HISTORY OF BANKING SYSTEM IN INDIA...................................................................3 BASEL II ACCORD.....................................................................................................7 MACROECONOMIC ANALYSIS - PESTEL FRAMEWORK...............................................................10
POLITICAL ANALYSIS.............................................................................................. 10 ECONOMIC ANALYSIS.............................................................................................11 SOCIAL FACTORS...................................................................................................16 TECHNOLOGICAL FACTORS....................................................................................18 ENVIRONMENTAL ANALYSIS...................................................................................18 LEGAL ANALYSIS.................................................................................................... 18 INDUSTRY ANALYSIS – PORTER’S 5 FORCES FRAMEWORK.......................................................19
ICICI BANK OVERVIEW.......................................................................................................................21
INTRODUCTION...................................................................................................... 21 PRODUCT OFFERINGS............................................................................................23 DIVERSIFICATION STRATEGIES...............................................................................24 PERFORMANCE AT DALAL STREET..........................................................................27 CRITICAL ANALYSIS OF ICICI BANK................................................................................................30
COMPETITOR ANALYSIS - CAMELS FRAMEWORK.....................................................30 SWOT ANALYSIS.....................................................................................................44 STRATEGIES FOR ICICI BANK............................................................................................................53
DIRECTIONAL POLICY MATRIX (GE MATRIX)............................................................53 FUTURE IMPLICATIONS.......................................................................................................................60
FUTURE PROJECTIONS OF PROFIT AND LOSS STATEMENT........................................................64
HISTORY OF BANKING SYSTEM IN INDIA
India has always been land of great economist and the banking system in India is as old as its history itself. From past to present, Banking System in India has taken many forms. The phases in the Indian Banking Sector can be divided in 4 parts:
PRE NATIONALIZATION PHASE
With coming up of Britishers in India, commercial banks got established. The first bank to be established was the Central Bank in 17861. After that came the Hindustan Bank and Bengal Bank. The East India Company came up with some of its own banks. They include Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843). Though these Banks worked as independent units but together they were called as Presidency Bank. These three banks were later
amalgamated in 1920 to form Imperial Bank of India. Shareholders of this bank were mainly Europeans.
When Swadeshi movement was on its peak, many Banks with Indian management got established. These included the Punjab National Bank in 1894 with headquarters in Lahore. Bank of Baroda, Canara Bank, Indian Bank, Bank of India, Central Bank of India, and Bank of Mysore were set up. Apart from these banks many small, city level banks were also set up. With no regulation to guide these banks, many banks met with failures. With economy under siege of Britishers, growth of these banks was slow.
Government intervention with banks began in 1930’s. The RBI act was passed in 1934 and Reserve Bank of India was established in 1935. RBI acted as the central bank of India, issuing banking notes and acting as supervisory body for all bank and exchange related activities.
On December 1967 social control of banking sector took underway. This was done to align the banking policy to the need of economic policy. On 22nd December 1967 National Credit Council was set up to discuss and asses the credit priorities of the country2. To promote export, Export credit (interest subsidy) scheme was introduced in 1968. To tighten its control over the banking sector, government established the Banking commission in January 1969. This commission was to look after:
a) Banking costs
b) Legislations affecting banking
c) Indigenous banking
d) Bank procedures
e) Non banking financial intermediaries.
The most important turn in the history of Indian Banking industry came on 19th, July 1969 to when the 14 major schedule commercial banks with deposits over 50 crores were nationalized. With this, the era of mass banking emerged. In 1970 the SLR rate was increased from 25% to 28% and penalty for non compliance of CRR and SLR was introduced which gave teeth to RBI to control the commercial banks. Six more banks were nationalized on 15th April 1980 to further control the heights of the economy.
By the end of 1990’s nearly 80% of the banking sector was under the control of government. The planned economic development required huge development expenditures. This expenditure was met by automatic monetization of fiscal deficit and subjecting the banking sector to large preemption – both in terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and administrative direction of credit to preferred sectors. Focus of development was on sectors like agriculture, small scale industry, retail trade, small businesses and transport. A part of the successes of green revolution could be attributed to these public banks.
Country faced a major humiliation, when it was forced to pledge its gold reserves for avoiding the balance of payment crisis. Narasimha committee was formed to give recommendation on banking sector reforms. On the basis of its report in 1991 CRR and SLR rates were reduced. The SLR has been gradually reduced from a peak of 38.5% to 25%. The CRR was reduced from a peak of 15% during 1989 to 1992 to 4.5% in June 2003. However it has been revised to 6%. The interest rate was deregulated.
There were some institutional reforms too. Board for Financial Supervision (BFS) 3, was formed in 1994, to exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and non-banking companies. It was constituted to form an arms-length relationship between regulation and supervision. On similar lines, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) prescribes policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, authorize the payment and settlement systems and determine criteria for membership to these systems.
Banking sector was open to the private players in 1993. Private investors have been allowed to invest up to 49% in public sector banks. Diversification of ownership, while retaining public sector character of these banks has led to greater market accountability and improved efficiency without loss of public confidence and safety. Since 1993, 12 private banks have been set up.
With increase in FDI limit in the banking sector to 74%4, it attracted many foreign investors. Major shareholdings in ICICI and HDFC banks are of foreign investors only. With large amount of foreign investment and foreign management coming to India, the structure of banking system took a major turn. These private banks started giving services of international standards. Suddenly Indian cities landscape was filled with ATMs.
POST 2000 CHANGES
To overcome the competitions from the private players the public sector banks like SBI started getting structural changes. Other banks were not too far behind. To tap on better employees many bank introduced Voluntary Retirement Schemes (VRS) and let away inefficient manpower in the banking in the system. Many new services were added with the banking system. Insurance and DEMAT account services were a boon more customers and bankers both.
BASEL II ACCORD
The Basel Committee was established by the central-bank Governors of the group of ten countries in 19745. It meets regularly four times a year. The countries which are member to this committee are Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. These countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank.
Though this Committee does not have any formal supervisory authority, and its conclusions do not have legal force, yet it formulates broad supervisory standards and guidelines and recommends statements of best practice. It expects that the individual country authorities will take steps to implement them through detailed arrangements - statutory or otherwise - which are best suited to their own national systems. In this way, the Committee encourages convergence towards common approaches and common standard.
The Basel revised framework is based on three important aspects called three pillars:
BASEL II ACCORD
CAPITAL SUPERVISORY 5 ADEQUACY http://www.bis.org/bcbs/history.htm
1ST PILLAR - CAPITAL ADEQUACY
The first pillar relates to minimum capital requirement for credit risk, operational risk and trading book issues including market risk. There are two approaches for providing capital against credit risk which include Standardized Approach and Internal Rating Based (IRB) approach. For capital requirement in respect to operational risk, the risk can be measured by adopting any of the three approaches, i.e. the Basic Indicator Approach (BIA), Standardized Approach and Advanced Measurement Approach. For market risk the Basel Committee has suggested two broad methodologies; Standardized method and Bank’s internal risk management model.
2ND PILLAR- SUPERVISORY REVIEW
Supervisory review process is intended to ensure that banks have adequate capital to support all the risk in their business and encourage them to develop and use better risk management technique in monitoring and managing risk. Central banks are to evaluate as to how well banks are assessing their capital needs considering their risk profile. There are 4 key principles of supervisory review:
a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.
b) Supervisors should review and evaluate bank’s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios.
c) Supervisors should expect banks to operate above minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.
d) Supervisors should seek to intervene at an early stage to prevent capital to fall below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.
3RD PILLAR- MARKET DISCIPLINE
Capital and risk management are of interest not only to supervisors, but also to all stakeholders, including the banks owners, employee as well as banks depositors and lenders. The objective of 3rd pillar is to complement the minimum capital requirement and supervisory review process through disclosers such as:
a) Capital structure
b) Total amount of Tier 2 capital
c) Bank’s approach to assess the capital adequacy to support its current and future activities
i.e. capital required for credit, market or operational risk.
d) Interest rate risk in the banking books.
MACROECONOMIC ANALYSIS6 - PESTEL FRAMEWORK
The banking Industry in India is a highly regulated industry in which Government and Reserve Bank of India plays an important role. Foreign Banks in India are only allowed to operate on a reciprocity basis; depends on how Indian banks are treated in their home country. Moreover the statutory requirements are changed from time to time to control inflation which gives rise to systematic risk of the banks. Issuing of new licenses to Corporates and changes in the startup capital requirement are some of the issue that is still undecided and depends on the political environment. CRAR is one of the ways in which Political Factors influence the banking industry.
a) CAPITAL TO RISK WEIGHTED ASSETS RATIO
All data for analysis is taken from http://www.rbi.org.in/scripts/AnnualPublications.aspx? head=Basic%20Statistical%20Returns
10 | P a g e
To overcome the risk involved in the banking banks maintain capital base. sector, have to a The
minimum amount of ratio of this capital base with respect to the credit, market and operational risk is known as Capital to Risk Weighted Assets Ratio and is calculated as follows: Total Eligible Capital Fund/ Risk Weighted Asset
The minimum required CRAR for public bank is 9% and for private and foreign banks is 10%. If we look at the CRAR of public, private and foreign banks over the years we see that the ratio has always been above 12%, well above the requirement. By 2010 the public and private sector banks were having CRAR of more than 17% which shows that the banks in India are very safe.
Economic analysis deals with forces operating in the economy which influences the banking sector. Any economy is best described by its GDP. Indian economy is the second fastest growing economy in the world. From 2004 until 2010, India's average quarterly GDP Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output
11 | P a g e
with less than one third of its labor force. This service industry is dependent on the banking sector to provide capital. Banking industry is the heart of the economy which is pumping the liquidity in the economy. Banking sector held an important position in India’s service sector. The growth of the economy directly affects the banking industry.
Deposits constitute a major source of funds for banks in India. As seen in the chart, the deposit of private, public and foreign banks has grown as the GDP8 has grown over the years. This figure also shows the confidence of the customers in banking system of India as the deposit in the bank is a considerable percentage of the GDP.
Inflation refers a general increase in the prices measured against a general level of the power to purchase. To control inflation, RBI uses tools like, CRR (Cash Reserve Ratio), Repo (Repurchase) Rate and Reverse Repo Rate.
Source for Deposit value: http://rbi.org.in Source for GDP value: http://mospi.nic.in/t1_1996_2003q2.htm
12 | P a g e
CRR is the amount of Cash that the banks have to keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the excessive money from the banks. To control increase in inflation rate RBI decides to increase the percent of this, so that the available amount with the banks comes down.
Repo rate is the rate at which the RBI lends shot-term money to the banks. To control inflation RBI increases repo rate, which makes borrowing form RBI more expensive. Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.
Note: in this analysis Wholesale Price Index (WPI) is taken as a proxy for inflation. The monthly inflation rate in calculated by subtracting the current WPI from WPI of same month, a year before and dividing by the current WPI.
Chart: Inflation, CRR, Repo Rate and Reverse Repo Rate:9
The above chart shows that the rates under consideration have been increased only when the rate of inflation has crossed the 7.5 mark. The inflation rate crossed the 7.5 mark in April 2008 and
13 | P a g e
again in January 2010 and both the time first the CRR rate was increased, followed by Repo rate and Reverse rate respectively. It is also observed that whenever there was rapid increase in the inflation rate, CRR as a tool has been used by the RBI, to cool off the inflation. This is seen in the way that CRR was increased considerably both between April till July 2008 and again in January till April 2010. In 2009, when the inflation rate was under control and was decreasing the CRR rate was fixed at 5, repo rate at 4.75 and reverse repo rate at 3.25. In 2010, the CRR was increased to 6 in order to reduce the rapid increase in the inflation rate, whereas further correction in the inflation rate was done by varying the repo and reverse repo rate.
Note: The figure shows the year on year growth average of 28 banks in India. The banks included are; Allahabad Bank, Andhra Bank, Bank of Maharashtra, Bank of Rajasthan, Bank of Baroda, Bank of India, Canara Bank, Corporation Bank, City Union Bank, Deena Bank, Dhan Laxmi Bank, Federal Bank, State Bank of India, Punjab National Bank, HDFC, IDBI, INDUSDIN, J&K Bank, Indian Overseas Bank, Karur Vasya Bank, Bank of Karnataka, Oriental Bank, South India Bank, Syndicate Bank, Union Bank, Axis Bank, ING Vasya Bank and Yes Bank.
14 | P a g e
The figure clearly depicts the phenomenal growth rate that banking industry has achieved over the years. Growth rate in PAT of nearly 30% shows that Banking Industry is still in its growth phase of life cycle in India. It is opposed to what the general perception of the people had about Indian Banking Industry to be in mature phase with very little opportunity of growth.
d) RETURN ON ASSETS
Return on Assets measures a bank’s profits compared to its entire investment. It is an indicator of how profitable a bank is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. It is calculate as:
= Net Income/ Total Asset
Public and Foreign sector banks saw a fall in their returns on assets in the financial year ended March 31, 2010 as a decrease in funding costs was unable to offset a fall in the interest rates charged to customers. The RBI has set the trigger point for RoA if it goes below .25% mark. With RoA still near 1% mark, it can be said that banks are doing well in spite of tough competition over interest rates.
15 | P a g e
The rising population of middle class individuals and their rising income has led to a significant growth of Banks in this industry. As due to the rising income individuals started saving in Banks but also due to increase in income the living standards also increased leading to increase in demand of loans for house, vehicles etc. in turn leading to growth of Banking Industry.
By the end of March 2010, in rural India, the public sector banks were having nearly 20000 branches; where as private sector banks have only 1000 branches. Foreign sector banks have yet to expand in the rural areas. The number of branches of foreign and private sector bank increases as we move from rural to semi-urban to urban and metropolitan areas. This is because, private and public sector banks follow the class banking philosophy. They provide quality services to people who do large transactions. Whereas the number of branches of public sector banks depends on the population it covers. This is why, the number of branches of public sector banks decreases as me move from rural to semi-urban to urban and metropolitan areas.
16 | P a g e
Still large population of the country is left to be covered by the banking sector. ICICI, a private sector bank has extensively started its operation in the rural areas. Similarly foreign sector banks are spending heavily to increase their operations in India.
b) NON PERFORMING ASSETS RATIO
Indian banking sector under control of government are required to make priority sector lending. Priority sector are those sector which are require to grow in order to improve the economy of the country. Currently 40% of all the advances are requiring to be made to priority sector by public and private sector banks. As priority sector ranks low in credit worthiness, this has given rise to large amount of Non Performing Assets. Nonperforming assets are those assets of banks on investment of which banks are not getting any returns. These are percentage of the loans distributed by banks, which have not been returned back. Banks usually treat assets as nonperforming if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing.
If we look at the average of the net non performing assets of the 33 Indian banks, we find the ratio is below 1.2% mark. As per RBI guidelines the NPA of any bank should be less than 10%. So the NPA level of Indian banks is well below danger level. This means that banks operate at a very safe level.
17 | P a g e
The technological advancement has made Banking very easy and a just a minute away. The internet banking, mobile banking, CRM etc. all these technological advancements has affected the industry in big way. These advancements have made Banking time and cost effective.
In the recent years the banking industry is focusing on great deal of protecting natural resources and thereby facilitating the green banking and go-green elements in their systems. The online banking system which led to the almost paperless banking in India is a major support to this.
The banking industry is subject to be in a great impact to legal and regulatory environment. The Reserve bank of India is considered to be the apex authority controlling all the legal aspects of banking in India. The following are the importance of legal authority for the banking sector:-
• It fixes the bench mark standard of capital adequacy and prudential norms for key performance areas and thereby ensures the soundness in the system.
• Formulation of best practices in the areas of risk management, provisioning, disclosures and credit delivery.
• Adoption of good corporate governance system.
• The development of institutional framework for the benefit of the customers.
• Regulates the entry and exit borders in case of cross border institutions.
18 | P a g e
• It helps to integrate the various financial systems and keep the system
contemporary and competitive.
INDUSTRY ANALYSIS – PORTER’S 5 FORCES FRAMEWORK10
19 | P a g e
Bargaining power of suppliers: Bargaining power suppliers: It is high in the periods when there is tight liquidity. Being a service sector, human capital is one of the most important supplies to the sector. Public sector banks in India have big trade unions which are having high bargaining power. Establishment of well functioning capital market in India has given a choice to the depositors to invest instead of saving. Moreover, with the deregulation of the interest rate suppliers bargaining power has considerably increased.
Bargaining power of customers: With large number of banks operating in India, the bargaining power of creditworthy borrowers is high. Development of capital markets in India has given an additional option to the businesses in India to source their funds.
Threat of substitute products: With development well functioning capital market in India, investors have an opportunity to direct their savings into investment opportunities whenever they decide so. Even Corporate have an option of raising their capital through public issues, than for taking debt from banking companies. Secondly individuals and households also have the option of borrowing money from the non- institutional lenders.
Threat of new entrants: In banking sector the entry barriers are high as to enter in this industry license is needed, moreover the initial minimum paid up capital is prescribed at Rs.200 crores and which is to be raised to Rs.300 crores within three years of commencement of business and many other formalities are to be fulfilled.
Competition Rivalry: Competition in banking sector is high due to presence of public sector, private sector banks and foreign banks along with non banking financial companies.
20 | P a g e
ICICI BANK OVERVIEW
The Industrial Credit and Investment Corporation of India Limited (ICICI) incorporated at the initiative of the World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and longterm project financing to Indian businesses. ICICI emerges as the major source of foreign currency loans to Indian industry.
In 1994, ICICI Bank was incorporated promoted by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. 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. ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,529 branches and about 6,102 ATMs in India, and has a presence in 19 countries, including India. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong
21 | P a g e
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 provides a wide array of banking products and financial services to its retail and corporate customers. It has a wide variety of delivery channels and specialized affiliates and subsidiaries that ensure the flow of its offerings in the areas like investment banking, venture capital, life and non-life insurance and asset management. This bank is also India's largest credit card issuer. ICICI Bank also has the largest international balance sheet among all the banks in India.
To become the leading provider of financial services in India and a major global bank
Awards & Recognitions
a) ICICI Bank ranked 5th in the list of "57 Indian Companies", and 288th in World Rankings
in Forbes Global 2000 list.
b) ICICI Bank has won the "Banking Technology Awards 2010" at The Indian Banks Association in the following categories:
"Best Financial Inclusion Initiative" (first prize)
"Best Online Bank" ( runner up)
"Best use of Business Intelligence" ( runner up)
22 | P a g e
"Technology Bank of the year" ( runner up)
c) ICICI Bank was recognized for its Special Citation of the Fully Electronic Branch Service
Channel, first set up at Hiranandani Estate, Thane, at the Financial Insights Innovation Awards held in conjunction with Asian Financial Services Congress.
d) For the second year in a row, ICICI Bank was ranked 70th in the Brandirectory league
tables of the world’s most valuable brands by ,The BranFinance Banking 500
e) ICICI Bank ranked second in the financial services sector in Business World’s, “Most Respected Company Awards 2011"
f) ICICI Bank was ranked 1st in the Banking and Finance category and 9th in the "2010 Best Companies to Work For" by Business Today.
The products offered by ICICI are as follows:
1. Finance and insurance
2. Retail Banking
3. Commercial Banking
5. Credit Cards
6. Private Banking
23 | P a g e
7. Asset Management
8. Investment Banking
Diversification Strategies within the Indian Banking Sector
As a response to economic and financial sector reforms, banks all over the world are expanding their normal business operations and diversifying their activities. The Indian banking industry too is not an exception and has been seen steadily shifting away from traditional sources of revenue like loan-making towards nontraditional activities that generates fee income, service charges, trading revenue, and other types of noninterest income.
The deregulation, disintermediation, emergence of advanced technologies, along with the consolidation wave in the banking sector have been instrumental in making banks to diversify their operations. As a result the banks are transcending their normal business operation and are venturing into insurance, investment and other non-banking activities.
Rationale for Diversification
Many Indian banks have adopted universal banking structures (in different forms and degrees) as a strategic response to increased competition in both domestic as well as global market. Diversification helps a bank in eliminating the unevenness of geographical reach, product-process innovation, exploit economies of scale and scope, reap benefit of advanced technology, and
24 | P a g e
diversify risk along with mobilization of additional capital. Determinants of diversification can be categorized into two categories.
External determinants such as Economies of Scale and Scope, Dynamics of bank Competition, Global presence of Financial Conglomerates and Disintermediation in banking activities. While the internal determinants include risk reduction motive, decline in interest margin, cost of production, low cost of capital, technology up gradation etc
Types of Diversification
Diversification can be related or unrelated. Diversification, in turn, can take three forms:
1. Horizontal Integration
2. Vertical Integration
3. Concentric Integration
Diversification strategies followed by ICICI
Related Product Diversification - Horizontal Integration
Horizontal integrations are those types of mergers where companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. The principal objective behind this type of mergers is to achieve economies of scale in the production procedure through carrying off duplication of installations, services and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition, minimizing the advertising expenses, enhancing the market capability and to get more dominance on the market.
25 | P a g e
1. ICICI Bank’s merger with Bank of Madura
2. ICICI Bank’s merger with Bank of Rajasthan
Unrelated Product Diversification – Horizontal Integration
Broad Spectrum or Unrelated Diversification refers to expansion other than vertical integration into a different business. I.e. into a different non-banking business like merchant banking, insurance etc. This is a type of diversification under which a firm develops or acquires new products that are different from its core business or technology, but which may appeal to its current customers.
1. ICICI Lombard General Insurance
2. ICICI Prudential Life Insurance
3. ICICI Venture
4. ICICI Prudential & AMC Trust
5. ICICI Securities
26 | P a g e
In the case of a concentric merger, a smaller company (usually the subsidiary) is merged with the bigger one (the parent), having almost the same kind of business. A peculiar variation of this concentric merger happens when a bigger company (the parent) is merged with its subsidiary, the smaller company. This is known as a Reverse Merger. Example: The reverse merger of ICICI Ltd. with ICICI Bank on 30th March, 2002
PERFORMANCE AT DALAL STREET
As on 19th August 2011, the market price of ICICI Bank is Rs 843 per share. Here are some of the events that produced major fluctuations in the share price of ICICI Bank.
16 July 2006
Unabated selling of FII pushed benchmark indices to a 15 month low. ICICI banks share priced also crashed out to low. Not only ICICI was affected by this but all the banking sector and reality and capital goods were also severely affected. BSE Sensex fell nearly 8%.
16 Aug 2007
27 | P a g e
Sensex sheds 643 pts. The turmoil in US credit markets affected Asian and European market as well.
17 Aug 2007
The foreign investment promotion board (FIPB) cleared a proposal from ICICI Bank to float a wholly-owned subsidiary called ICICI Financial Services, which will own its investments in the insurance and mutual fund business. This brought to an end the long-ruling controversy over ICICI Banks holding company structure. The market responded positively to this and the share prices of ICICI Bank roared. They got an increase of 5.5% in their share prices in one single day.
14 Nov 2007
ICICI Banks share price increased nearly 9% in a single day. Sensex gained 893 points that day. The reasons behind the same are – surge in Asian and US market, reassurance from big banks like Goldman Sachs and HSBC that subprime losses will come down.
11 OCT, 2008
The Lehman Brother fiasco leads the Indian investors’ frenzy. Sensex hit severely from this fiasco as did ICICI Bank.
17 March, 2008
Sensex dip by 951 points today. The main reason for the dip was because Wall Street’s fifth biggest security house, Bear Stearns, was sold to JP Morgan for just $240 million.
18 may, 2009
28 | P a g e
Investors bought stocks as if there was no tomorrow. Sensex rose 17.3% in a single day mainly because of being assured of a stable government in the centre. ICICI Banks share price increased by 23.3%.
29 | P a g e
CRITICAL ANALYSIS OF ICICI BANK
COMPETITOR ANALYSIS - CAMELS FRAMEWORK
Note: For analysis of ICICI Bank, five other banking companies were selected. The selection of these companies was done on the basis of the unique shareholding pattern of those companies. The shareholders in a banking company are divided into seven groups. These are Indian Government and RBI, Indian Financial Institutions, Foreign Financial Institutions, Other Indian Corporate, Other Foreign Corporate, Individual Indian Residents and Individual Foreign Residents.
The banking companies selected for the analyses are; Canara Bank, Axis Bank, HDFC Bank, Yes Bank and Standard Chartered Bank.
The major shareholder of Canara Bank is the Government and RBI, hence it could be considered as a bank run by Government.
ICICI bank can be said to be run by Foreign Financial Institutions as they have nearly 66% stake in the bank.
Axis Bank can be said to be a collaboration of Indian and Foreign Financial Institution. They are having 46% and 42% stake in the bank respectively.
HDFC Bank can be said as bank run by Corporate. Both Indian and Foreign Corporates are major shareholder of this bank.
30 | P a g e
Yes Bank is unique in a manner that a quarter of its shares are held by Indian individuals. Standard Chartered is a foreign bank operating in India and hence taken for analysis.
Several foreign supervisory and regulating agencies; such as Office of the Comptroller of the Currency (OOC) and Federal Deposit Insurance Corporation were used to rate the banks under their authority on CAMELS framework. CAMEL’s framework gives a broader insight on the position of a bank. In 1995 RBI had set up a working group headed by Sri. S. Padmanabhan to take a fresh look at the banking supervision during 1995. It suggested measures for on-site and offsite supervision and subsequent rating of banks by RBI. The committee suggested that supervision of bank should focus on defined parameters of soundness, financial, managerial and operational efficiency. Accordingly it recommended that bank should be rated on a 5 point scale; from A to E, widely on the lines of international CAMELS framework. It stands for:
C- CAPITAL ADEQUACY A- ASSET QUALITY M-MANAGEMENT E- EARNINGS L- LIQUIDITY S- SENSITIVITY
31 | P a g e
Capital Adequacy is a measure of a bank's financial strength, in particular its ability to cushion operational and abnormal losses. In the volatile economic environment the capital base is the only safeguard that any financial institutions have with them. By using their capital base, banks can honor their obligations even in a case of financial breakdown. Also capital base of any bank helps depositors in forming their risk perception about the institutions. The parameters defining the capital adequacy are:
a) Capital to Risk Weighted Asset Ratio: The most widely used indicator of capital adequacy
is capital to risk-weighted assets ratio (CRAR). High value of CRAR means higher level of safety for banks. It is calculated as
= (Total Capital Fund)/ (Risk Weighted Assets)
The capital taken into consideration for calculating the CRAR are the Tier 1 and Tier 2 capital. These are capital which is supposed to remain with the bank in most adverse financial conditions.
The minimum level of CRAR required by the banks to maintain is:
Minimum as per BASEL II recommendations Minimum in India as per RBI guidelines New Private Sector banks
32 | P a g e
08% 09% 10%
Banks undertaking Insurance business Local Area Banks
It can be seen that private banks such as HDFC and ICICI have stored a large amount of capital in 2009 and 2010 to safeguard them from any financial shocks. Canara bank on the other has maintained its CRAR to a safe around 13.5% level. Axis bank too is maintaining more than the required CRAR. It has raised its reserve capital from 11.57% in 2007 to nearly 16% in 2010. Yes Bank being a new entrant in the banking sector is maintaining the highest level of required capital compared to its risk weighted assets. Standard Chartered bank being a foreign bank operating in India is maintaining, just sufficient level of CRAR.
b) Debt Equity Ratio: The debt to equity ratio of a bank indicates, how much of bank’s business is financed through its own capital or through debt taken from others. It shows the financial leverage of the bank. An increase in the ratio decreases bank’s ability to raise future funds and hence affects the capital adequacy of the banks. It is calculated as:
= (Borrowings)/ (Capital + Reserve and Surplus)
33 | P a g e
Banks in India has an average of Debt to Equity ratio of 1. Banks like HDFC, Canara and Standard Chartered can raise more capital when required as their ratio is less than 1. On the other hand ICICI, Axis and Yes bank will have problem in borrowing the money as they are highly leveraged.
c) Advances to Total Asset Ratio: This ratio show, what amount of assets has been given as advances. Advances are directly responsible for the profit. An aggressive bank will try to earn more profit by giving out more advances. Thus a higher ratio of advance to assets is preferred than a lower one. It is calculated as:
= Advances/ Total Assets
All the banks except Canara Bank and Standard Chartered have maintained their Advances to Asset ratio to around 50%. Since Canara Bank was very slow to changes in the Banking sector it’s Advances to Asset ratio was very less in 2007 and 2008. But from 2009 onwards it has increased the amount of advances with respect to the total assets. Standard Chartered and ICICI Bank wholesale banking saw decrease in 2009 due to unfavorable economic conditions. This greatly affected the advances of the banks and a decreased the advances to total asset ratio.
34 | P a g e
Appreciation or depreciation of the value of assets that banks have is dependent on various market conditions. Asset quality has direct impact on the performance of the bank. The quality of assets particularly, loan assets and investments, would depend largely on the risk management system of the bank. To increase profitability bank provide large amount of loans on which it earns the interest. The nature and risk involved in each loan varies. Thus to measure the asset quality, one have to look at the Non Performing Assets of the bank. The parameters describing asset quality of a bank are:
a) Gross NPA to Advances: As gross NPA gives the exact amount of nonperforming assets in
that year as provisions are not deducted from it, it provides the vital information of how the assets performed in that year. It is calculated as
=Gross NPA/ Advances
Compared to the peers in the banking sector the gross NPA to advances ratio of Yes and AXIS bank are very high. This is due to the aggressive policies they adopt while sanctioning the advances. Axis bank gross NPA has reached alarming level, but the bank has increased provisions for non performing assets. Standard Chartered Bank has faced huge losses due to Non Performing Assets in India. Nearly 70% of all the loans and advances by Standard Chartered bank are of short tenure (less than a year), which has increased the probability of non performance of the loans and advances.
35 | P a g e
b) Net NPA to Advances: Net NPA to advances ratio gives the information regarding the performance of total assets combining the provisions also. Many banks operating aggressively have large provisions for their Non Performing Assets. It is calculated as
= Net NPA/ Advances
Net Non Performing Assets to total advances of each bank is well within the trigger level of RBI. Canara Bank being most conservative player in the field is having the lowest value of the ratio. Axis bank through large amount of provision has managed to lower the net Non Performing Assets to total advances to acceptable level. Standard Chartered credit policy of giving short term loan is mainly responsible for its high Net NPA to total advances ratio.
As important for any company, management plays a vital role in the functioning of banks. The performance of the other five CAMELS components will depend on the vision, capability, agility, integrity, and competence of the bank's management. In effect, management rating is just an amalgam of performance in the above-mentioned areas. The parameters defining management efficiency are:
36 | P a g e
a) Advances to Deposit Ratio: This ratio tells how much deposit has been gives as advances to others. Advances are necessary to earn profit and service the interest being paid to the deposits. It is calculated as
=Total Advances/ Total Deposits
Advances to deposit ratio of nearly all the banks in banking sector has gradually increased from around 60% to 75%. ICIC Bank and Standard Chartered Bank which have aggressive management policy from the beginning itself has given large amount respect to their deposits. of advances with
b) Profit per Employee: This ratio indicates the average profit generated per person employed. A good management will motivate employee to earn more profit for the bank.
Canara Bank being a public sector bank, very resistive to changes has a very low profit per employee ratio among its peers. HDFC bank is yet to fully establish itself also has a very low profit per employee ratio. Axis bank is
37 | P a g e
having a good profit per employee ratio which shows good management efficiency of the bank. Yes Bank’s management policy gives great importance to its human capital. Its HR policies involve great precaution in selection process. Hence Yes Bank has the highest Profit per Employee ratio. ICICI too shows prudent HR policies as revenue per employee in its case is second highest among the peers companies under consideration.
The ultimate aim of any financial institution is to increase its bottom line and bring profit to the stakeholders. In addition, it also helps to support present and future operations of the institutions. A bank must earn reasonable profit to support asset growth, build up adequate reserves and enhance shareholder’s value. Good earnings performance would inspire the confidence of depositors, investors, creditors, and the public at large. The parameters defining earnings are:
a) ROAA gives an indication as to how much profit a bank is able to generate per unit assets.
An indicator used to assess the profitability of a firm's assets. It is most often used by banks and other financial institutions as a means to gauge their performance. As return on average assets (ROAA) is calculated at period ends (in this case year end), it does not reflect all of the highs/lows but is merely an average of the period.
Return on average asset of Axis bank and HDFC bank is very high. Since ICICI bank is expanding its base in the rural areas, its return on average asset is maintained around 1%. Canara Bank too has managed to increase its return on average asset to around 1.3%. Standard Chartered bank being a foreign bank, has
38 | P a g e
presence only in metropolitan cities, hence with small assets it has been able to generate comparatively large profit.
b) Interest Income to Total Income: The core activity of any bank is to provide credit, on which it earns interest. Thus interest income is the most important income any bank has. The interest to total income shows the percentage of interest income to total income. It is calculated as
= Interest Income/ Total Income
With Indian banks diversifying their operation in many fields, yet interest income is one the major source of their revenue. The interest income holds 70 to 80 percent weight age in nearly all banks total income. HDFC bank operating in diverse fields has a relatively interest. less income from
c) Earnings per Share:
If a person invests in any company, it wishes to get return out of it. Earnings per share gives the gain a common stock holder earns. It is that portion of the company profit that has been allocated to each outstanding share of common stock.
Most of the banks in the have
39 | P a g e
share of around Rs 30 to Rs 40. Yes bank being new in the banking sector is still in its formative years, hence earning per share of this bank is low. HDFC has the best earning per share value among its peers in the banking sector.
To meet the demands of the customers; the depositors and the creditors, banks must maintain liquidity in their asset. This is done by an effective mechanism called the Asset and Liability Management. It minimizes maturity mismatches between assets and liabilities and to optimize returns. The indicators used to determine the liquidity of a bank are the credit to deposit ratios and cash to deposit ratio.
a) Credit Deposit Ratio: This ratio gives the information of how much of the deposit has been
gives away as credit. Since not all depositors will take out all their many at a time, banks give a large amount of credit from it. This in turn reduces the liquidity of the banks.
With boom in the economy all the banks has increased their credit to deposit ratio to around 70%. ICICI again being an aggressive bank has the highest value for the credit deposit ratio. HDFC bank on the other hand has not increased its credit deposit ratio.
40 | P a g e
b) Cash Deposit Ratio: Cash being liquid of all the assets gives the direct picture of the liquidity of the bank. But large volume of the cash in the system is harmful for the profit of the bank. On an average Banks in India maintains 0.50% cash in hand to the deposit that they have. Canara, Yes and Axis Bank are keeping to their less cash compared deposit
compared to the industrial average.
SENSITIVITY TO MARKET RISK
Over the years Indian banks have diversified the areas in which they operate. They are into exchange of foreign currencies, insurance related operations etc. Some of the risks associated with the banks are the interest rate risk, exchange rate risk, equity price risk, etc. Sensitivity analysis reflects institution’s exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). risk are as follows: Risk sensitivity is mostly evaluated in terms of management’s ability to monitor and control market risk. The common methods of quantifying
a) Beta: Beta is a measure of the volatility of a security or a portfolio of securities in
comparison to the market as a whole. It is a measure of the sensitivity of the assets return to the market return. It measures the strength of the relationship between the market return and the security return. The beta is calculated in the following way:
= Cov(s, m)/Var (m)
Where Cov(s, m) is the covariance between the market return and the security return and Var (m) is the variance of the market return.
41 | P a g e
A positive beta will indicate that the securities return and the market return follow the same trend whereas a negative beta will indicate that the securities return and the market return follows the opposite trend i.e. if market moves up then the securities return will move down.
b) Systematic Risk: Systematic Risk also known as the Non-diversifiable risk is that portion of an asset’s risk that is attributable to risk factors that affect all firms in the entire market. Systematic risk is beyond the control of investors and cannot be mitigated by diversification, i.e. combination of the asset with other assets. The factors of risk are changes in taxation, foreign investment policy change, shift in socio-economic parameters, international incidents etc.
c) Unsystematic Risk: Unsystematic risk also known as the Diversifiable risk is that portion of an asset’s risk that is inherent in each investment. It is attributable to industry specific or firm specific events that can be eliminated by diversification. The risk is due to the following factors strikes, lawsuits, regulatory actions etc.
Note: For calculating the beta, systematic and unsystematic risk of the banking companies, share price data of 8 banking companies listed on NSE are taken on a monthly basis from January 2006 to April 2011. Their return is compared with S&P CNX Nifty return, which is taken as a proxy for market return. It consists of stocks of 50 companies over 23 sectors, and hence is a diversified portfolio, reflecting the overall trend of the market. The data for Yes Bank is taken from March 2008.
Calculation in Appendix II
42 | P a g e
STAN' CHART YES BANK
yearly return Beta 0.1279 0.2681 1.1241 0.1851 0.2071 0.85152 1.1528 0.0883 1.4090 0.028 0.191294587
Axis, HDFC, ICICI, Yes Bank shows greater fluctuation than the market and hence are more risky than market portfolio. On the other hand Canara and Standard Chartered bank have less volatility than the market portfolio and hence are less risky. If we compare the risk with the return, we find that banks with high risk have also given high returns. But ICICI bank, though being perceived risky has given comparatively small yearly return.
CHART BANK 0.0050 0.02463282
Though Systematic Risk is that part of risk that cannot be diversified and affects all the banking
43 | P a g e
companies, yet Yes bank is shown have more systematic risk than its peers. This is due to the fact that it is a small bank compared to others and will face a bigger impact than others.
STAN' CHART YES BANK 0.0054 0.011908274
un sys risk
Again,Yes bank is having high value of unsystematic risk also. Standard Chareterd being a foreign bank is fully diversified is having least unsystematic risk as it operates many economies.
Online Services: - All the banking facilities of ICICI have been encircled by online services. They provide their customer the facilities of D-mart account so that those people can have an access of their account from anywhere he is.
44 | P a g e
Advanced Infrastructure: - ICICI bank one of the well equipped bank in India with a good deal of advanced infrastructure in each and every branch of it in order to help its customer with a tester banking services. Not only advanced in nature but the computers are situated in such a manner in the branch that it helps both the customers and bank staff with a user friendly approach.
Friendly Staffs: - ICICI has the number of staff pool in all of their branches who are very much friendly in nature and always ready to help out their customers. Thus by providing faster and customized services they maintain a strong personal relationship with their customers.
12 hrs banking services: - ICICI acts as a savior to those persons who are in urgent need of money by providing a long hrs of services of 8-8hrs as compared to the other private banks.
Late night ATM services: - In certain branches the ATM centers works even after 11.00 pm and thus able to provide a late night ATM services to their customers.
Brand name:- Within a very short span of time this bank has acquired a strong brand name by providing a quality of services to its customers, thus they have a getting a huge edge over their customers.
Huge network: - ICICI bank has a highest number of branches as compared to other private banks. The bank consists of near about 450 branches and over 1800 ATMs all over India. The huge network of ATM has given an added advantage to them in case of salary account i.e. most of the companies have maintained their salary account to this bank as compared to others.
Diversified portfolio: - This bank has a well diversified portfolio of products which not only helped them to minimize their risk but also huge customer base. They have a large
45 | P a g e
pool of products to offer to their customers so that once a person if once they have a banker-customer relation with them.
Expanding International and rural business: - ICICI has been aggressively progressing towards international growth. Today more than 25% of its business comes from the foreign shores. ICICI Bank's UK subsidiary, which runs the largest foreign banking operation with a focus on non-resident Indian remittances and internet banking services for local UK customers. ICICI Bank is already reaping the fruits of successful international operations with the bank mobilizing $2 billion (Rs 9000 crores) through a bond offering.
Strong balance sheet and loan growth: - ICICI bank reported a 23% growth in PAT for Q4FY11 and 28% growth in FY11 PAT. Net Interest Income grew by 11% and net interest margins increased to 2.6%. Retail loan grew by 7% with housing and commercial business. Deposits base grew by 12% and the bank maintained a CASA of 45% over the quarter, a growth of 21%. The bank’s balance sheet grew by 12% to Rs4062bn. ROA in FY11 improved to 1.3% as compared to 1.1%.
High banking service charges: - As compared to other private branches ICICI charges much more service cost to its customers and that is why they mainly end up with high end customers.
Less Credit period: - Though ICICI provides a huge loan credit facility to its customers but the period of credit limit is very small. Even though the credit period is not over, it sends
46 | P a g e
letters of reminder to their customer which in turn results annoying customers and thus creates a lack of trust among the customers.
Overdependence on domestic market: - Though it has felt its present in International market in recent years but their main focus is on domestic sector which increases their business risk.
Increase in NPAs reduces the profitability of the company.
POOR CUSTOMER CARE/SERVICE: With its aggressive marketing ICICI Bank is rapidly increasing its customer base. They are not however, increasing the number of employees accordingly. This is leading to deterioration of the standard of customer service.
demand-: car and
increase in demand for personal loans due to rising living standards of the individuals.
47 | P a g e
Infrastructure being one of the biggest growth drivers which is expected to grow at about 35% in coming years.
Telecom 3G lending also increased the credit demand.
Rural penetration by private banks
Consolidations and Expansions: mergers and Acquisitions are very prevalent in the industries creating demand for the credit.
The risks associated with providing banking services differ by the type of service rendered. Risk is the danger of an adverse deviation in the actual result from an expected result. High returns are said to also accompany high risk. So the risks involved in the banking sector are: CREDIT RISK MARKET RISK OPERATIONAL RISK LIQUIDITY RISK OTHER RISKS
48 | P a g e
Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. It is the negative consequence associated with the defaults or non- fulfillment of concluded contracts in lending operations due to deterioration in the counterparty’s credit quality. The goal of credit risk management is to maximize a bank's riskadjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. It consists of:
a. Counterparty default risk: this refers to the possibility that the other party in contract in an agreement will default.
b. Securitization risk: in recent world crisis that led to global recession was started due to improper management of the securitization risks. Securitization is a process of distributing risk by aggregating debt instruments in a pool and then issuing new securities backed by the pool. There are two type of securitizations viz., ‘traditional’ and ‘synthetic’ securitizations. A ‘traditional’ securitization is one in which an originating bank transfers a pool of assets that it owns to an arm’s length special purpose vehicle. Conversely, a ‘synthetic’ securitization is one in which an originating bank transfers only the credit risk associated with underlying pool of assets through the use of credit-linked notes or credit derivatives while retaining the legal ownership of the pool of assets.
c. Concentration risk: it is any single exposure or group of exposures with the potential to produce losses large enough (relative to bank’s capital, total assets, or overall risk level) to threaten a bank’s health or ability to maintain its core operations.
49 | P a g e
Market risk is the risk of possible losses in, on- balance sheet and off balance sheet positions, due to movement in the market prices. The market risk positions, subject to capital charge requirement, are:
a. Interest Rate Risk (IRR): The risks pertaining to interest rate related instruments and equities in the trading book. IRR is defined as the change in bank’s portfolio value due to interest rate fluctuations. The IRR management in concerned with measurement and control of risk exposures, both in trading book (i.e. assets that are regularly traded and are liquid in nature) and the banking book (i.e. assets that are usually held till maturity and rarely traded).
b. Equity Price Risk: the risk arising due to fluctuation in market prices of equity due to general-market related operations.
c. Foreign exchange risk throughout the bank. The risk arises due to fluctuation in the exchange rate.
Operational risk is defined as the risk to loss resulting from inadequate or failed internal processes, people and systems or external events. This does not include strategic and reputational risk. Some of the factors for operational risk could be lack of competent management or proper planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated systems, noncompliance, programming errors, failure of computer systems, increased competition, deficiency in loan documentation etc.
Liquidity risk arises from the bank’s inability to meet its obligation when they come due. The various types of liquidity risks are:
50 | P a g e
a. Term Liquidity Risk: this risk arises due to unexpected prolongation of the capital commitment period in lending transactions. It is the unexpected delay in the repayment.
b. Withdrawal/Call Risk: it is the risk that more deposits will be withdrawn than expected. When large amount of deposits are taken away from the bank in a relatively span of time, it raises the risk that bank will not be able to meet all its obligations.
c. Structural Liquidity Risk: it is the risk that rises when the necessary funding transactions cannot be carried out. The risk is sometime also called as funding liquidity risk.
d. Contingent Liquidity Risk: it is the risk associated with funding additional funds or replacing maturing liabilities under potential, future stressed market conditions.
e. Market Liquidity Risk: this is a risk which arises when positions cannot be sold within desired time period or could only be sold at a discount. This is especially the case with securities/derivatives in illiquid markets, or when bank hold such a large positions that they cannot be easily sold.
a. Strategic Risk: it refers to the negative impact on capital and earnings due to business
policy decisions, changes in the macroeconomic environment, insufficient implementation of decisions or failure to adopt in the changing economic environmental conditions.
b. Reputation Risk: it is the potential adverse effect that a bank can have if its reputation deviates negatively from its expected position. A bank’s reputation refers to its image in the eyes of interested public; the stakeholders.
51 | P a g e
c. Capital Risk: it is the imbalance in the internal capital structure in relation to the nature and size of the bank, or from difficulties associated with raising additional risk coverage capital quickly, if necessary.
d. Earnings Risk: this risk arises due to inadequate diversification of bank’s earnings or its inability to attain sufficient and lasting profitability.
52 | P a g e
STRATEGIES FOR ICICI BANK
DIRECTIONAL POLICY MATRIX (GE MATRIX)
The GE matrix is an alternative technique used in brand marketing and product management to help a company decide what product(s) to add to its product portfolio, and which market opportunities are worthy of continued investment. Also known as the 'Directional Policy Matrix,' the GE multi-factor model was first developed by General Electric in the 1970s.
Description of the Model This matrix measures the health of the market and your strength to pursue it. The results indicate the direction for future investment. The recommendation may be to invest, grow, harvest or divest.
Invest High Market Attractiveness High Business Strengths This is the ideal quadrant. Your strengths are directed at a highly attractive market. Invest your parts of your business which are in this
Grow High Market Attractiveness Low Business Strengths You are in an uncomfortable quadrant. The market potential is attractive but you do not have necessary for being really successful. The
Harvest Low Market Attractiveness High Business Strengths In this quadrant you have high strengths in a market that has lost its attractiveness in terms of future potential. It is still good for near term profits, so maintain
Divest Low Market Attractiveness Low Business Strengths
Think carefully about what you are doing to be in this quadrant. The market is not particularly attractive and your business strengths are below average here. Keep in
best resources in those the business strengths
53 | P a g e
options facing you are either to take what you can while it is still possible or to invest in building a better competitive position. You must be selective in your efforts here, as this segment will cost you to invest in every aspect of the business.
the position for as long as possible.
this segment only if it supports a more profitable part of your business (for instance, if this segment completes a product line range) or if it absorbs some of the overhead costs of a more profitable segment
Conceptually, the GE Matrix is similar to the Boston Box as it is plotted on a two-dimensional grid. In most versions of the matrix:
the Y-Axis comprises industry attractiveness measures, such as Market
Profitability, Fit with Core Skills etc. and
The X-Axis comprises business strength measures, such as Price, Service Levels
54 | P a g e
55 | P a g e
DIRECTIONAL POLICY MATRIX – ICICI BANK According to the above discussed rationale, the following is the DPM of ICICI BANK’s BUSINESS UNITS:
ICICI Bank is well positioned to redefine the banking model by focusing on the untapped potential in the profitable retail business segments and leveraging its superior delivery capabilities and lower operating costs in the under-served corporate banking business.
Despite the fast growth, with a CAGR of 32%, the Indian retail market continues to be underpenetrated in comparison to its peers
56 | P a g e
India’s retail market is at a nascent stage and is expected to grow rapidly on account of the current trend in upward migration of household income levels (ICICI estimation: CAGR of 22.9%
ICICI growth rate in retail are as follows:
Home loans grew at 230% in FY 2002
Amongst the leading providers of home loans in India
Other retail loans grew at 130% in FY 2002
Bank accounts grew at 53% in FY 2002
Internet customer accounts grew at 100% in FY 2002
Comprised 25% of bank accounts
Among top twelve internet banks in the world
ICICI entered the retail market at the beginning of the growth stage and are now harnessing the untapped potential in all the profitable business segments.
For mortgages & other retail loans: Nascent <1% of GDP, Commoditized >30% of GDP.
57 | P a g e
For credit cards: Nascent <0.1% penetration, Commoditized > 50% penetration
The strategies adopted by ICICI to capture Retail potential are as follows:
1. Strong corporate relationship
4. Operational efficiency
The core of this strategy is their relentless focus on the customer and cross selling of the products.
58 | P a g e
The following graph shows the immense potential tapped in the corporate banking.
Significant opportunities for funding well-structured projects with in-built risk mitigation
India is seen as a key growth market for investment banking
Currently, a US$41 billion industry, India is the world's fifth largest life insurance market and growing at a rapid pace of 32-34% annually as per Life Insurance Council studies. Currently, in India only two million people (0.2 % of the total population of 1 billion) are covered under Mediclaim, whereas in developed nations like USA about 75 % of the total population is covered under some insurance scheme. With more and more private companies in the sector, the situation may change soon.
59 | P a g e
Rural Focus: The partnership of ICICI Bank with Vodafone Essar for financial inclusion of the untapped rural markets is a great initiative taken by the bank to acquire new customers and increase the penetration in the unbanked sections of the country. Under this initiative ICICI bank will leverage the distribution strength of Vodaphone’s distribution network which manages 1.5 million retail points.
This strategy will aid the bank in providing its wide range of innovative financial products to the underserved rural sectors through a mobile phone based platform thus providing an effective reach without incurring much costs at the ends, customer as well as service provider.
Through this innovative way of marketing, the bank will also save its cost incurred in covering the remote areas with the help of its sales force.
Direct marketing: strategies such as direct marketing can be used by the bank to cater to the varying needs of customers, making them aware about the broad portfolio of financial products, schemes and policies of investments.
Implication : This will help in gaining knowledge about the bank’s own customers and the competitor’s customers, catering to their specific needs and preferences, identifying gaps in the existing product portfolio and developing customer specific innovative financial products such as 4 in 1 accounts- a powerful combination of savings, FD, online trading
60 | P a g e
and demat account wherein the customer will be provided a single investment window for equities, mutual funds, derivatives, IPO’s, insurance product, savings and tracking the account through a single login.
The bank has pioneered the MULTI CHANNEL distribution system giving the customers 24*7 access to banking services. This has highly reduced the customer acquisition cost and has helped in the migration of customer transactions from branches to lower cost technology enabled channels thus saving the cost involved. The bank should focus on strengthening the distribution network in tier II and tier III cities to further its reach and accessibility.
The bank should increase its use of digital media in its overall promotional plan to leverage cost effectiveness and reach for the target segment of 25 – 45 years in tier I cities. Traditional promotional activities should go hand in hand with the use of digital technology to ensure maximum effectiveness in the promotional campaign.
61 | P a g e
One important strategic initiative of the bank can be the use of WIRELESS TECHNOLOGY and SMART CARDS in rural banking to provide cost effective financial services to the poor
It can enhance the level of customer service by offering 24 hr availability, multichannel banking, straight through processing and cost efficiency via electronic channels which allows wider and focused market reach and opportunities for cross selling of various financial products.
Since ICICI has undergone a lot of mergers and acquisitions in the past and will continue its efforts in this type of growth in the future also therefore, its HR policies should be in compliance with the growth and diversification strategies followed by the bank which are as follows
Hr should focus on smooth integration of employees. HR management system should work in the context of merger as well as on continuous improvement of recruitment, training and performance management processes.
The process of integration should involve defining the organizational structure of the merged entity, people placement in various positions across the business and corporate groups and integration of the grade and remuneration structure of the employees of the merged entities.
62 | P a g e
In the present scenario the recruitment process is based on appropriate competency profiling tools and matching employee profile to job specifications. The process is streamlined by following a uniform recruitment policy across the merged organization.
In addition to campus recruitment it should also undertake lateral recruitment to bring new skills, competencies and experience into the organization and meet the requirements of rapidly growing businesses.
At present a six sigma initiative has been undertaken for the lateral recruitment process to improve capabilities in this area.
ICICI should encourage cross functional movement, enriching employee’s knowledge and experience and giving them a holistic view of the organization.
The rapidly changing business environment poses constant challenges to the organization therefore it is critical to enhance knowledge and skill sets across the organization to get an edge over competition and meet the customer expectations. ICICI bank should built strong capabilities in training and development to build competencies.
At present Training on products and operations is imparted through web based training modules. Special programs on functional training and leadership development to build knowledge as well as management ability are conducted at a dedicated training facility.
The bank must believe in defining clear performance parameters for employees and empowering them to achieve their goals this will help in creating a culture of high performance across the organization.
The bank must have a structured process of identifying and developing leadership potential.
63 | P a g e
FUTURE PROJECTIONS OF PROFIT AND LOSS STATEMENT12
Assumption: The quantitative effect of the above said strategies cannot be explicitly determined. Thus we are assuming that, if not increasing the growth of the bank will help in maintaining the current tempo in growth rate of the bank. The CAGR of past five years is taken as a proxy future growth.
Mar'12 Income Interest Earned Other Income Total Income Interest expended Employee Cost
26614.82 7138.467 33753.29 17079.48 3147.768
27271.41 7168.147 34439.55 17202.7 3517.461
27944.19 7197.951 35142.14 17326.81 3930.574
28633.56 7227.878 35861.44 17451.81 4392.205
29339.95 7257.93 36597.88 17577.71 4908.053
64 | P a g e
Selling and Admin Expenses Depreciation Miscellaneous Expenses Operating Expenses Provisions & Contingencies Total Expenses Net Profit for the Year Profit brought forward Total Equity Dividend Corporate Dividend Tax Earnings Per Share (Rs) 5599.598 5676.057 10371.27 1811.608 213.8693 47.08999 6061.979 9299.68 12487.61 2035.2 226.1226 49.57449 6538.902 15236.64 15035.82 2286.388 239.078 52.19007 7030.752 24963.79 18104 2568.579 252.7756 54.94366 7537.924 40900.79 21798.28 2885.598 267.258 57.84252 3594.561 566.0401 3891.659 8543.913 2564.801 28153.69 3413.587 569.6633 3975.142 8493.961 2763.638 28377.57 3241.724 573.3096 4060.415 8444.3 2977.89 28603.23 3078.514 576.9793 4147.518 8394.93 3208.752 28830.69 2923.52 580.6725 4236.489 8345.848 3457.511 29059.95
This is a very conservative estimate of things to come as with more and more advancement in technology and improvement in the banking system in general, the Earning per Share will be expected to grow more than its annual CAGR. Never the less, it is the minimum level of our expectation from the company.
65 | P a g e
1. DON U.A. GALAGEDERA and PIYADASA EDIRISURIYA., 2003. Performance of
Indian Commercial Bank (1995-2002): an application of data envelopment analysis and Malamquist Productivity Index, pp. 1-5
2. JOHN. J. MURPHY., 1999. Technical Analysis of the Financial Market, pp. 234-245
3. N.S. TOOR., 2009. Handbook Of Banking Information, pp. 1-28
4. McKinsey & Company., 2010. Indian Banking 2010
5. Reserve Bank Of India., 2009. The Banking Sector in India: Emerging Issues and
Challenge, Volume: 1, pp. 1-12
6. Reserve Bank Of India., 2009. The Banking Sector in India: Emerging Issues and
Challenge, Volume: 2, pp. 433-439
66 | P a g e
7. Case Study, ICMR., 2004. State Bank of India: Competitive Strategy of a Market Leader.
8. Annual Report 2007 to 2010 of ICICI
9. Annual Report 2007 to 2010 of HDFC 10. 11.
Annual Report 2007 to 2010 of Canara Bank Annual Report 2007 to 2010 of Axis Bank
12. Annual Report 2007 to 2010 of Yes Bank 13. Annual Report 2007 to 2010 of Standard Chartered Bank
67 | P a g e
WPI YEAR MONTH INDEX
INFLATION RATE CRR
68 | P a g e
69 | P a g e
AXIS Bank Date Friday, April 01, 2011 Tuesday, March 01, 2011 Tuesday, 0.0896992 0.14847690 -0.023645619 0.01620937 0.008163311 0.14426482 0.01852413 0.13907985 0.000461361 -0.0061652 -0.0012285 Nifty return 0.0069609 return -0.0204059 Canara return 0.0586416 HDFC return 0.0370819 ICICI return 0.0024052 STAN'CHART 0.003395
70 | P a g e
February 01, 2011 Monday, January 03, 2011 Wednesday, December 01, 2010 Monday, November 01, 2010 Friday, October 01, 2010 Wednesday, September 01, 2010 Monday, August 02, 2010 Thursday, July 01, 2010 Tuesday, June 01, 2010 Monday, May 03, 2010 Thursday, April 01, 2010 Tuesday, March 02, 2010 Thursday, February 11, 2010 Monday, January 04, 2010 Tuesday,
0.03185943 6 0.10810833 1 0.04531832 7 0.02609487 8 0.00203359 2 -0.041083185 0.215640606 -0.063884254 0.053317323 -0.0112902 -0.071949132 0.037781365 0.019410303 -0.049513134 -0.0421383 -0.014913833 -0.126279619 -0.053818378 0.011919092 -0.0031824 -0.08248193 -0.080067928 -0.145995802 -0.155665782 -0.0575505
0.10989542 0.00646241 8 0.01031834 7 0.04351188 4 0.03699658 7 0.00549060 5 0.06428073 2 0.05980329 1 0.00471866 4 0.03290390
71 | P a g e
December 01, 2009 Tuesday, November 03, 2009 Thursday, October 01, 2009 Tuesday, September 01, 2009 Monday, August 03, 2009 Wednesday, July 01, 2009 Monday, June 01, 2009 Monday, May 04, 2009 Wednesday, April 01, 2009 Monday, March 02, 2009 Monday, February 02, 2009 Thursday, January 01, 2009 Monday, December 01, 2008 Monday, November 03, 2008 Wednesday, 9 0.06590784 2 0.07603974 1 0.08662252 8 0.00551700 3 0.07740587 7 0.03612500 3 0.24737583 8 0.13972092 4 0.08901908 2 0.03943083 7 0.02891895 8 0.07144832 5 0.04627911 1 -0.336909013 -0.233742208 0.013702925 -0.126080186 -0.137021798 -0.258487152 -0.195806997 -0.30598922 -0.185084 -0.2815054 0.211652707 0.109199292 0.22146382 0.301456155 0.03666398 -0.154480702 -0.045030662 -0.213454026 -0.155363536 0.0011422 -0.218073248 -0.080273959 -0.122738059 -0.279624011 -0.2770839 0.174267177 -0.006636525 0.177900032 0.064488359 0.26617996 0.301467127 0.18111017 0.194609663 0.439734454 0.1996735 0.331293031 0.350087639 0.295822317 0.411746839 0.17075524 0.059662559 -0.069628559 0.035832684 -0.054102903 -0.0973976 -0.011763548 0.099977045 -0.067246146 0.0872657 0.007540284 -0.053372547 -0.026832061 0.060824004 -0.0177498 0.22162289 0.077738957 0.186581977 0.183657246 0.233833263 0.09946927 -0.077296699 0.067346832 -0.067804811 -0.203816487 -0.0272819 0.09920665 0.139497027 0.195925376 0.167909778 -0.0110572
72 | P a g e
October 01, 2008 Monday, September 01, 2008 Friday, August 01, 2008 Tuesday, July 01, 2008 Monday, June 02, 2008 Friday, May 02, 2008 Tuesday, April 01, 2008 Monday, March 03, 2008 Friday, February 01, 2008 Tuesday, January 01, 2008 Monday, December 03, 2007 Thursday, November 01, 2007 Monday, October 01, 2007 Monday, September 03, 2007 Wednesday,
0.30666487 9 0.10607432 8 0.00622345 4 0.06986778 2 0.18673364 9 0.05896486 6 0.08720321 3 0.09829155 1 0.01661082 8 0.17803985 6 0.06318191 2 0.02364772 3 0.16136369 2 0.11765359 7 0.18494279 0.014434385 0.133480099 -0.071451889 0.189347018 0.02328075 0.170629928 0.00292892 0.04473589 -0.0583922 0.189061445 0.053481204 0.260430883 0.27546818 0.15379347 0.011847204 -0.069771157 -0.032984086 -0.13765443 0.02539819 0.035755649 0.201450086 -0.030499835 0.016228534 -0.0372582 0.134176845 -0.137824391 -0.089264864 -0.012105497 -0.102112 -0.074038487 -0.055990683 -0.0893686 -0.158769626 0.00539085 -0.296802657 -0.202886517 -0.104943083 -0.305588351 0.02827043 0.185153494 0.051237836 0.138202875 0.154935917 0.04096136 -0.151688338 -0.098476409 -0.122949283 -0.167054085 0.04469409 -0.269038386 -0.188573618 -0.330734344 -0.271470001 -0.2714674 0.107158207 0.074362345 0.168713377 0.014497048 0.146225487 0.087081148 0.046520016 0.029126609 -0.0388079 0.08058049 -0.000760167 -0.122998859 -0.063176499 -0.276781035 -0.103053
73 | P a g e
August 01, 2007 Monday, July 02, 2007 Monday, June 04, 2007 Thursday, May 03, 2007 Monday, April 02, 2007 Thursday, March 01, 2007 Thursday, February 01, 2007 Tuesday, January 02, 2007 Friday, December 01, 2006 Wednesday, November 01, 2006 Tuesday, October 03, 2006 Friday, September 01, 2006 Tuesday, August 01, 2006 Monday, July 03, 2006 Thursday, June 01,
0.01442281 9 0.04760623 8 0.00522400 5 0.051771482 0.099245293 -0.008155592 0.033095058 -0.0479134 0.033136051 -0.03066167 0.027508026 -0.103440804 -0.0049201
0.04960641 0.06737529 1 0.02015437 9 0.08625681 4 0.02889965 2 0.00300471 1 0.05467290 3 0.04247484 7 0.04985108 8 0.08261394 4 0.00478363 0.01808871
0.136843556 0.105117904 -0.119295441
0.118970987 -0.022416252 -0.14919267
0.049185812 -0.007359739 0.029958515
0.021587659 0.099338189 -0.117548101
-0.0292265 0.02543144 0.00531714
74 | P a g e
2006 Monday, May 01, 2006 Monday, April 03, 2006 Wednesday, March 01, 2006 Wednesday, February 01, 2006
7 0.09652810 4 -0.142250311 -0.05854009 -0.105322736 -0.030726089 -0.1033784
0.03054943 0.10131781 5 0.02422844 7
NIFTY 0.01066 average return yearly return variance covariance beta sys risk un sys risk 1 0.12793 2 0.00741 8
AXIS 0.02234 7 0.268165 0.01832 8 0.00833 9 1.12411 7 0.00937 4 0.00895 4
ICICI 0.00735 8 0.08830 1 0.02527 4 0.01045 3 1.40906 8 0.01472 8 0.01054 6
STAN' CHART 0.002398 0.028776 0.010417 0.006098 0.821989 0.005012 0.005405 STAN'
0.015432 0.185184 0.013155 0.006317 0.851523 0.005379 0.007776
3 0.20715 4 0.01579 4 0.008552 1.15284 1 0.009859 0.005935
CAPM Rf Rm 0.079 0.128
75 | P a g e
Rm-Rf Risk Premium Expected Return
0.049 0.05648 0.055082 0.13408 2 0.041725 0.120725 9 0.13548 9 0.06904 4 0.14804 4 0.040277 0.119277
YES Bank nifty Date Tuesday, March 01, 2011 Tuesday, February 01, 2011 Monday, January 03, 2011 Wednesday, December 01, 2010 Monday, November 01, 2010 Friday, October 01, 2010 Wednesday, September 01, 2010 Monday, August 02, 2010 Thursday, July 01, 2010 Tuesday, June 01, 2010 Monday, May 03, 2010 Thursday, April 01, 2010 Tuesday, March 02, 2010 Monday, February 01, 2010 Monday, January 04, 2010 Tuesday, December 01, 2009 Tuesday, November 03, 2009 Thursday, October 01, 2009 Tuesday, September 01, 2009 Monday, August 03, 2009 Wednesday, July 01, 2009 nifty 5833.7 5 5333.2 5 5505.9 6134.5 5862.7 6017.7 6029.95 5402.4 5367.6 5312.5 5086.3 5278 5249.1 4922.3 5225.65 5201.05 5032.7 4711.7 5083.95 4662.1 4636.4 5 YES 300 255.75 263.85 312.75 307.85 356.5 354 311.5 295.1 269 287 286.3 254.2 237 282.75 267.3 252.25 238.1 205 166.2 160.35 return 0.08969 9 -0.03186 -0.10811 0.04531 8 -0.02609 -0.00203 0.109895 0.00646 2 0.01031 8 0.04351 2 -0.037 0.00549 1 0.06428 1 -0.0598 0.00471 9 0.03290 4 0.065908 -0.07604 0.08662 3 0.005517 0.07740 6 YES return 0.15958207 -0.031180355 -0.170023389 0.015791498 -0.146721588 0.007037327 0.127897575 0.054085056 0.092602902 -0.064770836 0.002442004 0.118918853 0.070061218 -0.176502974 0.056191492 0.057950964 0.057729906 0.149680774 0.209818097 0.035832956 0.078796213
76 | P a g e
Monday, June 01, 2009 Monday, May 04, 2009 Wednesday, April 01, 2009 Monday, March 02, 2009 Monday, February 02, 2009 Thursday, January 01, 2009 Monday, December 01, 2008 Monday, November 03, 2008 Wednesday, October 01, 2008 Monday, September 01, 2008 Friday, August 01, 2008 Tuesday, July 01, 2008 Monday, June 02, 2008 Friday, May 02, 2008 Tuesday, April 01, 2008 Tuesday, March 25, 2008
4291.1 4448.9 5 3473.9 5 3020.9 5 2763.6 5 2874.8 2959.15 2755.1 2885.6 3921.2 4360 4332.9 5 4040.5 5 4870.1 5165.9 4734.5 NIFTY
148.2 126 77.35 49.8 51.55 61.5 75.5 61.55 68.65 122.5 134.1 126.1 115 156.7 170.3 169
-0.03613 0.24737 6 0.13972 1 0.08901 9 -0.03943 -0.02892 0.07144 8 -0.04628 -0.30666 -0.10607 0.00622 3 0.06986 8 -0.18673 -0.05896 0.08720 3
0.162280806 0.48794133 0.440325593 -0.034537226 -0.176484964 -0.205095481 0.204282804 -0.10917128 -0.579089898 -0.09047476 0.061510547 0.092143115 -0.309401021 -0.083228438 0.007662873
YES BANK 0.015941216 0.191294587 0.036541094 0.01514738 1.626209913 0.02463282 0.011908274
average return yearly return variance covariance beta sys risk un sys risk
0.00579955 0.06959463 0.00931453
77 | P a g e
78 | P a g e