,77, ,71, ,59, ,34, ,20, Gross Block 4, , , , , Accumulated Depreciation , Net Block 4, , , , , Capital Work In Progress Other Assets 32, , , , , Total Assets 5,94, ,36, ,89, ,06, ,63, Source : Dion Global Solutions Limited Techniques to Financial Markets Interfaces; (Mar/Apr2003, vol. 33 issue 2), (Pg12-24). References & Bibliography Barman R. B. and Samanta G. P Banking Services Price Index: An Exploratory Analysis for India ( Bhadury Prof. Subrato (2007) conducted study on Commercial banking in India new challenges and opportunities after liberalization South Asian Journal of Socio-Political Studies (Vol No-2, Jan-June 2007). Board John Sutcliffe, Ziemba Charles, William T.(2003). Applying Operations Research Brown Craig O. and Dinc I. Serdar (2005) The Politics of Bank Failures: Evidence from EmergingMarkets Quarterly Journal of Economics, (November 2005) (Pg ). Chidambaram R.M and Alamelu (1994): Profitability in Banks A matter of Survival, The Banker: pp 1-3 May. Chowdari Prasad and K.S. Srinivasa Rao (2004) : Private Sector Banks in India - A SWOT Analysis, Bankers Profession, pp 28-33

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