Financial Analysis & Cost Reduction of ICICI bank

Chapter 1

Executive Summary

1

Analysis and interpretation of the financial statement has now

become an important technique of credit appraisal. Though the basic

technique of appraisal remains the same in all the cases but the

approach and the emphasis in analysis vary. Analysis of financial

statement is necessary because it help in depicting the financial

position on the basis of past and current records. Analysis of

financial statement helps in making the future decision and

strategies. Therefore, it is very necessary for every organization

whether it is a financial or manufacturing etc. to make financial

statement and to analysis it.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an

Indian financial institution, and was its wholly owned subsidiary.

Income statements of the ICICI motors for years 99-00 to 05-06 are

the business mirrors, which reflect the financial position and operating

strength and weakness of the concern. Income statement analysis

which is done by using ratio analysis and trend analysis give the true

picture of the company. Cost reduction is the true medicine for the

revival of the company during the decline of the company which is

studied in this project. The big positive of the cost reduction initiative

goes beyond the statistics of money saved. The crisis unified the

company. Companies have emerged from this as phoenix

2

In order to understand and analysis Ratio I have used profit and loss

and balance sheet of both banks. The analysis showed various

aspect of bank regarding their financial system. Observation also

indicated most widely emphasized goal of the firm is to maximize the

value of the firm to it’s to meet the long term and short term

requirements. Funds are invariably required to carry on the various

activities of a business. on the basis of ratio analysis I have

suggested some issues which will helpful to bank regarding their

financial systems analysis of financial statements helped me to know

how ration analysis helps the banker to know the financial position of

the business. Among the various tools for evaluating the financial

statements, ratio analysis is the most widely used tool, as it helps us

to measure the financial and operational performance of any

business.

In this project, the concepts of Cost reduction are used in such a

manner that it can be made more effective, emphasizing more on the

role of management, explaining the factor behind success and failure

of such analysis within the organization, accentuating its application

in Banking Sector and also highlighting Cost reduction concept, cost

reduction process & strategies and so on. There is a case study on

Cost reduction programmers in ICICI Bank.

3

Chapter 2

Introduction

4

Every financial manager is involved in financial decision making and

financial planning in order to take right decision at right time, he

should be equipped with sufficient past and present information about

the firm and its operations and how it is changing overtime. Much of

this information that is used by financial manager to take various

decisions and to plan for the future is derived from the financial

statements. The project, is to analyze the financial statements and to

study different ratios over the period of 5 years to determine the

financial position of ICICI Bank.

Financial analysis involves the use of various financial statements.

These statements do several things. First, the balance sheet

summarizes the assets, liabilities and owners equity of a business at

moment in time, usually the end of a year or a quarter. Next the

income statement summarizes the revenues and expenses of the firm

over a period of time while balance sheet represents a snapshot of

the firm s financial position at a moment in time.

Financial management is planning and controlling of financial

resources of a firm with a specific objective. Since, financial

management as a separate discipline is of recent origin, it is still in a

developing stage. It is very crucial for an organization to manage its

funds effectively and efficiently. Financial management has assumed

greater importance today as the financial strategies required to

survive in the competitive environment have become very important.

5

In the financial markets also new instruments and concepts are

coming and one must say that a finance manager of today is

operating in a more complex environment. A study of theories and

concepts of financial management has therefore become a part of

paramount importance for academics as well as for practitioners but

there are many concepts and theories about which controversies

exist as no unanimous opinion is reached as yet. The project, further

aims at discussing and understanding the concepts of financial

management of ICICI Bank; the functions expect to be performed by

the financial management as well as the objectives of financial

managements.

6

Chapter 3

Objective of study

7

Objective of study

To Analysis ICICI Bank Financial Statement

To understand the importance of financial statement analysis,

calculate the ratios, and also analyze them.

To study the ICICI Bank financial position and market standing

through the ratio Analysis and cost reduction programmes

Through the net profit ratio and other profitability ratio,

understand the profitability position of ICICI bank.

Evaluating company’s performance relating to Financial

Statement Analysis.

To know the liquidity position of the company, with the help of

Current ratio.

How the Cost Reduction process works.

8

Chapter 4

Research Methodology

9

Research methodology

Research Methodology is a systematic method of discovering new

facts or verifying old facts, their sequence, inter-relationship, casual

explanation and the natural laws which governs them.

It covers the systematic approach concerning generalization and the

formulation of the theory. Different stages involved in research

consists of enacting the problem, formulating a hypothesis, collecting

the facts or data, analyzing the facts and reaching certain conclusion

either in the form of solution towards the concerned problem or in

generalization for some theoretical formulation.

The main objective of the study is to determine and analyze the

financial position by two ways:

1. Primary Data:

Ratio Calculation

Graphical Representation

Interviews with finance manager.

10

2. Secondary Data:

Secondary data consist of the information that already exists or

someone has collected it for specific purpose. This data was

collected by:

The company profile was collected from website of

www.icicibank.com

www.icicidirect.com

Books related to Financial Management.

Reference to the various report, material, published by the

company.

11

http://www.icicidirect.com/

http://www.icicibank.com/

Chapter 5

Limitations of the study

12

Limitations of the study

The limitations of the study can be as follows in the process of

the research.

Companies are being heisted to provide to right or valid data

which is mush important for study.

Consumption Time frame

Primary data can be bias depending upon the individuals view

Dynamic market economy and business opportunities

Position of Indian economy in coming years

13

Chapter 6

Review of literature

14

Strategic and Financial Performance Implications of Global

Sourcing Strategy: A contingency Analysis

“ Using a contingency model of global sourcing strategy, this study

investigated the moderating effects of sourcing – related factors on

the relationship between sourcing strategy and a product’s strategic

and financial performance. The results lent some support to the

contingency model of global sourcing strategy in that product

innovation, process innovation and asset specificity were significant

moderator variables for financial, but not strategic , performance.

However, the results provided no support for bargaining power of

suppliers and transaction frequency as moderator variables. In other

words, in achieving high financial performance for a product, whether

a particular sourcing strategy should be used for a particular product

depended on the levels of product innovation , process innovation

and asset specificity”

Several unique financial characteristics differentiate a cooperative

from an investor-oriented firm (IOF). When evaluating the

cooperative’s performance, comparing a cooperative’s financial

position with an IOF can be misleading for those unfamiliar with these

characteristics. This report was written to help boards and managers

assess the financial performance of their cooperatives and to

familiarize potential creditors with the unique financial characteristics

and performance of cooperatives.

15

This study discusses the differences in financial management and

goals of cooperatives versus IOFs. It starts by discussing the

contents of the various cooperative financial statements and follows

with a view of common sizing statements for analysis.

Next, it reviews the usefulness of standard financial ratios applied to

the cooperative framework. A brief review shows what lenders look

for when analyzing potential borrowers.

Finally, financial ratios are developed to build on these standards with

an eye toward a comprehensive understanding of a cooperative s

performance. Ratios will be related to data during the last 18 years

from the largest agricultural cooperatives.

16

Environmental and Financial Performance Literature

“ We review the growing literature relating corporate environmental

performance to financial performance. We seek to identify

achievements and limitations of this literature and to highlight areas

for further research. Our primary interest is to assess the adequacy of

the literature in informing corporate managers how, when, and where

to make pro-environment investments that will pay off with financial

returns for long-term shareholders. To do so , we create a conceptual

framework that maps the influence of regulators, public health

scientists , environmental advocates , consumers, employees, and

other interested parties upon corporate financial returns. Our decision

has relevance to all parties interested in influencing corporate

actions affect the environment .”

17

Financial System Analysis: A Functional View by Mariko FUJII

(Research Center for Advanced Economic Engineering,

University of Tokyo)

The Financial system plays a fundamental role in the economic

system in facilitating the transfer of resources and provision of

settlement services, liquidity and price information, among others.

Under the recent economic situations where uncertainty of future

economic variables have more widely prevailed, the function to

provide tools for trading and sifting risks has increased its

importance. Depending on how such mechanism is provided,

economic welfare of the agents may differ substantially. Functional

approach to the financial systems is quite helpful to examine the role

of specific institutions and design of the financial system and to

evaluate them in the light of current economic developments. In this

note, the functions of financial systems are reviewed from the

viewpoints described above and the modern developments of

financial institutions are considered for evaluation.

Banks and financial markets are two basic structures that consist of

the financial system, and they may be distinct in the way they perform

the financial functions. In recent years, financial markets seem to

have increased their relative weight in many economies because they

can deal with a wide variety of products to trade risks, which have

been made available by virtue of the advancement of technologies,

but also can aggregate opinions through the decentralized decision-

18

making processes. These characteristics of financial markets, in

comparison with banks, are inherent in market mechanism itself, and

may work well under rapidly changing and rather uncertain economic

conditions.

As a matter of course, banks and financial markets are both

essential to the economy and interacting each other. Some of

relatively newly developed financing methods such as venture capital

and securitization could be regarded as resulting products of the

interactions of banks and financial markets.

It is important to understand under what conditions a particular

financial structure of institutions emerges. For this purpose, the

analysis to deal with banks and financial markets in a consolidated

framework is interesting and would be the direction of future

research.

19

Chapter 7

Introduction to Financial Analysis

20

7.1.1 Introduction:

A Financial Statement is a compilation of data, which is logically and

consistently organized according to accounting principles. Its purpose

is to convey an understanding of some financial aspects of a

business firm. It shows a position at a movement in time, as in the

case of balance sheet, or reveals a series of activities over a given

period of time, as in the case of an income statement. Financial

statements are the major means through which firms present their

financial situation to stock holders, creditors and general public. The

majority of firms which include extensive financial statements in their

annual reports, which receive wide distribution.

Nature of financial statement Analysis:

Financial Statement Analysis consist of the application of analytical

tools and techniques to the data in financial statements in order to

derive from them measurements and relationships that are significant

and useful for decision making. The process of financial analysis can

be described in various ways, depending on the objectives to be

obtained. Financial analysis can be used as a preliminary screening

tool in the selection of stocks in the secondary market. It can be used

as a forecasting tool for future financial conditions and results. It may

21

be used as a process of evaluation and diagnosis of managerial,

operating or other problem areas. Above all, financial analysis

reduces reliance on intuition, guesses and thus narrows the areas of

uncertainty that is present in all decision making processes. Financial

analysis does not lesson the need for judgment but rather establishes

a sound and systematic basis for its rational application.

Sources of Financial Information:

The financial data needed in financial analysis come from many

sources. The primary source is the data provided by the firm itself in

its annual report and required disclosures. The annual report

comprises the income statement, the balance sheet, and the

statement of cash flows, as well as footnote to these statements.

Besides this information such as the market price of securities

publicly traded corporations can be found in the financial 20 press

and the electronic media daily. The financial press also provides

information to stock price indices for industries and for market as a

whole.

22

7.1.2 History of financial Analysis

Analysis of financial statements has had its greatest growth since

1990 s. A major impetus came from increasing need from increasing

need on the part of grantors of commercial credit such as bankers,

financial institutions etc, to understand the condition of their

customer. At the same time businessman need to understand their

own conditions of their own enterprise in order to assure its survival in

stress of competition. Satisfaction of these needs has been assisted

by the continuous development of accounting as a science and

passing of income tax law in1993. This required preparation of

balance sheets and income statements, as they are the basic

statements required for the income tax purpose. Thus a reasonably

reliable data from which typical financial ratios could be calculated

has become increasingly available. Between 1919 and 1929 four men

pioneered in development of financial ratios. These where James

bliss who published a book on this subject in 1923. Alexander wall,

head of Robert Morris associates and Raymond W Dunning,

published a work on this subject in 1928 and Roy Foulke, who made

some of the first detailed compilations and studies between 1925 and

1928.

23

Users of Accounting Information

The list of categories of readers and users of accounts includes the

following people and groups of people:

Investors

Lenders

Managers of the organization

Employees

Suppliers and other trade creditors

Customers

Governments and their agencies

Public

Financial analysts

Environmental groups

Researchers: both academic and professional

24

7.1.3 Advantages of Financial Statement Analysis

There are various advantages of financial statements analysis. The

major benefit is that the investors get enough idea to decide about

the investments of their funds in the specific company. Secondly,

regulatory authorities like International Accounting Standards Board

can ensure whether the company is following accounting standards

or not. Thirdly, financial statements analysis can help the government

agencies to analyze the taxation due to the company. Moreover,

company can analyze its own performance over the period of time

through financial statements analysis.

7.1.4 Limitations of Financial Statement Analysis:

Comparison of one company with another can provide valuable clues

about the financial health of an organization. Unfortunately,

differences in accounting methods between companies sometimes

make it difficult to compare the companies financial data. For

example if one firm values its inventories by LIFO method and

another firm by the average cost method, then direct comparison of

financial data such as inventory valuations and cost of goods sold

between the two firms may be misleading. Sometimes enough data

are presented in foot notes to the financial statements to restate data

to a comparable basis. Otherwise, the analyst should keep in mind

25

the lack of comparability of the data before drawing any definite

conclusion.

7.2 The Principal Tools of Analysis:

In the analysis of financial statements, the analyst can have a variety

of tools available from which he can choose the best suited to his

specific purpose. The following are the important tools of analysis.

The Principles Tools/Techniques of Financial Analysis:

26

Figure 1 Classification of Financial Analysis

27

Tools of

Financial

Analysis

Trend

Analysis

Common size

statement

Comparative

Statement

Ratio

Analysis

7.2.1 Trend Analysis

An aspect of technical analysis that tries to predict the future

movement of a stock based on past data. Trend analysis is based on

the idea that what has happened in the past gives traders an idea of

what will happen in the future.

There are three main types of trends: short-, intermediate- and long-

term. Trend Analysis Analysts make a trend analysis of performance

over the past five to ten years to get an overall picture. Trend analysis

is made in respect of sales, cost of sales, gross profit, net profit

(before tax), net profit (after tax), net worth, debt, dividend policy,

bonus and Rights issues, return on net worth, earnings per share,

etc.

7.2.2 Common Size Statements

Definition and Explanation of Vertical Analysis and Common Size

Statements: Vertical analysis is the procedure of preparing and

presenting common size statements.

Common size statement is one that shows the items appearing on it

in percentage form as well as in dollar form. Each item is stated as a

percentage of some total of which that item is a part. Key financial

changes and trends can be highlighted by the use of common size

statements. Common size statements are particularly useful when

comparing data from different companies.

28

The information it contains in the selection, reclassification and

summarization of the data contained in profit and loss account and

balance sheet, it is no way replacement of either these statements.

To provide a comparative view of movement of funds by the

statement of changes in financial position is prepared for the period

covered by the profit and loss account as well as the corresponding

previous period.

7.2.3 Comparative Statement

Comparative statements are financial statements that cover a

different time frame, but are formatted in a manner that makes

comparing line items from one period to those of a different

period an easy process. This quality means that the comparative

statement is a financial statement that lends itself well to the

process of comparative analysis. Many companies make use of

standardized formats in accounting functions that make the

generation of a comparative statement quick and easy. The

benefits of a comparative statement are varied for a corporation.

Because of the uniform format of the statement, it is a simple

process to compare the gross sales of a given product or all products

of the company with the gross sales generated in a previous month,

quarter, or year. Comparing generated revenue from one period to a

different period can add another dimension to analyzing the

effectiveness of the sales effort, as the process makes it possible to

29

http://www.wisegeek.com/what-is-a-corporation.htm

http://www.wisegeek.com/what-is-a-financial-statement.htm

http://www.wisegeek.com/what-are-financial-statements.htm

identify trends such as a drop in revenue in spite of an increase in

units sold.

Along with being an excellent way to broaden the understanding of

the success of the sales effort, a comparative statement can also

help address changes in production costs. By comparing line items

that catalog the expense for raw materials in one quarter with another

quarter where the number of units produced is similar can make it

possible to spot trends in expense increases, and thus help isolate

the origin of those increases. This type of data can prove helpful to

allowing the company to find raw materials from another source

before the increased price for materials cuts into the overall

profitability of the company.

A comparative statement can be helpful for just about any

organization that has to deal with finances in some manner.

Even non-profit organizations can use the comparative

statement method to ascertain trends in annual fund raising

efforts. By making use of the comparative statement for the

most recent effort and comparing the figures with those of the

previous year’s event, it is possible to determine where

expenses increased or decreased, and provide some insight in

how to plan the following year’s event.

30

7.2.4 Ratio Analysis:

This is the important tool available to financial analyst for their work.

An accounting ratio shows the relationship in mathematical terms

between two interrelated accounting figures. Fundamental Analysis

has a very broad scope. One aspect looks at the general (qualitative)

factors of a company. The other side considers tangible and

measurable factors (quantitative). This means crunching and

analyzing numbers from the financial statements. If used in

conjunction with other methods, quantitative analysis can produce

excellent results.

Ratio analysis isn't just comparing different numbers from the balance

sheet, income statement, and cash flow statement. It's comparing the

number against previous years, other companies, the industry, or

even the economy in general. Ratios look at the relationships

between individual values and relate them to how a company has

performed in the past, and might perform in the future.

A ratio is one figure express in terms of another figure. It is a

mathematical yardstick that measures the relationship two figures,

which are related to each other and mutually interdependent. Ratio is

express by dividing one figure by the other related figure. Thus a ratio

31

is an expression relating one number to another. It is simply the

quotient of two numbers.

7.2.4.1 MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of

items or group of items in the financial statement are computed,

determined and presented. Ratio analysis is an attempt to derive

quantitative measure or guides concerning the financial health and

profitability of business enterprises. Ratio analysis can be used both

in trend and static analysis. There are several ratios at the disposal of

an annalist but their group of ratio he would prefer depends on the

purpose and the objective of analysis.

While a detailed explanation of ratio analysis is beyond the scope of

this section, we will focus on a technique, which is easy to use. It can

provide you with a valuable investment analysis tool. This technique

is called cross-sectional analysis. Cross-sectional analysis compares

financial ratios of several companies from the same industry. Ratio

analysis can provide valuable information about a company's

financial health. A financial ratio measures a company's performance

in a specific area. For example, you could use a ratio of a company's

debt to its equity to measure a company's leverage. By comparing

the leverage ratios of two companies, you can determine which

company uses greater debt in the conduct of its business. A company

whose leverage ratio is higher than a competitor's has more debt per

32

equity. You can use this information to make a judgment as to which

company is a better investment risk. However, you must be careful

not to place too much importance on one ratio. You obtain a better

indication of the direction in which a company is moving when several

ratios are taken as a group.

7.2.4.2 OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business

organization-

1. Solvency-

Long term

Short term

Immediate

2. Stability

3. Profitability

4. Operational E) Credit standing

5. Structural analysis

6. Effective utilization of resources

7. Leverage or external financing

8. Standardize financial information for comparisons

9. Evaluate current operations efficiency

10. Compare performance with past performance

11. Compare performance against other firms or industry

standards.

33

12. Study the efficiency of operations efficiency

13. Study the risk of operations

7.2.4.3FORMS OF RATIO:

Since a ratio is a mathematical relationship between to or more

variables accounting figures, such relationship can be expressed in

different ways as follows –

A] As a pure ratio:

For example the equity share capital of a company is Rs.

20,00,000 & the preference share capital is Rs. 5,00,000, the

ratio of equity share capital to preference share capital is

20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

In the above case the equity share capital may also be

described as 4 times that of preference share capital. Similarly,

the cash sales of a firm are Rs. 12,00,000 & credit sales are

Rs. 30,00,000. so the ratio of credit sales to cash sales can be

described as 2.5 [30,00,000/12,00,000] or simply by saying that

the credit sales are 2.5 times that of cash sales.

34

C] As a percentage:

In such a case, one item may be expressed as a percentage of

some other item.

For example, net sales of the firm are Rs.50,00,000 & the

amount of the gross profit is Rs. 10,00,000, then the gross profit

may be described as 20% of sales [ 10,00,000/50,00,000]

7.2.4.4 STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2]Comparing the ratio with some predetermined standards. The

standard ratio may be the past ratio of the same firm or industry’s

average ratio or a projected ratio or the ratio of the most successful

firm in the industry. In interpreting the ratio of a particular firm, the

analyst cannot reach any fruitful conclusion unless the calculated

ratio is compared with some predetermined standard. The importance

of a correct standard is oblivious as the conclusion is going to be

based on the standard itself.

35

7.2.4.5 TYPES OF COMPARISONS

The ratio can be compared in three different ways –

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to

compare them with the ratio or ratios of some other selected

firm in the same industry at the same point of time. So it

involves the comparison of two or more firm’s financial ratio at

the same point of time. The cross section analysis helps the

analyst to find out as to how a particular firm has performed in

relation to its competitors. The firms performance may be

compared with the performance of the leader in the industry in

order to uncover the major operational inefficiencies. The cross

section analysis is easy to be undertaken as most of the data

required for this may be available in financial statement of the

firm.

2] Time series analysis:

The analysis is called Time series analysis when the

performance of a firm is evaluated over a period of time. By

comparing the present performance of a firm with the

performance of the same firm over the last few years, an

36

assessment can be made about the trend in progress of the

firm, about the direction of progress of the firm. Time series

analysis helps to the firm to assess whether the firm is

approaching the long-term goals or not.

The Time series analysis looks for (1) important trends in financial

performance (2) shift in trend over the years (3) significant deviation if

any from the other set of data.

3] Combined analysis:

If the cross section & time analysis, both are combined together

to study the behavior & pattern of ratio, then meaningful &

comprehensive evaluation of the performance of the firm can

definitely be made. A trend of ratio of a firm compared with the

trend of the ratio of the standard firm can give good results. For

example, the ratio of operating expenses to net sales for firm

may be higher than the industry average however, over the

years it has been declining for the firm, whereas the industry

average has not shown any significant changes.

The combined analysis as depicted in the above diagram, which

clearly shows that the ratio of the firm is above the industry average,

but it is decreasing over the years & is approaching the industry

average.

37

7.2.4.6 PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful

conclusions, there are certain pre-requisites, which must be taken

care of. It may be noted that these prerequisites are not conditions for

calculations for meaningful conclusions. The accounting figures are

inactive in them & can be used for any ratio but meaningful & correct

interpretation & conclusion can be arrived at only if the following

points are well considered.

1) The dates of different financial statements from where data is

taken must be same.

2) If possible, only audited financial statements should be considered,

otherwise there must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in

case of cross section analysis otherwise the results of the ratio

analysis would be distorted.

4) One ratio may not throw light on any performance of the firm.

Therefore, a group of ratios must be preferred. This will be conductive

to counter checks.

5) Last but not least, the analyst must find out that the two figures

being used to calculate a ratio must be related to each other,

otherwise there is no purpose of calculating a ratio

38

7.2.4.7 CLASSIFICATION OF RATIO

39

Figure 2 Classification of Ratio

40

CLASSIFICATION

OF RATIO

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet , P&

P A/C, or both. One-way of classification of ratios is based upon the

sources from which are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called

Balance Sheet Ratios. E.g. ratio of current assets to current liabilities

or ratio of debt to equity. While calculating these ratios, there is no

need to refer to the Revenue statement.

These ratios study the relationship between the assets & the

liabilities, of the concern. These ratio help to judge the liquidity,

solvency & capital structure of the concern. Balance sheet ratios are

Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio,

Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement is called

revenue statement ratios. These ratio study the relationship between

the profitability & the sales of the concern. Revenue ratios are Gross

profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net

operating profit ratio, Stock turnover ratio.

41

3] Composite ratio:

These ratios indicate the relationship between two items, of which

one is found in the balance sheet & other in revenue statement.

There are two types of composite ratiosa) Some composite ratios

study the relationship between the profits & the investments of the

concern. E.g. return on capital employed, return on proprietors fund,

return on equity capital etc.

Other composite ratios e.g. debtors turnover ratios, creditors turnover

ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in

to liquidity ratios, leverage ratios, activity ratios, profitability ratios &

turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets &

current liabilities of the concern e.g. liquid ratios & current

ratios. Liquidity refers to the ability of a firm to meet its short-term

(usually up to 1 year) obligations. The ratios, which indicate the

liquidity of a company, are Current ratio, Quick/Acid-Test ratio, and

Cash ratio. These ratios are discussed below

42

2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in

financing the assets of the concern e.g. capital gearing ratios, debt

equity ratios, & Proprietory ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known

as Turnover ratios & productivity ratios e.g. stock turnover ratios,

debtors turnover ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g. operating

ratios, gross profit ratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on

investment, return on equity capital.

43

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the

claims of the outsiders to be paid out of such profit e.g. dividend

payout ratios & debt service ratios.

BASED ON USER:

1] Ratios for short-term creditors:

Current ratios

liquid ratios

stock working capital ratios etc.

2] Ratios for the shareholders:

Return on proprietors fund

return on equity capital etc.

44

LIQUIDITY RATIO: -

Liquidity refers to the ability of a firm to meet its short-term (usually up

to 1 year) obligations. The ratios, which indicate the liquidity of a

company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio.

These ratios are discussed below

45

CURRENT RATIO

Meaning:

This ratio compares the current assests with the current liabilities. It is

also known as ‘working capital ratio’ or ‘ solvency ratio’. It is

expressed in the form of pure ratio.

E.g. 2:1

46

Formula:

Current Ratio = Current Assets / Current Liabilities

Significance:

The current assests of a firm represents those assets which can be,

in the ordinary course of business, converted into cash within a short

period time, normally not exceeding one year. The current liabilities

defined as liabilities which are short term maturing obligations to be

met, as originally contemplated, with in a year. Current ratio (CR) is

the ratio of total current assets (CA) to total current liabilities (CL).

Current assets include cash and bank balances; inventory of raw

materials, semifinished and finished goods; marketable securities;

debtors (net of provision for bad and doubtful debts); bills receivable;

and prepaid expenses.

Current liabilities consist of trade creditors, bills payable, bank credit,

provision for taxation, dividends payable and outstanding expenses.

This ratio measures the liquidity of the current assets and the ability

of a company to meet its short-term debt obligation. CR measures the

ability of the company to meet its CL, i.e., CA gets converted into

cash in the operating cycle of the firm and provides the funds needed

to pay for CL. The higher the current ratio, the greater the short-term

solvency. This compares assets, which will become liquid within

47

approximately twelve months with liabilities, which will be due for

payment in the same period and is intended to indicate whether there

are sufficient short-term assets to meet the short- term liabilities.

Recommended current ratio is 2: 1. Any ratio below indicates that the

entity may face liquidity problem but also Ratio over 2: 1 as above

indicates over trading, that is the entity is under utilizing its current

assets.

LIQUID RATIO:

Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio

compare the quick assets with the quick liabilities. It is expressed in

the form of pure ratio. E.g. 1:1. The term quick assets refer to current

assets, which can be converted into, cash immediately or at a short

notice without diminution of value.

Formula:

Liquid ratio = Quick Assets / Current Liabilities

Significance:

48

Quick Ratio (QR) is the ratio between quick current assets (QA) and

CL. QA refers to those current assets that can be converted into cash

immediately without any value strength. QA includes cash and bank

balances, short-term marketable securities, and sundry debtors.

Inventory and prepaid expenses are excluded since these cannot be

turned into cash as and when required. QR indicates the extent to

which a company can pay its current liabilities without relying

on the sale of inventory. This is a fairly stringent measure of liquidity

because it is based on those current assets, which are highly liquid.

Inventories are excluded from the numerator of this ratio because

they are deemed the least liquid component of current assets.

Generally, a quick ratio of 1:1 is considered good. One drawback of

the quick ratio is that it ignores the timing of receipts and payments.

EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the

organization. An earnings per Share represents earning of the

company whether or not dividends are declared. If there is only one

class of shares, the earning per share are determined by dividing net

profit by the number of equity shares.EPS measures the profits

available to the equity shareholders on each share held.

49

Formula:

Earning per share = NPAT / Number of equity share

Significance:

The higher EPS will attract more investors to acquire shares in the

company as it indicates that the business is more profitable enough

to pay the dividends in time. But remember not all profit earned is

going to be distributed as dividends the company also retains some

profits for the business

DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend

paid to equity shareholders out of the profit available to the equity

shareholders.

Formula:

Dividend Pay out ratio = Dividend per share / Earning per

share *100

50

Significance:

D/P ratio shows the percentage share of net profits after taxes and

after preference dividend has been paid to the preference equity

holders.

CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity shareholders

return through the use of debt. Equity shareholders earn more when

the rate of the return on total capital is more than the rate of interest

on debts. This is also known as leverage or trading on equity. The

Capital-gearing ratio shows the relationship between two types of

capital viz: - equity capital & preference capital & long term

borrowings. It is expressed as a pure ratio.

Formula:

Capital gearing ratio = Preference capital+ secured loan /

Equity capital & reserve & surplus

51

Significance:

Capital gearing ratio indicates the proportion of debt &

equity in the financing of assets of a concern. If the amount of

fixed cost bearing capital is more than the equity share capital

including reserves an undistributed profits), it will be called high

capital gearing and if it is less, it will be called low capital gearing.

The high gearing will be beneficial to equity shareholders when the

rate of interest/dividend payable on fixed cost bearing capital is lower

than the rate of return on investment in business.

Thus, the main objective of using fixed cost bearing capital is to

maximize the profits available to equity shareholders.

PROFITABILITY

These ratios help measure the profitability of a firm. A firm, which

generates a substantial amount of profits per rupee of sales, can

comfortably meet its operating expenses and provide more returns to

its shareholders. The relationship between profit and sales is

measured by profitability ratios. There are two types of profitability

ratios: Gross Profit Margin and Net Profit Margin.

52

GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It

is defined as the excess of the net sales over cost of goods sold or

excess of revenue over cost.

Formula:

Gross profit ratio = Gross profit / Net sales * 100

Significance:

This ratio shows the profit that remains after the

manufacturing costs have been met. It measures the

efficiency of production as well as pricing. This ratio helps to judge

how efficient the concern is I managing its production, purchase,

selling & inventory, how good its control is over the direct cost, how

productive the concern , how much amount is left to meet other

expenses & earn net profit.

53

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the

sales it is usually expressed in the form of a percentage.

Formula:

Net profit ratio = NPAT / Net sales * 100

Significance:

This ratio shows the net earnings (to be distributed to both equity and

preference shareholders) as a percentage of net sales. It measures

the overall efficiency of production, administration, selling, financing,

pricing and tax management. Jointly considered, the gross and net

profit margin ratios provide an understanding of the cost and profit

structure of a firm.

54

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of

view of the total funds employed in the firm. The term fund employed

or the capital employed refers to the total long-term source of funds. It

means that the capital employed comprises of shareholder funds plus

long-term debts. Alternatively it can also be defined as fixed assets

plus net working capital. Capital employed refers to the long-term

funds invested by the creditors and the owners of a firm. It is the sum

of long-term liabilities and owner's equity. ROCE indicates the

efficiency with which the long-term funds of a firm are utilized.

Formula:

Return on capital employed = NPAT / Capital employed * 100

Significance :

These ratios determine how quickly certain current assets can be

converted into cash. They are also called efficiency ratios or asset

utilization ratios as they measure the efficiency of a firm in managing

assets. These ratios are based on the relationship between the level

55

of activity represented by sales or cost of goods sold and levels of

investment in various assets

FINANCIAL

These ratios determine how quickly certain current assets can be

converted into cash. They are also called efficiency ratios or asset

utilization ratios as they measure the efficiency of a firm in managing

assets. These ratios are based on the relationship between the level

of activity represented by sales or cost of goods sold and levels of

investment in various assets. The important turnover ratios are

debtors turnover ratio, average collection period, inventory/stock

turnover ratio, fixed assets turnover ratio, andtotal assets turnover

ratio. These are described below:

56

DEBTORS TURNOVER RATIO (DTO)

Meaning:

DTO is calculated by dividing the net credit sales by average debtors

outstanding during the year. It measures the liquidity of a firm's debts.

Net credit sales are the gross credit sales minus returns, if any, from

customers. Average debtors are the average of debtors at the

beginning and at the end of the year. This ratio shows how rapidly

debts are collected. The higher the DTO, the better it is for the

organization.

57

Formula:

Debtors turnover ratio = Credit sales / Average debtors

Significance:

This ratio indicates the speed with which the amount is collected from

debtors. The higher the ratio, the better it is, since it indicates that

amount from debtors is being collected more quickly. The more

quickly the debtors pay, the less the risk from bad- debts, and so the

lower the expenses of collection and increase in the liquidity of the

firm.

By comparing the debtors turnover ratio of the current year with the

previous year, it may be assessed whether the sales policy of the

management is efficient or not.

Average collection period

This ratio indicates the time with in which the amount is collected

from debtors and bills receivables.

Formula:

Average collection period = debtors + bills receivable / credit

sales per day

58

Here, credit sales per day = net credit sales of the year / 365

Average collection period can also be calculated on the bases of

‘debtors turnover ratio’.

The Formula will be:

Average collection period = 12 months or 365 days / debtors

turnover ratio

Significance:

This ratio shows the time in which the customers are paying for credit

sales. A higher debt collection period is thus, an indicates of the

inefficiency and negligence on the part of management. On the other

hand, if there is decrease in debt collection period, it indicates prompt

payment by debtors which reduces the chance of bad debts.

INVENTORY OR STOCK TURNOVER RATIO (ITR)

Meaning:

ITR refers to the number of times the inventory is sold and replaced

during the accounting period.

59

Formula:

Stock Turnover Ratio = COGS / Average stock

Significance:

ITR reflects the efficiency of inventory management. The higher the

ratio, the more efficient is the management of inventories, and vice

versa. However, a high inventory turnover may also result from a low

level of inventory, which may lead to frequent stock outs and loss of

sales and customer goodwill. For calculating ITR, the average of

inventories at the beginning and the end of the year is taken. In

general, averages may be used when a flow figure (in this case, cost

of goods sold) is related to a stock figure (inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in

fixed assets.

Formula:

Fixed assets turnover = Net sales / Net fixed assets

60

Significance:

This ratio measures the efficiency with which fixed assets are

employed. A high ratio indicates a high degree of efficiency in asset

utilization while a low ratio reflects an inefficient use of assets.

However, this ratio should be used with caution because when the

fixed assets of a firm are old and substantially depreciated, the fixed

assets turnover ratio tends to be high (because the denominator of

the ratio is very low).

PROPRIETORS RATIO:

Meaning:

Proprietary ratio is a test of financial & credit strength of the business.

It relates shareholders fund to total assets. This ratio determines the

long term or ultimate solvency of the company. In other words,

Proprietary ratio determines as to what extent the owner’s interest &

expectations are fulfilled from the total investment made in the

business operation. Proprietary ratio compares the proprietor fund

with total liabilities. It is usually expressed in the form of percentage.

Total assets also know it as net worth.

61

Formula:

Proprietary ratio = Proprietary fund / Total fund

Significance:

This ratio should be 33% or more than that. In other words, the

proportion of shareholders funds to total funds should be 33% or

more.

A higher proprietary ratio is generally treated an indicator of sound

financial position from long-term point of view, because it means that

the firm is less dependent on external sources of finance.

If the ratio is low it indicates that long-term loans are less secured

and they face the risk of losing their money.

STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock & the

working capital. It helps to judge the quantum of inventories in

relation to the working capital of the business. The purpose of this

ratio is to show the extent to which working capital is blocked in

inventories. The ratio highlights the predominance of stocks in the

current financial position of the company. It is expressed as a

percentage.

62

Formula:

Stock working capital ratio = Stock / Working Capital

Significance:

Stock working capital ratio is a liquidity ratio. It indicates the

composition & quality of the working capital. This ratio also helps to

study the solvency of a concern. It is a qualitative test of solvency. It

shows the extent of funds blocked in stock. If investment in stock is

higher it means that the amount of liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:

Debt equity ratio is also called as leverage ratio. Leverage means the

process of the increasing the equity shareholders return through the

use of debt. Leverage is also known as ‘gearing’ or ‘trading on

equity’. Debt equity ratio shows the margin of safety for long-term

creditors & the balance between debt & equity.

Formula:

Debt equity ratio = Total long-term debt / Total shareholders

fund

63

Significance:

This ratio is calculated to assess the ability of the firm to meet its long

term liabilities. Generally, debt equity ratio of is considered safe.

If the debt equity ratio is more than that, it shows a rather risky

financial position from the long-term point of view, as it indicates that

more and more funds invested in the business are provided by long-

term lenders.

The lower this ratio, the better it is for long-term lenders because they

are more secure in that case. Lower than 2:1 debt equity ratio

provides sufficient protection to long-term lenders.

RETURN ON PROPRIETOR FUND:

Meaning:

Return on proprietors fund is also known as ‘return on proprietors

equity’ or ‘return on shareholders investment’ or ‘ investment ratio’.

This ratio indicates the relationship between net profit earned & total

proprietors funds. Return on proprietors fund is a profitability ratio,

which the relationship between profit & investment by the proprietors

in the concern.

Its purpose is to measure the rate of return on the total fund made

available by the owners. This ratio helps to judge how efficient the

64

concern is in managing the owner’s fund at disposal. This ratio is of

practical importance to prospective investors & shareholders.

Formula:

Return on proprietors fund = NPAT / Proprietors fund * 100

CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at which

payments are made to the supplier for purchase made from them. It

is a relation between net credit purchase and average creditors.

Formula :

Credit turnover ratio = Net credit purchase / Average creditors

Average age of accounts payable = Months in a year / Credit

turnover ratio

Significance:

Both the ratios indicate promptness in payment of creditor purchases.

Higher creditors turnover ratio or a lower credit period enjoyed

signifies that the creditors are being paid promptly. It enhances credit

worthiness of the company. A very low ratio indicates that the

company is not taking full benefit of the credit period allowed by the

creditors.

65

6.2.4.8 Uses of Ratio analysis

To evaluate performance, compared to previous years and to

competitors and the industry

To set benchmarks or standards for performance

To highlight areas that need to be improved, or areas that offer

the most promising future potential

To enable external parties, such as investors or lenders, to

assess the creditworthiness and profitability of the firm

6.2.4.9 Advantage of ratio analysis

Helpful in analysis of financial statements.

Helpful in comparative study.

Helpful in locating the weak spots of the business.

Helpful in forecasting.

Estimate about the trend of the business.

Fixation of ideal standards.

Effective control.

Study of financial soundness.

66

6.2.4.10 Limitations of Ratio analysis

There is considerable subjectivity involved, as there is no

“correct” number for the various ratios. Further, it is hard to

reach a definite conclusion when some of the ratios are

favorable and some are unfavorable.

Ratios may not be strictly comparable for different firms due to

a variety of factors such as different accounting practices or

different fiscal year periods. Furthermore, if a firm is engaged

in diverse product lines, it may be difficult to identify the industry

category to which the firm belongs. Also, just because a

specific ratio is better than the average does not necessarily

mean that the company is doing well; it is quite possible rest of

the industry is doing very poorly.

Ratios are based on financial statements that reflect the past

and not the future. Unless the ratios are stable, it may be

difficult to make reasonable projections about future trends.

Furthermore, financial statements such as the balance sheet

indicate the picture at “one point” in time, and thus may not be

representative of longer periods.

Financial statements provide an assessment of the costs and

not value. For example, fixed assets are usually shown on the

balance sheet as the cost of the assets less their accumulated

67

depreciation, which may not reflect the actual current market

value of those assets.

Financial statements do not include all items. For example, it is

hard to put a value on human capital (such as management

expertise). And recent accounting scandals have brought light

to the extent of financing that may occur off the balance sheet.

Accounting standards and practices vary among countries, and

thus hamper meaningful global comparisons.

68

Chapter 8

Overview

69

8.1 Profile

ICICI Bank is India's second-largest bank with total assets of about

Rs.1,67,659 crore at March 31, 2005 and profit after tax of Rs. 2,005

crore for the year ended March 31, 2005 (Rs. 1,637 crore in fiscal

2004). ICICI Bank has a network of about 560 branches and

extension counters and over 1,900 ATMs. ICICI Bank offers a wide

range of banking products and financial services to corporate and

retail customers through a variety of delivery channels and through its

specialized subsidiaries and affiliates in the areas of investment

banking, life and non-life insurance, venture capital and asset

management.

ICICI Bank set up its international banking group in fiscal 2002 to

cater to the cross border needs of clients and leverage on its

domestic banking strengths to offer products internationally. ICICI

Bank currently has subsidiaries in the United Kingdom and Canada,

branches in Singapore and Bahrain and representative offices in the

United States, China, United Arab Emirates, Bangladesh and South

Africa.

ICICI Bank's equity shares are listed in India on the Stock Exchange,

Mumbai and the National Stock Exchange of India Limited and its

American Depositary Receipts (ADRs) are listed on the New York

Stock Exchange (NYSE).

70

As required by the stock exchanges, ICICI Bank has formulated a

Code of Business Conduct and Ethics for its directors and

employees.

At April 4, 2005, ICICI Bank, with free float market capitalization of

about Rs. 308.00 billion (US$ 7.00 billion) ranked third amongst all

the companies listed on the Indian stock exchanges.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an

Indian financial institution, and was its wholly-owned subsidiary.

ICICI's shareholding in ICICI Bank was reduced to 46% through a

public offering of shares in India in fiscal 1998, an equity offering in

the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's

acquisition of Bank of Madura Limited in an all-stock amalgamation in

fiscal 2001, and secondary market sales by ICICI to institutional

investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at

the initiative of the World Bank, the Government of India and

representatives of Indian industry. The principal objective was to

create a development financial institution for providing medium-term

and long-term project financing to Indian businesses. In the 1990s,

ICICI transformed its business from a development financial

institution offering only project finance to a diversified financial

services group offering a wide variety of products and services, both

directly and through a number of subsidiaries and affiliates like ICICI

Bank. In 1999, ICICI become the first Indian company and the first

71

bank or financial institution from non-Japan Asia to be listed on the

NYSE.

After consideration of various corporate structuring alternatives in the

context of the emerging competitive scenario in the Indian banking

industry, and the move towards universal banking, the managements

of ICICI and ICICI Bank formed the view that the merger of ICICI with

ICICI Bank would be the optimal strategic alternative for both entities,

and would create the optimal legal structure for the ICICI group's

universal banking strategy. The merger would enhance value for

ICICI shareholders through the merged entity's access to low-cost

deposits, greater opportunities for earning fee-based income and the

ability to participate in the payments system and provide transaction-

banking services. The merger would enhance value for ICICI Bank

shareholders through a large capital base and scale of operations,

seamless access to ICICI's strong corporate relationships built up

over five decades, entry into new business segments, higher market

share in various business segments, particularly fee-based services,

and access to the vast talent pool of ICICI and its subsidiaries. In

October 2001, the Boards of Directors of ICICI and ICICI Bank

approved the merger of ICICI and two of its wholly-owned retail

finance subsidiaries, ICICI Personal Financial Services Limited and

ICICI Capital Services Limited, with ICICI Bank. The merger was

approved by shareholders of ICICI and ICICI Bank in January 2002,

by the High Court of Gujarat at Ahmedabad in March 2002, and by

the High Court of Judicature at Mumbai and the Reserve Bank of

72

India in April 2002. Consequent to the merger, the ICICI group's

financing and banking operations, both wholesale and retail, have

been integrated in a single entity.

8.2 Vision and Mission of ICICI Bank Ltd.

Vision of ICICI Bank:

73

Mission :

We will leverage our people, technology, speed and financial

capital to:

Be the banker of first choice for our customers by

delivering high quality, world-class products and services.

Expand the frontiers of our business globally.

Play a proactive role in the full realization of India’s potential.

Maintain a healthy financial profile and diversify our

earnings across businesses and geographies.

Maintain high standards of governance and ethics.

Contribute positively to the various countries and markets

in which we operate.

Create value for our stakeholders.

74

8.3 HISTORY :

ICICI Bank was originally promoted in 1994 by ICICI Limited,

an Indian financial institution, and was its wholly owned subsidiary.

ICICI's shareholding in ICICI Bank was reduced to 46% through a

public offering of shares in India in fiscal 1998, an equity offering in

the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's

acquisition of Bank of Madura Limited in an all-stock amalgamation

in fiscal 2001, and secondary market sales by ICICI to

institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed

in 1955 at the initiative of the World Bank, the Government of India

and representatives of Indian industry. The principal objective

was to create a development financial institution for providing

medium-term and long-term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development

financial institution offering only project finance to a diversified

financial services group offering a wide variety of products and

services, both directly and through a number of subsidiaries and

affiliates like ICICI Bank. In 1999, ICICI become the first Indian

company and the first bank or financial institution from non-Japan

Asia to be listed on the NYSE. After consideration of various

corporate structuring alternatives in the context of the emerging

competitive scenario in the Indian banking industry, and the

move towards universal banking, the managements of ICICI and

ICICI Bank formed the view that the merger of ICICI with ICICI Bank

would be the optimal strategic alternative for both entities, and

75

would create the optimal legal structure for the ICICI group's

universal banking strategy. The merger would enhance value for

ICICI shareholders through the merged entity's access to low-cost

deposits, greater opportunities for earning fee-based income and the

ability to participate in the payments system and provide transaction-

banking services. The merger would enhance value for ICICI Bank

shareholders through a large capital base and scale of operations,

seamless access to ICICI's strong corporate relationships built up

over five decades, entry into new business segments, higher

market share in various business segments, particularly fee-

based services, and access to the vast talent pool of ICICI and

its subsidiaries. In October 2001, the Boards of Directors of ICICI

and ICICI Bank approved the merger of ICICI and two of its wholly-

owned retail finance subsidiaries, ICICI Personal Financial Services

Limited and ICICI Capital Services Limited, with ICICI Bank. The

merger was approved by shareholders of ICICI and ICICI Bank

in January 2002, by the High Citst of Gujarat at Ahmedabad in

March 2002, and by the High Citst of Judicature at Mumbai and the

Reserve Bank of India in April 2002. Consequent to the merger, the

ICICI group's financing and

banking operations, both wholesale and retail, have been integrated

in a single entity. ICICI Bank has formulated a Code of Business

Conduct and Ethics for its directors and employees.

76

As on June 30, 2008 FY’08

CMP: - 955.45 Target Price: - 1,710

77

Incorporation Year 1994

Managing Director K. V. Kamath

Registered Office Landmark, Race Course

Circle, Alakapuri,

Vadodra-390007,

Gujrat

Telephone 91-265-2339923/25/27/28

Fax 91-265-2339926

Website www.icicibank.com

Face Value [Rs] 10

BSE Code 532174

BSE Group A

NSE Code ICICIBANK

Bloomberg ICICIBC IN

Reuters ICBK.BO

ISIN Demat INE090A01013

Market Lot 1

Listing BSE, NSE, NYSE

Financial Year End 03

Book Closure Month Jun/Jul

AGM Month Jul

Table :1 Background Of ICICI

8.4 BOARD MEMBERS

Mr. N. Vaghul, Chairman

Mr. Uday M. Chitale

Mr. Sridar Iyengar

Mr. Lakshmi N. Mittal

Mr. Anupam Puri

Mr. Vinod Rai

Mr. Somesh R. Sathe

Mr. M.K. Sharma

Mr. P.M. Sinha

Prof. Marti G. Subrahmanyam

Mr. T.S.Vijayan

Mr. V. Prem Watsa

Mr. K.V. Kamath, Managing Director & CEO

Ms. Lalita D. Gupte, Joint Managing Director

Ms. Kalpana Morparia, Deputy Managing Director

Ms. Chanda Kochhar, Executive Director

Dr. Nachiket Mor, Executive Director

78


8.5 Why ICICI Bank Leads

ICICI bank envisaged retail banking as a key area of strategic

emphasis for it — with the share of the retail business (both on the

funding and asset sides) growing strongly year after year— the share

of retail business, particularly retail assets.

It appears to be following a business strategy that is quite different

from the high-volume and commodity-style approach of AXIS Bank

and HDFC Bank. That strategy also has its pluses in terms of the

relatively higher margins in some segments of the retail business and

the in-built credit risk diversification (and mitigation) achieved through

a widely dispersed retail credit portfolio. ICICI Bank has been able to

maintain the quality of its loan portfolio for a decent time period now.

79

8.6 SUBSIDIARIES/JOINT VENTURE/ ASSOCIATES

Domestic Subsidiaries

ICICI Brokerage Services Limited.

ICICI Distribution Finance Private Limited.

ICICI Home Finance Company Limited.

ICICI Investment Management Company Limited.

ICICI Trusteeship Services Limited.

Prudential ICICI Trust Limited.

ICICI Venture Funds Management

Company Ltd.

Manages funds that provide

venture capital to start-up

companies and undertake private

equity investments.

ICICI Primary Dealership Ltd.

Engaged in equity underwriting,

brokerage and primary dealership

in government securities.

ICICI Securities Ltd.Leading Investment Banking

Organization.

80

First Source Solutions Ltd.

Leading third party BPO service

provider.

ICICI Prudential Life Insurance

Company Ltd.

Retail market share of about 28%

in new business by private sector

life insurance companies during

FY 2007.

ICICI Lombard General Insurance

Company Ltd.

Market share of about 34% in

gross written premium among the

private sector general insurance

companies during FY2007.

ICICI Prudential Asset

Management Company

Among the top two mutual funds

in India in terms of total funds

under management in the Indian

Mutual Fund Industry for FY07

with a market share of over 11%.

(Source: AMFI)

Table 2: Subsidiaries

81

International Subsidiaries

ICICI Bank Canada.

ICICI Bank Eurasia Limited Liability Company.

ICICI International Limited.

ICICI Securities Holding Inc*.

ICICI Securities Inc*.

ICICI Bank UK Limited.

8.5 Awards in 2009

82

ICICI Bank

For the third year in a row ICICI Bank has won The Asset Triple A

Country Awards for Best Domestic Bank in India

ICICI Bank won the Most Admired Knowledge Enterprises (MAKE)

India 2009 Award. ICICI Bank won the first place in "Maximizing

Enterprise Intellectual Capital" category, October 28, 2009

Ms Chanda Kochhar, MD and CEO was awarded with the Indian

Business Women Leadership Award at NDTV Profit Business

Leadership Awards , October 26, 2009.

ICICI Bank received two awards in CNBC Awaaz Consumer Awards;

one for the most preferred auto loan and the other for most preferred

credit Card, on September 30, 2009

Ms. Chanda Kochhar, Managing Director & CEO ranked in the top 20

of the World's 100 Most Powerful Women list compiled by Forbes,

August 2009

Financial Express at its FE India's Best Banks Awards, honoured Mr.

K.V. Kamath, Chairman with the Lifetime Achievement Award , July

25, 2009

ICICI Bank won Asset Triple A Investment Awards for the Best

Derivative House, India. In addition ICICI Bank were Highly

commended , Local Currency Structured product, India for 1.5 year

ADR GDR linked Range Accrual Note., July 2009

ICICI bank won in three categories at World finance Banking awards

on June 16, 2009

Best NRI Services bank

83

Excellence in Private Banking, APAC Region

Excellence in Remittance Business, APAC Region

ICICI Bank Mobile Banking was adjudged "Best Bank Award for

Initiatives in Mobile Payments and Banking" by IDRBT, on May 18,

2009 in Hyderabad.

ICICI Bank's b2 branchfree banking was adjudged "Best E-Banking

Project Implementation Award 2008" by The Asian Banker, on May

11, 2009 at the China World Hotel in Beijing.

ICICI Bank bags the "Best bank in SME financing (Private Sector)" at

the Dun & Bradstreet Banking awards 2009.

ICICI Bank NRI services wins the "Excellence in Business Model

Innovation Award" in the eighth Asian Banker Excellence in Retail

Financial Services Awards Programme.

ICICI Bank's Rural Micro Banking and Agri-Business Group wins

WOW Event & Experiential Marketing Award in two categories -

"Rural Marketing programme of the year" and "Small Budget On

Ground Promotion of the Year". These awards were given for Cattle

Loan 'Kamdhenu Campaign' and "Talkies on the move campaign'

respectively.

ICICI Bank's Germany Branch has been certified by "Stiftung

Warrentest". ICICI Bank is ranked 2nd amongst 57 savings products

across 19 banks

ICICI Bank Germany won the yearly banking test of the investor

magazine â‚¬uro in the "call money “category.

84

The ICICI Bank was awarded the runner's up position in Gartner

Business Intelligence and Excellence Award for Asia Pacific for its

Business Intelligence functions.

ICICI Bank's Organisational Excellence Group was recently awarded

ISO 9001:2008 certification by TUV Nord. The scope of certification

comprised processes around consulting and capability building on

methods of quality & improvements.

ICICI Bank has been awarded the following titles under The Asset

Triple A Country Awards for 2009:

Best Transaction Bank in India

Best Trade Finance Bank in India

Best Cash Management Bank in India

Best Domestic Custodian in India

ICICI Bank has bagged the Best Cash Management Bank in India

award for the second year in a row. The other awards have been

bagged for the third year in a row.

ICICI Bank Canada received the prestigious Canadian Helen Keller

Award at the Canadian Helen Keller Centre's Fifth Annual Luncheon

in Toronto. The award was given to ICICI Bank its long-standing

support to this unique training centre for people who are deaf-blind.

85

http://www.b2.icicibank.com/

Chapter 9

Data analysis and interpretation

9.1.1 Comparative Profit AND Loss a/c86

2008

Rs. cr

2009

Rs. cr

Increase

&

Decrease

%

Increase

&

Decrease

INCOME

Operating

Income39,467.92 38,250.39 (1,217.53) (3.08)

EXPENSES

Financial

Expenses23,484.24 22,725.93 (758.31) (3.23)

Personal

Expenses2,078.90 1,971.70 (107.20) (5.16)

Selling

Expenses1,750.60 669.21 (1,081.39) (61.77)

Administrative

Expenses6,447.32 7,475.63 1,028.31 15.95

TOTAL

OPER.

EXPENSES

33,761.07 32,842.48 (918.59) (2.72)

OPERATING

PROFIT5,706.85 5,407.91 (298.94) (5.24)

Other

Recurring

Income

65.58 330.64 265.06 4.04

ADJUSTED 5,772.43 5,738.55 (33.88) (0.59)

87

PBDIT

Provisions -509.77 -511.17 (1.40) 0.27

Depreciation 578.35 678.60 100.25 17.33

ADJUSTED

PBT5,703.85 5,571.13 (132.72) (2.33)

Taxes 1,611.73 1,830.51 218.78 13.57

ADJUSTED

PAT4,092.12 3,740.62 (351.50) (8.59)

Table 3 : Comparative Profit AND Loss a/c

88

Interpretation :

By analyzing the summarized profit & loss account of ICICI Bank, the

following trends are presented:

Operating profit decreased to 5.24% for 2008 to 2009

due to recession. which is less than as compared to

increased to Rs. 5,874 crore for 2007 from Rs. 3,888

crore for 2006

Profit after tax decreased to 8.59 for 2008 to 2009

Profit before tax decrease by 2.33% in 2009 from 2009.

it’s increased to Rs. 132.72Billion for 2008 from Rs.

36.48 Billion for FY2007 which is also less than as

compared to increased to Rs. 3,648 crore for 2007 from

Rs. 3,097 crore for 2006.

Provisions and contingencies (excluding provision for

tax) increased to 0.27%.

Other Recurring Income of ICICI bank increased in 2009

by 4.04% from 2008.

89

9.1.2 COMPARATIVE Balance Sheet

2008

Rs. cr

2009

Rs. cr

Increase &

Decrease

% Increase

&

Decrease

CAPITAL &

LIABILITIES

Owned Funds

Equity Share

Capital1,112.68 1,113.29 0.61 0.05

Preferential

Share Capital350.00 350.00 0.00 0.00

Reserves &

Surplus45,357.53 48,419.73 3,062.20 6.75

Loan Funds

Deposits 244,431.05 218,347.82 (26,083.23) (10.67)

Borrowings

made by the

bank

65,648.43 67,323.69 1,675.26 2.55

TOTAL 356,899.69 335,554.53 (21,345.16) (5.98)

ASSETS

Cash &

Balances with

RBI

29,377.53 17,536.33 (11,841.20) (40.31)

Money at call

and Short 8,663.60 12,430.23 3,766.63 43.48

90

Notice

Investments 111,454.34 103,058.31 (8,396.03) (7.53)

Advances 215,060.94 208,090.41 (6,970.53) (3.24)

Fixed Assets

Gross Block 7,036.00 7,443.71 407.71 5.79

Accumulated

Depreciation2,927.11 3,642.09 714.98 24.43

Net Block 4,108.89 3,801.62 (307.27) (7.48)

Net Current

Assets31,129.77 34,384.06 3,254.29 10.45

TOTAL 356,899.69 335,554.53 (21,345.16) (5.98)

Table 4 : Comparative Balance Sheet

91

Interpretation :

By analyzing the balance sheet of ICICI Bank, the following

trends are presented:

Our total assets asset increased by 10.45% billion at year-end

fiscal 2009 from year-end fiscal 2008.It show that company had

purchase current asset within 2008-09.

Decrease in cash balance with bank in 2009 is less than

in the previous year 2008.

But decrease in investment in 2009 is also less than the

previous year.

Increase in advances in 2008 from Rs 2256.16 Billion to

Rs1958.66 Billion in 2007.

Erstwhile ICICI borrowings is increasing in years 2009 but rate

of decreasing is less in 2008 i.e. 18% but in 2007 it is 31%.

Our equity share capital and reserves at year-end fiscal

2009 increased to Rs. 0.05 billion as compared to 2008

Total deposits increased by 6.0% to Rs. 2,444.31 billion at

year-end fiscal 2008 from Rs. 2,305.10 billion at year-end fiscal

2007.

92

9.2.1 Trend Analysis of Profit and Loss with base year 2005

2005

Rs. cr

2006

Rs. cr

2007

Rs. cr

2008

Rs. cr

2009

Rs. cr

INCOME

Operating

Income100 147.98 240.39 333.40 323.11

EXPENSES

Financial

Expenses100 146.06 248.95 357.40 345.86

Personel

Expenses100 146.77 219.25 281.92 267.38

Selling

Expenses100 139.77 289.45 290.94 111.22

Administrati

ve

Expenses

100 218.47 396.27 516.48 598.86

TOTAL

OPER.

EXPENSES

100 155.57 269.30 368.64 358.61

OPERATIN

G PROFIT100 122.02 141.56 212.96 201.80

Other

Recurring

Income

100 103.92 68.94 14.62 73.73

93

ADJUSTED

PBDIT100 119.43 131.15 184.53 183.44

Provisions 100 263.72 -4898.84 -5927.56 -5943.84

Depreciatio

n100 105.66 92.28 97.97 114.95

ADJUSTED

PBT100 122.15 157.33 225.51 220.26

Taxes 100 106.61 188.55 308.76 350.67

ADJUSTED

PAT100 126.19 149.21 203.86 186.35

Table 5 : Trend Analysis of Profit and Loss with base year 2005

94

Figure 1 Trend of P/L

95

Interpretation :

1) TOTAL INCOME:-

The total income of the company is continuously increased from

100% to 333.40% in the last three years from 2005-06 to 2007-08

because of highly increase in the service revenue. The total income is

less increased because of decrease in the other income from 309.17

to 65.58.

2) EXPENSES:-

The operating expenses of the company is increasing in last 5 years

from 100% to 358.61 % because of the highly increase in the network

operating expenses from 2208.19milion to 10469.53 million,

advertisement and business promotion expense and administrative

expenses. It was comparatively highly increase than the total income

so it inversely affects the profit margin of the company

3) PBDIT:-

The profit before financial charges, amortization expenses and taxes

increases from 100% to 183.44% but it increases less than sales

increases because of highly increase in the operating expenses.

96

4) PBT:-

The PBT of the company was continuously increased in last three

years from 2005-06 to 2007-08 because of the comparatively less

increased in the financial charges and the amortization expenditures.

The profit before tax is increased in the 2007-08 than 2006-07

because of decrease in the financial charges. In 2008-09 decrease

from 225.51 to 220.26

5) PAT:-

The PAT of the company is increasing from 100% to 203.86%till

2008 because of continuously increase in the profit before tax. It

expresses the satisfactory situation for the company and one can say

that company has high ability to operate the business efficiently.

But in 2009 PAT decreases upto 186.35because of increase in

expenses.

9.2.2 Trend Analysis of Balance Sheet with base year 2005

97

2005

%

2006

%

2007

%

2008

%

2009

%

CAPITAL &

LIABILITIES

Owned

Funds

Equity Share

Capital100 120.78 122.07 151.03 125.11

Preferential

Share

Capital

100 100 100 100 100

Reserves &

Surplus100 180.44 198.2 383.96 227.15

Loan Funds

Deposits 100 165.38 230.93 244.87 132.27

Borrowings

made by the

bank

100 114.84 152.8 195.71 174.77

TOTAL

FUNDS

AVAILABLE

100 154.63 209.51 244.01 148.37

ASSETS

Cash &

Balances

with RBI

100 140.81 294.83 463.01 196.28

98

Money at

call and

Short Notice

100 123.09 279.64 131.56 153.35

Investments 100 141.71 180.75 220.76 144.04

Advances 100 160.72 211.95 241.66 145.49

Fixed

Assets

Gross Block 100 108.02 113.99 127.33 124.72

Accumulated

Depreciation100 133.63 159.66 196.77 183.22

Net Block 100 98.58 97.161 101.75 95.501

Capital

Work-in-

progress

100 153.62 196.95 0 0

Net Current

Assets100 140.72 211.87 280.04 219.81

TOTAL

FUND

EMPLYED

100 154.63 209.51 244.01 148.37

Table 6: Trend Analysis of Balance Sheet with base year 2005

99

Figure 2 Trend of Capital & Liability

100

Figure 3 : Trend of Asset

101

INTERPRETATION:-

1) SHARE HOLDER’S FUND:-

The share holders fund of the company increases from 100% to

492.72% in the last five years the share holders’ fund was increased

because the company had issued bonus share. And also issues the

additional shares.

2) LOAN FUNDS:-

The loan fund of the company increases fromv100% to 307.04%

(including secured & unsecured loan) the company has increased in

the secured loan till 2008 but decreased in the 2009.

3)Total fund employed :

The net worth of the company increased from 100% to 244.01% in

2008 because highly increased in the shareholder’s fund. but it’s

become 148.37

102

APPLICATION OF FUND:-

1) FIXED ASSETS

Company’s fixed assets increased from 100% in the year 2004-05 to

101.75% in 2007-08 and it’s become 95.501%

2) INVESTMENT:-

The investment of the company increased from 100% to 220.76% in

2007-08 and 144.04% in 2008-09 because of the company has

invested its capital in stock market, mutual fund & subsidiary

company.

3) CURRENT ASSETS, LOANS & ADVANCES:

The current assets, loans and advances of the company increased

because of highly increased in the cash& bank balance.

4) CURRENT LIABILITIES:-

The current liabilities and provisions of the company decreased

because of decreased in the short term loan and in creditors.

103

9.3 Ratio Analysis

CURRENT RATIO

Formula :

Current Ratio = Current Assets / Current Liabilities

Table 7: Current Ratio

2005 2006 2007 2008 2009

Current

Assets11115.99 15642.79 23551.85 31129.77 343484.06

Current

Liabilities21796.06 25230.31 38609.59 43235.79 440364.18

Current

Ratio0.51 0.62 0.61 0.72 0.78

104

Figure 4 : Current Ratio

Interpretation :

The Current Ratio of the Company decreased in 2008-09 from

0.72 to 0.78 because of increase in the loans and advances

from 310079.48 to 285671.51 and increase in sundry Assets

from 31,129.77 to 34,384.06.

105

The Current Ratio of the Company decreases in 2007-08 up to

from 0.61 to .072 because of the increase in Cash and Bank

Balance from 18,706.88 to 29,377.53.

The Committee appointed by the R.B.I recommended a

satisfaction current ratio is 1.33:1 the company’s current ratio is

raising continuously so it is satisfactory.

LIQUID RATIO:

Liquid ratio = Quick Assets / Current Liabilities

2005 2006 2007 2008 2009

Quick

Assets

108544.38 167539.26 233201.92 277573.77 2615763.23

Current

Liabilities21796.06 25230.31 38609.59 43235.79 440364.18

Liquid

ratio4.98

6.64 6.04 6.42 5.94

Table 8: Liquid Ratio

106

Figure 5: Liquid Ratio

Interpretation :

As the standard ratio the quick ratio of 1:1 is satisfactory.

The quick ratio of the company is decreasing from 6.42 to 5.94

in 2008-09 because of increase in sundry creditors and

decrease in the loans and advances.

The quick ratio of the company is decreasing because of

decrease in cash bank balance.

This situation express the company’s has less quick assets

which are used to meet the quick liability of the current, thus

company may come in trouble for a short period of time.

107

EARNING PER SAHRE

Formula:

Earning per share = NPAT / Number of equity share

2005 2006 2007 2008 2009

NPAT 2,007.28 2,532.95 2,995.00 4,092.12 3,740.62

No. of

Equity

share

73.67 88.98 89.93 111.27 111.27

Earning

per

share

27.22 28.55 34.59 37.37 33.78

Table 9: Earning per share

108

Figure 6 :Earning per share

INTERPRETATION:-

This yield can be used by a Share holder while making

decisions about the investment on comparison to other

alternative investments.

The E.P.S. when compared to the current market price of the

share ,gives measure of the rate of yield .

The E.P.S. of the company is currently decreasing because of

the decreasing in the net worth during recession.

109

The earning per share of the IDEA CELLULAR LIMITED is

continuously increased in the year from 2005-06 to 2006-07

because of highly increased in the net profit.

Then it was also increased in the year 2007-08 because of the

increased in the net profit and relatively less percentage

increase in the no.of equity share.

The EPS is continuously increase which express that the

company is effectively uses its capital and also efficiently uses

the loan funds instead of the owner’s fund. It was good for the

share holder’s of the company and they get the satisfactory

return.

Return on capital employed

Return on capital employed = NPAT / Capital employed * 100

2005 2006 2007 2008 2009

NPAT 2,007.28 2,532.95 2,995.00 4,092.12 3,740.62

Capital

employed 736.75 889.83 899.34 1,112.68 1,113.29

Return

on capital

employed2.72 2.85 3.33 3.68 3.36

110

Table 10: Return on capital employed

Figure 7: Return on capital employed

Interpretation:

This is another ratio to judge the efficiency and effectiveness of

the company like profitability ratio.

The income from services is greaterly increased compared with

the previous year and the total capital employed includes

capital and reserves & surplus. Due to huge increase in the net

111

profit the capital employed is also increased along with income

from services. Both are effected in the increment of the ratio of

current year.

Proprietary ratio

Formula :

Proprietary ratio = Proprietary fund / Total fund

2005 2006 2007 2008 2009

Proprietary

fund12,549.95 22,205.99 24,313.26 46,470.21 49,533.02

Total fund 17,460.89 24,577.16 42,258.73 60,507.30 51,920.39

Proprietary

ratio0.72 0.90 0.58 0.77 0.95

Table 11: Proprietary ratio

112

Figure 8 :Proprietary ratio

113

Interpretation:

The proprietary ratio establishes the relationship between

shareholders funds to total assets. It determines the long-term

solvency of the firm. This ratio indicates the extent to which the

assets of the company can be lost without affecting the interest

of the company.

The share holder’s funds include capital and reserves and

surplus. The reserves and surplus is increased due to the

increase in balance in profit and loss account, which is caused

by the increase of income from services.

Total assets, includes fixed and current assets. The fixed

assets are reduced because of the depreciation and there are

no major increments in the fixed assets. The current assets are

increased compared with the year 2007. Total assets are also

increased than precious year, which resulted an increase in the

ratio than older.

114

Chapter 10

Cost Reduction

115

10.1.1 Introduction :

In today’s competitive world Corporate and businesses are

struggling to maintain profits and healthy bottom lines .Cost

of production, fuel, raw material and human resources is rising

each year. These developments have prompted people to look

for Cost reduction Ideas & methods. Those who have opted for

focused cost reduction strategies have survived those who

could not managed have perished. In recent economic down

turn it becomes more important to make cost reduction

program a major initiative in industry .Companies are finding it

difficult to retain people and are laying off people which is

unprecedented in recent history of industrial recession.

Companies have to develop its own cost reduction program for

savings without cutting jobs .

“Cost cutting is no longer the solution to sustainable profitability, the

key to success is finding creative ways to prevent cost.”

Cost reduction program is policy of cutting costs to improve

profitability. It may be implemented when a company is having

financial problems and must "tighten its belt." In some cases, the firm

is initiating a policy to eliminate waste and inefficiency. A cost

reduction program may detract from the quality of earnings when

significant cuts are made in discretionary cost. Cost reduction refers

to the real and permanent reduction in the unit cost of the goods

manufactured or services rendered.

116

10.1.2 DEFINITION

Amount of money used when purchasing a car that is paid up

front in order to get lower monthly lease payments. This can come

from the trade-in value of the previous car, or from a cash down

payment.

“Cost reduction is to be understood as the achievement of real and

permanent reductions in the unit cost of the goods manufactured or

services rendered without impassing their suitability for the use that is

intended”

- ICWA London.

Reduction in the cost of product must be brought about by the

elimination of wasteful and resources employed in its design,

manufacture, sale and distribution. Reduction in quality of a product

or the range of its uses cannot be regarded as fitting cost reduction.

Cost reduction must be an attitude of mind throughout the

organization. it must be organised and controlled by a senior

manager, with a team of skilled people able to analyses and record

business activity and find ways improves the methods used. So that

costs are reduced and output increased.

117

http://www.allbusiness.com/glossaries/discretionary-cost/4952750-1.html

http://www.allbusiness.com/glossaries/quality-earnings/4948334-1.html

How to reduce cost?

Elimination of waste

Improving operations.

Increasing Productivity.

Cheaper materials.

Improved Standards of Quality.

COST REDUCTION CAN BE EFFECTED BY EITHER OF THE

FOLLOWING WAYS:

(i) By reduction in unit cost of production:

This is usually brought by elimination of wasteful and non-

essential elements in the design of products and from

techniques and practices carried out .(Any reduction in costs

due to changes in Government policy like reduction in taxes or

duties or due to price agreements do not come into the area of

cost reduction as these are not real and permanent reductions)

(ii) By increasing productivity:

This refers to increase in the volume of output with the

expenditure remaining the same. But this should not be

118

http://www.investorwords.com/1568/down_payment.html

http://www.investorwords.com/1568/down_payment.html

http://www.investorwords.com/747/cash.html

http://www.investorwords.com/5209/value.html

http://www.investorwords.com/3634/payment.html

http://www.investorwords.com/2749/lease.html

http://www.investorwords.com/3495/order.html

http://www.businessdictionary.com/definition/front.html

http://www.investorwords.com/3572/paid_up.html

http://www.businessdictionary.com/definition/purchasing.html

http://www.investorwords.com/3100/money.html

http://www.investorwords.com/205/amount.html

achieved at the cost of the characteristics and quality of the

product.

10.1.3 Cost control :

Cost control is concerned with keeping the expenditure within

acceptable limits. Its major assumption is that costs are in control

unless costs exceed budget or standard by an excessive amount.

DIFFERENCES BETWEEN COST CONTROL AND COST

REDUCTION

COST CONTROL COST REDUCTION

Controls costs towards

achievement of predetermined

decrease in costs. target or goals.

Represents real and permanent

decrease in costs.

It is a routine exercise. It is a planned process.

It is a preventive function. It is a corrective function.

Table 12: Differences between Cost Control & Cost Reduction

119

10.1.4 TECHNIQUES OF COST REDUCTION

1. VALUE ANALYSIS:

Value analysis is the identification of un necessary cost i.e. cost

that neither provides quality, nor use, nor life, nor appearance, nor

customer satisfaction. Thus value analysis attacks costs at

production stage.

2. ECONOMIC BATCH QUANTITY:

(EBQ) EBQ is that point where carrying costs equals set up cost

approximately. At this point the total cost will also be minimum.

3. ECONOMIC ORDER QUANTITY:

(EOQ) EOQ is the quantity fixed at a point where total cost of

ordering and the cost of carrying the inventory will be minimum.

4. ACTIVITY BASED COST MANAGEMENT:

ABC assumes that resource-consuming activities cause costs. Its

aim is to directly control the activities that cause costs, rather than

120

cost. By managing activities that cause costs, costs will be

managed in the long run. Cost causing activities – designing,

engineering, manufacturing, marketing, etc.

5. JUST-IN-TIME APPROACH:

(JIT) The aims of JIT are to produce the required items, at the

required quality and in the required quantities, at the precise time

they are required.

JIT helps in cost reduction by –

a. elimination of non-value-added activities,

b. zero inventory,

c. zero defects,

d. zero breakdowns,

e. single batch ordering.

Though the above goals are unlikely to be achieved, it represent

targets and create a climate for continuous improvement and

excellence.

6. TOTAL QUALITY MANAGEMENT:

(TQM) TQM works on the philosophy that all business functions

are involved in a process of continuous quality improvement.

TQM reduces cost by producing the products correctly the first

time rather than wasting resources making substandard items and

incurring additional expenditure on inspection, rework and

scrapping. It helps organisations to achieve their quality goals by

121

providing reports and measures that will improve quality. TQM

aims at a customer-oriented process of continuous improvement

that focuses on delivering products or services of consistent high

quality in a timely fashion.

7. SUPPLY CHAIN MANAGEMENT:

(SCM) SCM attempts to build a cost effective chain beginning with

the ultimate customer and links all the previous suppliers under

one platform. An effective SCM eliminates most of the activities in

between customers and raw material suppliers along with

associated costs. Most of the non-core activities are outsourced

and hence fixed costs are kept minimal.

Close interaction between the corporate R&D and the suppliers

facilitates continuous improvements in product design, process

methodologies, etc. resulting in customer value enhancement and

cost reduction. A rupee spent on the supply chain can give more

value than a rupee spent on marketing. The supply chain is part of

the service offering.

8. PERT ANALYSIS:

Program Evaluation Review Technique (PERT) reduces cost by

giving an optimum schedule for the activities necessary to

complete a project.

122

10.1.5 Non-Conventional Approach for cost reduction :

Material Cost – Cost reductions thru’

o Material cost E-sourcing

Discovery of new sources

Competitive pressures

Rationalisation of suppliers

o Thrust on Value Engineering

Re-Visiting Designs

Application oriented engineering

o Product Life Cycle Management

Manpower Cost

o Right-sizing of Employees – VRS Schemes

o Optimum utilisation of Manpower

Transition from Machine engagement time to Man-

Engagement time.

o Productivity-linked wage settlements

o Adopting new concepts

MOST

CELL Layout

Cost Management Initiatives

Selling and Distribution123

Funding Cost

10.1.6 Cost Reduction Process

1) Analysis

2) Examination.

3) Developing Solution.

4) Selecting a solution.

5) Obtaining agreement.

9.1.7 Implementing Cost reduction program

Set realistic goals

Develop cost reduction program consulting all

Do an ROI analysis

Implement the cost reduction program

Measure actual results with goals

Continue the process until the set goals are achieved

Explore all options, not only BPR/technology(consider off

shoring and outsourcing

124

Figure 3 Cost Reduction Program Structure

125

10.1.8 Benefits of cost reduction

Figure 4 Benefit of Cost reduction

126

Cost

Reduction

10.1.9 Fish Bone Diagram for cost reduction program

Figure 5 Fish bone Diagram for Cost Reduction

127

10.1.10 Precautions in Implementations

1) Must be planned soundly .

2) Appropriate to organization.

3) Requires cooperation and coordinated efforts.

4) Reluctance should be recognized and dealt with.

5) Programs should be clearly communicated.

6) Should not have undesirable effects on external parties.

7) Unnecessary costs can be reduced not eliminated.

8) Is expensive and complicated to implement

128

10.1.11 Advantages of Cost Reduction

A. To a particular concern

Improves profits.

Improves financial position.

Improves competitive capabilities.

Serves as an index of efficiency.

B. To the Industry

One company serves as a trend setter for the other

companies.

C. To the Nation

Efficient utilization of Scarce Resources .

High taxes can be levied by the government.

Retaining the markets and gaining new buyers.

Combating inflation.

129

10.1.12 A few applications of cost reduction strategies.

1. Freeze in hiring .

2. Personal awareness to cost cutting.

3. No bonuses or pay hikes.

4. Night home drops and pick ups are charged.

5. Reducing off-shore trainings.

6. Outlook comm. Used in Place of Bharti

1. The share ownership plan discount scrapped 2. Reducing work hours for trainees.3. Delay in fresher joining the company.4. WFR carried out.5. Paycut of 5%.6. Annual shutdown of a week extended to a fortnite

130

1. Shutting down older fabrication units.

2. Freeze in hiring.

3. Reduced travel expenses,using video chats &voice chats as

alternatives.

4. Reducing/reusing inventory.

5. Increasing personal awareness.

6. Avoiding discretionery expenditures.

1. Introduction of new cost effective technology.

2. Process re-aligning.

3. Re-engineering of product.

4. Restructuring of workforce.

5. Rationalizing input costs.

131

10.2 Cost Reduction Program of ICICI Bank Ltd.

With pressures on the spreads and the competition in the urban

markets increasing rapidly, banks need to develop new ways to

sustain profitability & reduce costs. Banks led to a plethora of new

products, hence becoming a one stop shop for all financial solutions.

Moreover, the entries of several other foreign banks in India are

acting as a strong signal to the domestic players to pull up their socks

to face the new competitors.

132

10.2.1 Areas for cost reductions in ICICI Bank Ltd.

Figure 9: Areas for Cost Reduction in ICICI Bank

Not surprisingly, personnel, as the largest expense in the Bank, is

targeted most often for cost reductions. The additional categories

rank fairly closely to the typical makeup of ICICI bank budgets as

well.

*Of those selecting “other,” increasing efficiencies was most often

cited.

133

10.2.2 Cuts in ICICI Bank Ltd. are as follows :

Figure 10 : Cuts in ICICI Bank

Initially surprising, reducing attrition, tops the list of specific planned

cuts, followed closely by reducing headcount. Half of those reducing

headcount are also reducing attrition. Many people questioned

shared that reducing headcount was often not replacing those lost by

attrition or using part-time or home agents, as opposed to actively

reducing positions. Additionally, only a little more than a third of those

reducing agents are also reducing supervisors.

134

9.2.3 The various Cost Reduction strategies of ICICI bank ltd. are

as follows :

A. Interest on Deposits

B. Bringing down other costs

A. Interest on Deposits

Increasing CASA %

For a bank with a large network, if each branch can contribute

more low-cost deposits, the bank will become cost-effective as

deposits represent a very stable source of funds – Low

volatility. It is one major weapon with which banks can face the

threat of any competitor in the banking industry. While foreign

banks are not constrained for funds, public & private sector

banks will have to learn to operate with lesser margins in some

transactions, and also improve cost effectiveness. It is virtually

impossible to run an effective retail bank of any size without a

culture of deposit gathering and deposit growth. Hence, the

availability of these low-cost funds reduces the burden of the

bank to acquire funds at a high costs & therefore helps in

reducing banks overall cost.

135

Short – Term Fixed Deposits

Short term fixed deposits helps bank; maximize their bottom lines

by reducing their costs. For instance, if a client makes a one-week

deposit, and then extends the deposit by another and then another

week, a bank is able to use the capital for three weeks while it only

has to pay a one-week interest rate, which is always much lower a

one-month interest rate. It is also believed that if banks refuse

short-term deposits, they might miss out on idle capital. Moreover

the interest rate for one-week term and less-than-one-month term

deposits is lower than the rates for medium- and long-term

deposits which favor the banks bottom line. However, ‘adjusting

the interest rate curve’ will have the following impact.

First, interest rates will be put in order: longer-term deposits

will have higher interest rates than shorter-term deposits.

Second, the low interest rates for short-term deposits will

encourage clients to make long-term deposits, thus helping

banks reduce capital mobilization costs. If banks can reduce

capital mobilization costs, they will be able to slash lending

interest rates.

136

Increasing Float Funds

Increased fund availability provides more opportunities to take

advantage of the float on the electronic deposit. Banks can now

leverage these additional funds by investing in other services or

financial earnings instrument. The challenge posed by banks is to

learn how to invest that money in the optimum area for increased

revenue growth.

B. Bringing down other costs

Staff Costs

Wages are a major chunk of a banks cost and banks must try

minimizing this by improving productivity per employee of the bank.

Foreign banks touch the peak with 19.71% of their total expenses

incurred towards wages compared to 10.34% in case of ICICI’s in

2007-2008. Wages have a direct impact on the profits of the bank &

a bank can significantly improve their profits by reducing their

expenditure on wages.

137

Cost on Technology and Utilities

Although most companies abandon their investments in technology

altogether during harsh times, automation can mean lower cost of

human resources, less paper use and faster operations, all resulting

in substantial cost savings. Companies which can find ways to

make better use of their existing IT systems or make minimal

investments with substantial impact can create considerable cost

savings through such efforts. Adoption of Technology can lead to

business transformation and cost advantage in the long term. For

instance, Oracle Financial Services Applications enable financial

institutions to automate processes to reduce finance and accounting

costs, cut IT costs, manage by fact and improve operational

efficiency. With ICICI bank ltd. State Bank of India, UTI Bank and

Development Credit Bank Ltd has successfully implemented Oracle

Financial Services Applications (OFSA) in India.

Online Banking

Online banking uses modern computer technologies to offer the

users convenient banking facilities. This facility eliminates the need

of a customer to personally visit the bank’s branch for any sort of

transaction. It also eliminates the necessity of doing any paper-

based work and saves considerable time for the bank & the users.

Banks largely benefit from the online banking facilities. Besides

138

offering their users the convenience of banking, the online banking

system means significant cost savings for the banks. With such an

automatic system in place, banks need not hire employees

specialized in handling paper work and teller interactions. This

reduces the banks’ operating costs considerably, translating into

significant cost savings over the long-term.

Optimize Cash Management

Cash is, ultimately, the inventory of financial institutes, and as in all

industries, effective management of cost of inventory results in

decreased costs. By optimizing levels of cash in ATM machines and

across branches as well as automating transactions as much as

possible, ICICI banks decrease their cash handling maintenance

costs as well as their opportunity costs.

Communication Cost

Although traditional mass marketing and advertising activities can

be effective ways for increasing overall awareness and interest,

they are not the most cost effective means for marketing. Tailored

marketing activities targeted at only the relevant audience can

substantially decrease the cost of communications while boosting

response rates. Companies should move more towards targeted

activities in promoting their products and services, cutting down

139

their marketing budgets while keeping and even improving their

effectiveness. Communications also includes tele-communication

cost which can be significantly reduced by integrating all existing

communications networks into a single integrated network with

voice over IP (VoIP) and eliminate redundant charges. The savings

are realized in four major areas: Cost reduction of new data/voice

circuits Elimination of intercompany long distance Reduction of local

dial tone service at branches Strategic implementation of enterprise-

wide call-routing patterns.

Stationery & Other Cost

Optimum utilization of stationery can considerably decrease

operating costs. As an example, Citigroup recently posted a cost-

cutting memo, advising that 'staff should print black and white and

on double sided paper'. Similarly memos going out all around the

world, with reminders - to not print documents for reading, to turn off

lights when leaving office etc can result in cost cutting for banks.

Transaction Cost

Over the years, most banks treated customer channel migration as

a priority, seeking out means to decrease crowd at the branches as

well as to reduce cost of transaction. With the downturn, this has

become even more critical…the cost to serve a customer via the

internet pales in comparison to branch service costs. Numerous

140

methods (i.e. loyalty program incentives, higher interest rates, etc.)

can be used to drive the migration of customers to lower cost

channels. From a pure profitability point of view, not all customers

are equal, and, they should not be treated equally. Retention of high

value and high potential customers are far more critical than

individual mass customers, especially in times of economic

downturn. Companies should focus their limited marketing budgets

on getting, retaining and growing these customers as much as they

can. At the other end of spectrum is the below zero customers, who

have negative impact on the company bottom-line. ICICI bank also

consider ways for selectively 'firing' these customers, unless they

have the potential to grow into profitable customers.

Consider Channel Close Down and Relocations

ICICI Banks should be looking into closure of their unprofitable

channels, ATMs and branches, in order to decrease cost of sales

and services. With decreasing market demand and changing

customer needs, certain branches, ATMs and channels can become

redundant with limited potential, or, expensive to maintain.

Relocation is also an alternative to a close down, which can

significantly decrease cost of rent and maintenance.

141

Chapter 11

Findings

142

This study is carried out with the objective of analyzing the financial

performance

of ICICI Bank to examine and understand the role of finance in the

growth of the company and also to find out the cost reduction

program during recession.

This chapter attempts to highlight the findings of the study.

The comparative statement shows that the Operating Income

of the year 2008 are very high compared to the past. But in

2009 it’s reduces due to recession.

The profit before interest and tax is in positive during the period

of study excluding the year 2009 because of low operating

income in the corresponding year.

The sales, PBIT, PBT, PAT all shows the increasing trend

during the period under review. It depicts that the company is

working with more efficiency.

The repayment of loan funds which reduces the interest

charges

The interest and finance charges in the year 2007 are one third

of 2001. It made a favorable impact towards the company.

Return on Investment fluctuates more due to the charges in the

operating profit of the company.

Net Profit ratio shows increasing trend. It depicts that the

efficiency is maintained in sales value and operating expenses.

143

Fixed Assets turnover ratio shows the increasing trend. It

depicts that the company’s fixed assets are utilized properly.

Working Capital turnover ratio depicts the increasing trend

shows from 2002 to 2004 and then slope downwards due to

holding high cash and bank balance after the year 2005.

The ideal current ratio is 2 which the firm obtains only after the

year 2005 it shows the positive impact.

The ideal liquid ratio is 1 which is also obtained by the firm only

after the year 2005, which enables the company to meet the

emergency requirements.

Proprietary ratio of the company fluctuates during the period of

study. It shows the change in the value of reserves and surplus

in the form of shareholders’ fund.

144

Chapter 12

SUGGESTIONS

145

SUGGESTIONS

Some of the recommendation and suggestion are as follows:

The attention is required on the areas of growth,

profitability ,service level and building talent.

To increase the profit of bank, bank should decrease their

operating expenses and increase their income.

To increase its liquidity, bank should keep some more

cash in its hand instead of giving more and more advances.

Introduce quality consciousness and standardization of the

work system and procedures.

Make manager competitive and introduce spirit of market-

orientation and culture of working for customer satisfaction.

There is need to build the knowledge and skill base among the

employees in the context of technology.

Performance measure should not only cover financial

aspects i.e. quantitatively aspects but also the qualitative

aspects.

It is high time to focus on work than the work-achieved.

Bank should increase its retail portfolio.

Bank should manage its all risk such as credit, market

and operational risk properly and should be managed by a

person who are highly skilled and qualified. Bank should pay

attention on its subsidiary “ICICI Prudential Life Insurance

Company Limited”

146

Chapter 13

CONCLUSION

147

CONCLUSION

The balance-sheet along with the income statement is an

important tools for investors and many other parties who are

interested in it to gain insight into a company and its operation. The

balance sheet is a snapshot at a single point of time of the company’s

accounts- covering its assets, liabilities and shareholder’s equity.

The purpose of the balance-sheet is to give users an idea of

the company’s financial position along with displaying what the

company owns and owes. It is important that all investors know

how to use, analyze and read balance-sheet. P & L account tells

the net profit and net loss of a company and its appropriation. In the

case of ICICI Bank, during fiscal 2008, the bank continued to grow

and diversify its assets base and revenue streams. Bank maintained

its leadership in all main areas such as retail credit, wholesale

business, international operation, insurance, mutual fund, rural

banking etc. Continuous increase in the number of branches, ATM

and electronic channels shows the growth take place in bank. Trend

analysis of profit & loss account and balance sheet shows the %

change in items of p & l a/c and balance sheet i.e. % change in 2009

from 2008 and % change in 2007 from 2006. It shows that all

items are increased mostly but increase in this year is less than as

compared to increase in previous year. In p & l a/c, all items like

interest income, non-interest income, interest expenses, operating

expenses, operating profit, profit before tax and after tax is increased 148

but in mostly cases it is less than from previous year but in

some items like interest income, interest expenses, provision %

increase is more. Similarly in balance sheet some item is less than

previous year and in some items it is more.

Ratio analysis of financial statement shows that bank’s current

ratio is better than the quick ratio and fixed/worth ratio. It means

bank has invested more in current assets than the fixed assets

and liquid assets. Bank have given more advances to its

customer and they have less cash in their hand. Profitability

ratio of bank is lower than as compared to previous year. Return on

equity is better than the return on assets. Therefore analysis shows

that cash inflow is more than the cash outflow in ICICI Bank. Thus,

the ratio analysis and trend analysis shows that ICICI Bank’s

financial position is good. Bank’s profitability is increasing but

not at high rate. Bank’s liquidity position is fair but not good

because bank invest more in current assets than the liquid

assets. As we all know that ICICI Bank is on the first position

among all the private sector bank of India in all areas but it should

pay attention on its profitability and liquidity. Bank’s position is stable.

149

CHAPTER 14

ANNEXURE

150

14.1 Balance sheet of ICICI Bank Ltd.

Balance Sheet

Rs. Cr

Period &

months2009/03 2008/03 2007/03 2006/03 2005/03

CAPITAL & LIABILITIES

Owned Funds

Equity Share

Capital1,113.29 1,112.68 899.34 889.83 736.75

Share

Application

Money

0.00 0.00 0.00 0.00 0.02

Preferential

Share

Capital

350.00 350.00 350.00 350.00 350.00

Reserves &

Surplus

48,419.7

3

45,357.5

3

23,413.9

2

21,316.1

6

11,813.2

0

Loan Funds

Deposits218,347.

82

244,431.

05

230,510.

19

165,083.

17

99,818.7

8

151

Borrowings

made by the

bank

67,323.6

9

65,648.4

3

51,256.0

3

38,521.9

1

33,544.5

0

TOTAL335,554.

53

356,899.

69

306,429.

48

226,161.

08

146,263.

24

ASSETS

Cash &

Balances

with RBI

17,536.3

3

29,377.5

3

18,706.8

88,934.37 6,344.90

Money at

call and

Short Notice

12,430.2

38,663.60

18,414.4

58,105.85 6,585.07

Investments103,058.

31

111,454.

34

91,257.8

4

71,547.3

9

50,487.3

5

Advances208,090.

41

215,060.

94

188,614.

01

143,029.

89

88,991.7

5

Fixed Assets

Gross Block 7,443.71 7,036.00 6,298.56 5,968.57 5,525.65

Accumulate

d

Depreciation

3,642.09 2,927.11 2,375.14 1,987.85 1,487.61

Less:

Revaluation

0.00 0.00 0.00 0.00 0.00

152

Reserve

Net Block 3,801.62 4,108.89 3,923.42 3,980.72 4,038.04

Capital

Work-in-

progress

0.00 0.00 189.66 147.94 96.30

Net Current

Assets

34,384.0

6

31,129.7

7

23,551.8

5

15,642.7

9

11,115.9

9

Miscellaneo

us Expenses

not written

off

0.00 0.00 0.00 0.00 0.00

TOTAL335,554.

53

356,899.

69

306,429.

48

226,161.

08

146,263.

24

Number of

Equity

shares

outstanding

(Cr.)

111.27 111.27 89.93 88.98 73.67

Bonus

component

in Equity

Capital

0.00 0.00 0.00 0.00 0.00

Notes:

153

Contingent

liabilities

840,670.

63

401,114.

91

199,771.

41

134,920.

99

107,311.

46

Book Value

of Unquoted

Investments

0.00 0.00 0.00 0.00 0.00

Market Value

of Quoted

Investments

0.00 0.00 0.00 0.00 0.00

154

7.9 Profit and Loss of ICICI Bank

155

156

157

Chapter 15

Bibliography

Books

158

COST ACCOUNTING AND FINANCIAL MANAGEMENT-

R.M.Kishore

Investment Analysis & Portfolio Management- Prasanna

Chandra

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007).

Intermediate Accounting (12th ed.). Hoboken, NJ: John Wiley &

Sons

“Finance Management” by Khan& Jain, Fifth Edition, published

by Tata Mc Graw-Hill Publishing Company Limited.

Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). Accounting

Principles (4th ed.). New York, Chichester.

Groppelli, Angelico A.; Ehsan Nikbakht (2000). Finance, 4th

ed. Barron's Educational Series

Financial Statement Analysis by K. R. Subramanyam and

John J. Wild

Financial Analysis and Modeling Using Excel and VBA

(Wiley Finance) by Chandan Sengupta

News Papers:

Economic Times

Business Standard

159

Magazines:

Capital Market

Dalal Street

Bank Quest

Cost reduction handbook

Websites:

www.intra.rathi.com

www.icicibank.com

www.rbi.org.in

www.moneycontrol.com

www.equitymaster.com

www.nseindia.com

www.dynemic.comwww.google.comwww.bseindia.com

www.indiainfoline.com

http://www.netmba.com/finance/financial/ratios

www.icicidirect.com

www.investorwords.com

http://www.netmba.com/finance

160

http://www.amazon.com/Financial-Analysis-Modeling-Using-Finance/dp/047027560X/ref=sr_1_16?ie=UTF8&s=textbooks-trade-in&qid=1267586540&sr=1-16

http://www.amazon.com/Financial-Analysis-Modeling-Using-Finance/dp/047027560X/ref=sr_1_16?ie=UTF8&s=textbooks-trade-in&qid=1267586540&sr=1-16

http://www.amazon.com/Financial-Statement-Analysis-K-Subramanyam/dp/0073379433/ref=sr_1_2?ie=UTF8&s=textbooks-trade-in&qid=1267586482&sr=1-2

http://www.investorwords.com/

http://www.icicidirect.com/

http://www.netmba.com/finance/financial/ratios

http://www.indiainfoline.com/

http://www.dynemic.comwww.google.comwww.bseindia.com/

http://www.nseindia.com/

http://www.equitymaster.com/

http://www.moneycontrol.com/

http://www.rbi.org.in/


http://www.intra.rathi.com/

Financial Analysis & Cost Reduction of ICICI bank

Documents