ICICI Bank’s decision to raise a massive Rs20,000 crore worth of fresh capital has overshadowed the declaration of its financial results for the March quarter. The huge issue would lead to a dilution of about 25% of its equity, which means that the number of outstanding ICICI Bank shares would go up by around 25% (depending, of course, on the price at which the new shares are issued). Such a large dilution will weigh on the stock, as it will limit growth in earnings per share. The bank’s return on equity too will be affected.
This is not the first time that ICICI Bank has gone in for mega issues—it did so in early 2004 and in December 2005—but it must be said that the bank’s high growth rate has ensured earnings growth per share in spite of the larger equity base. While the money raised earlier was primarily used to fund retail loans, this time the opportunity lies in project finance. With companies planning to expand capacity and with several infrastructure projects coming up, loan growth should not be an issue. So far, the bank has consistently beaten the average industry growth.
As for the fourth quarter results, net profit growth was a mere 4.4%, compared to the same quarter of 2006, because of the Reserve Bank of India’s directive increasing general provisions, which took away Rs310 crore from the bottomline. This, as the management points out, is a one-time impact and if it were to be added back, the bank would show a net profit growth of 43.6%.
Net interest income and fee income have shown healthy growth. Yet core operating profit, although higher by 34% compared to the fourth quarter of 2005-06, was below that notched up in the December quarter. That’s because of higher operating expenses. Net interest margin, or the difference between the interest rate the bank earned on its assets and the rate it paid out on borrowings and deposits, remained flat at 2.6%.
Bad loans were at 0.98% of customer assets, around the same level as at end-December. But gross non-performing assets went up to Rs4,850 crore, compared to Rs2,963 crore a year ago, which is a substantial jump. The bank management, however, says it sees no signs of distress in mortgages.
If profit growth remains at around 40%, earnings per share will go up this year, in spite of the mega capital issue. But with fourth quarter profits coming in much lower than expected and with a downward revision in earnings per share, the stock is likely to underperform the market.