After conducting an analysis of a specific borrower’s risk, the Global Credit Risk Management Group assigns a credit rating to the borrower. ICICI Bank has a scale of ten ratings ranging from AAA to B, an additional default rating of D and short-term ratings from S1 to S8. A borrower’s credit rating is a critical input for the credit approval process. The borrower’s credit rating and the default pattern corresponding to that credit rating, forms an important input in the risk-based pricing framework of the Bank. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the Global Credit Risk Management Group before being submitted for approval to the appropriate approval authority. The approval process for non-fund facilities is similar to that for fund-based facilities . The credit rating for every borrower is reviewed at least annually. The Bank also reviews the ratings of all its borrowers in a particular industry upon the occurrence of any significant event impacting that industry.
Working capital loans are generally approved for a period of 12 months. At the end of the 12 month validity period, ICICI Bank reviews the loan arrangement and the credit rating of the borrower and makes a decision on whether to continue the arrangement and changes in the loan covenants as necessary.
Project Finance Procedures
ICICI Bank has a strong framework for the appraisal and execution of project finance transactions. ICICI Bank believes that this framework creates optimal risk identification, allocation and mitigation and helps minimize residual risk.
The project finance approval process begins with a detailed evaluation of technical, commercial, financial, marketing and management factors and the sponsor’s financial strength and experience. Once this review is completed, an appraisal memorandum is prepared for credit approval purposes. As part of the appraisal process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and residual risks associated with the project. The appraisal memorandum analyzes the risk matrix and establishes the viability of the project. Typical risk mitigating factors include the commitment of stand-by funds from the sponsors to meet any cost over-runs and a conservative collateral position. After credit approval, a letter of intent is issued to the borrower, which outlines the principal financial terms of the prop osed facility, sponsor obligations, conditions precedent to disbursement, undertakings from and covenants on the borrower. After completion of all formalities by the borrower, a loan agreement is entered into with the borrower.
In addition to the above, in the case of structured project finance in areas such as infrastructure, oil, gas and petrochemicals, as a part of the due diligence process, ICICI Bank appoints consultants, wherever considered necessary, to advise the lenders, including technical advisors, business analysts, legal counsel and insurance consultants. These consultants are typically internationally recognized and experienced in their respective fields. Risk mitigating factors in these financings include creation of debt service reserves and channeling project revenues through a trust and retention account.
ICICI Bank’s project finance loans are generally fully secured and have full recourse to the borrower. In most cases, ICICI Bank has a security interest and first lien on all the fixed assets. Security interests typically include property, plant and equipment as well as other tangible assets of the borrower, both present and future. ICICI Bank’s borrowers are required to maintain comprehensive insurance on their assets where we are recognized as payee in the event of loss. In some cases, ICICI Bank also takes additional credit comforts such as corporate or personal guarantees from one or more sponsors of the project or a pledge of the sponsors’ equity holding in the project company. In certain industry segments, ICICI Bank also takes security interest in relevant project contracts such as concession agreements, off-take agreements and construction contracts as part of the security package.
ICICI Bank normally disburses funds after the entire project funding is committed and all necessary contractual arrangements have been entered into. Funds are disbursed in tranches to pay for approved project costs as the project progresses. When ICICI Bank appoints technical and market consultants, they are required to monitor the project’s progress and certify all disbursements. ICICI Bank also requires the borrower to submit periodic reports on project implementation, including orders for machinery and equipment as well as expenses incurred. Project completion is contingent upon satisfactory operation of the project for a certain minimum period and, in certain cases, the establishment of debt service reserves. ICICI Bank continues to monitor the credit exposure until its loans are fully repaid.
Corporate Finance Procedures
As part of the corporate loan approval procedures, ICICI Bank carries out a detailed analysis of funding requirements, including normal capital expenses, long-term working capital requirements and temporary imbalances in liquidity. ICICI Bank’s funding of long-term core working capital requirements is assessed on the basis, among other things, of the borrower’s present and proposed level of inventory and receivables. In case of corporate loans for other funding requirements, ICICI Bank undertakes a detailed review of those requirements and an analysis of cash flows. A substantial portion of ICICI Bank’s corporate finance loans are secured by a lien over appropriate assets of the borrower.
The focus of ICICI Bank’s structured corporate finance products is on cash flow based financing. We have a set of distinct approval procedures to evaluate and mitigate the risks associated with such products. These procedures include:
| | · | carrying out a detailed analysis of cash flows to forecast the amounts that will be paid and the timing of the payments based on an exhaustive analysis of historical data; |
| | · | conducting due diligence on the underlying business systems, including a detailed evaluation of the servicing and collection procedures and the underlying contractual arrangements; and |
| | · | paying particular attention to the legal, accounting and tax issues that may impact the structure. |
ICICI Bank’s analysis enables it to identify risks in these transactions. To mitigate risks, ICICI Bank uses various credit enhancement techniques, such as over-collateralization, cash collateralization, creation of escrow accounts and debt service reserves. ICICI Bank also has a monitoring framework to enable continuous review of the performance of such transactions.
With respect to financing for corporate mergers and acquisitions, ICICI Bank carries out detailed due diligence on the acquirer as well as the target’s business profile. The key areas covered in the appraisal process include:
| | · | assessment of the industry structure in the target’s host country and the complexity of the business operations of the target; |
| | · | financial, legal, tax, technical due diligence (as applicable) of the target; |
| | · | appraisal of potential synergies and likelihood of their being achieved; |
| | · | assessment of the target company’s valuation by comparison with its peer group and other transactions in the industry; |
| | · | analysis of regulatory and legal framework of the overseas geographies with regard to security creation, enforcement and other aspects; |
| | · | assessment of country risk aspects and the need for political insurance; and |
| | · | the proposed management structure of the target post takeover and the ability and past experience of the acquirer in completing post merger integration. |
Working Capital Finance Procedures
ICICI Bank carries out a detailed analysis of borrowers’ working capital requirements. Credit limits are established in accordance with the approval authorization approved by the Bank’s Board of Directors. Once credit limits are approved, ICICI Bank calculates the amounts that can be lent on the basis of monthly statements provided by the borrower and the margins stipulated. Quarterly information statements are also obtained from borrowers to monitor the performance on a regular basis. Monthly cash flow statements are obtained where considered necessary. Any irregularity in the conduct of the account is reported to the appropriate authority on a monthly basis. Credit limits are reviewed on a periodic basis.
Working capital facilities are primarily secured by inventories, receivables and other current assets. Additionally, in certain cases, these credit facilities are secured by personal guarantees of directors, or subordinated security interests in the tangible assets of the borrower including plant and machinery and covered by personal guarantees of the promoters.
Credit Monitoring Procedures for Corporate Loans
Credit Middle Office Group monitors compliance with the terms and conditions for credit facilities prior to disbursement. It also reviews the completeness of documentation, creation of security and insurance policies for assets financed.
All borrower accounts are reviewed at least once a year.
Retail Loan Procedures
ICICI Bank’s customers for retail loans are typically middle and high-income, salaried or self-employed individuals, and, in some cases, partnerships and corporations. Except for personal loans and credit cards, ICICI Bank requires a contribution from the borrower and its loans are secured by the asset financed.
In respect of retail loans, the Bank’s credit officers evaluate credit proposals on the basis of the operating notes approved by the Committee of Executive Directors and the risk assessment criteria defined by the Global Credit Risk Management Group. These criteria vary across product segments but typically include factors such as the borrower’s income, the loan-to-value ratio and demographic parameters. External agencies such as field investigation agencies facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans made to individual borrowers. In making its credit decisions, ICICI Bank draws upon a centralized delinquent database and reports from the Credit Information Bureau (India) Limited to review the borrower’s profile. For mortgage loans, a valuation agency or an in-house technical team carries out the technical valuations. In the case of credit cards, in order to limit the scope of individual discretion, ICICI Bank has implemented a credit-scoring program that is an automated credit approval system that assigns a credit score to each applicant based on certain demographic attributes like income, educational background and age. The credit score then forms one of the criteria for loan evaluation.
ICICI Bank has established centralized operations to manage operating risk in the various back office processes of its retail loan business except for a few operations, which are decentralized to improve turnaround time for customers. A separate team under the Retail Strategy and Policy Group undertakes review and audits of credit quality and processes across different products. The Bank also has a debt services management group structured along various product lines and geographical locations, to manage debt recovery. The group operates under the guidelines of a standardized recovery process. A fraud prevention and control group has been set up to manage fraud-related risks, through fraud prevention and through the recovery of fraud losses. The fraud control group evaluates various external agencies involved in retail finance operations , including direct marketing associates, external verification associates and collection agencies.
Small Enterprises Loan Procedures
ICICI Bank finances small enterprises, which are defined generally as enterprises with tangible net worth less than Rs. 500 million. It includes financing dealers and vendors of companies by implementing structures to enhance the base credit quality of the vendor/dealer. The process involves an analysis of the base credit quality of the vendor/dealer pool and an analysis of the linkages that exist between the vendor/dealer and the company.
The group is also involved in financing based on a cluster-based approach, financing small enterprises that have a homogeneous profile such as apparel manufacturers and manufacturers of pharmaceuticals. The risk assessment of such a cluster involves the identification of appropriate credit norms for target market, the use of scoring models for enterprises that satisfy these norms and a comprehensive appraisal of those enterprises which are awarded a minimum required score in the scoring model. A detailed appraisal is performed based on the financial as well as non-financial parameters to identify the funding needs of the enterprise. There are appropriate credit structures built in based on the assessment of each case. The group also finances small businesses based on analysis of the business
and financials. The assessment includes a scoring model with minimum score requirement before appraisal of these enterprises are conducted.
The risk management policy herein also involves setting up of portfolio control norms, continuous monitoring renewal norms as well as stringent review and exit triggers to be followed while financing such clusters or communities.
Rural and Agricultural Loan Procedures
The rural and agricultural loan portfolio is composed of corporates in the rural sector, small and medium enterprises, dealers and vendors linked to these entities and farmers. ICICI Bank seeks to adopt appropriate risk assessment methodologies for each of the segments. For corporates, borrower risk is evaluated by analyzing the industry risk, the borrower’s market position, financial performance, cash flow adequacy and the quality of management. The credit risk of dealers, vendors and farmers is evaluated by analyzing the base credit quality of the borrowers or the pool and also the linkages between the borrowers and the companies to which the dealers, vendors or farmers are supplying their produce. We attempt to enhance the credit quality of the pool of dealers, vendors and farmers by strengthening the structure of the transactio n.
For some segments, ICICI Bank uses a cluster-based approach wherein a lending program is implemented for a homogeneous group of individuals or business entities that comply with certain laid down parameterized norms. To be eligible for funding under the programs, the borrowers need to meet the stipulated credit norms and obtain a minimum score on the scoring model. ICICI Bank has incorporated control norms, borrower approval norms and review triggers in all the programs.
ICICI Bank’s rural initiative may create additional challenges with respect to managing the risk of frauds and credit monitoring due to the increased geographical dispersion and use of intermediaries. ICICI Bank has put in place control structure and risk management framework to mitigate the related risk. See “Risk Factors — Risks Relating to Our Business — Entry into new businesses or expansions of existing businesses may expose us to increased risks that may adversely affect our business.”
Portfolio Review
An analysis of our portfolio composition based on our internal rating is carried out and is submitted to the Risk Committee of the Board on a quarterly basis. This facilitates the identification and analysis of trends in the portfolio credit risk.
The Credit Committee of the Bank, apart from approving proposals, regularly reviews the credit quality of the portfolio and various sub-portfolios, cases that need special attention and movement in the non-performing assets portfolio. A detailed calendar of reviews is formulated by the Credit Committee. The review calendar is comprehensive covering ICICI Bank’s exposure to particular industries and the outlook for those industries, analysis of non-performing loans, accounts under watch, overdues, incremental approvals and specific review of each portfolio. A summary of the reviews carried out by the Credit Committee is submitted to the Board for its information.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices. Our exposure to market risk is a function of our trading and asset-liability management activities and our role as a financial intermediary in customer-related transactions. These risks are mitigated by the limits stipulated in the Investment Policy and Asset Liability Management Policy, which are approved and reviewed by the board of directors.
Market Risk Management Procedures
Market risk policies include the Investment Policy and the Asset-liability Management Policy. The policies are approved by the board of directors. The Asset-liability Management Committee stipulates liquidity and interest rate
risk limits, monitors adherence to limits, articulates the organization’s interest rate view and determines the strategy in light of the current and expected environment. The policies and processes, which provide the framework for implementing strategy, are articulated in the Asset Liability Management Policy. The Investment Policy addresses issues related to investment products. The policies are designed to ensure that operations in the securities and foreign exchange and derivatives areas are conducted in accordance with sound and acceptable business practices and are as per current regulatory guidelines, laws governing transactions in financial securities and the financial environment. The policies contain the limit structures that govern transactions in financial instruments.
With regard to our treasury activities, the board has authorized the Asset-Liability Management Committee and Committee of Executive Directors (Borrowing, Treasury and Investment Operations), to act within the broad parameters laid down by policies approved by the board. The Asset-Liability Management Committee meets periodically and reviews the positions in domestic trading groups, international branches and banking subsidiaries, interest rate and liquidity gap positions on the banking book, formulates a view on interest rates, sets deposit and benchmark lending rates, reviews the business profile and its impact on asset liability management and determines the asset liability management strategy, as deemed fit, in light of the current and expected business environment.
The Global Market Risk Management Group is responsible for the identification, assessment and mitigation of risk. Risk limits including position limits and stop loss limits are monitored on a daily basis by the Treasury Middle Office Group and reviewed periodically. Foreign exchange risk is monitored through the net overnight open foreign exchange limit. Interest rate risk is measured through the use of repricing gap analysis and duration analysis. ICICI Bank prepares interest rate risk reports on a fortnightly basis. These reports are submitted to the Reserve Bank of India on a monthly basis. Interest rate risk is further monitored through interest rate risk limits approved by the Asset-Liability Management Committee.
Interest Rate Risk
Our core business is deposit taking and borrowing, and lending in both Indian rupees and foreign currencies, as permitted by the Reserve Bank of India. These activities expose us to interest rate risk.
Exposure to fluctuations in interest rates is measured primarily by way of gap analysis, providing a static view of the maturity and repricing characteristics of balance sheet positions. An interest rate gap report is prepared by classifying all assets and liabilities into various time period categories according to contracted maturities or anticipated repricing date. The difference in the amount of assets and liabilities maturing or being repriced in any time period category, gives an indication of the extent of exposure to the risk of potential changes in the margins on new or repriced assets and liabilities. ICICI Bank prepares interest rate risk reports on a fortnightly basis. These reports are submitted to the Reserve Bank of India on a monthly basis. Interest rate risk is further monitored through interest rate risk limits approved by the Asset Liability Management Committee.
Our primary source of funding is deposits and, to a smaller extent, borrowings. In the rupee market, most of our deposit taking is at fixed rates of interest for fixed periods, except for savings account deposits and current account deposits, which do not have any specified maturity and can be withdrawn on demand. We usually borrow for a fixed period with a one-time repayment on maturity, with some borrowings having European call/put options, exercisable only on specified dates, attached to them. However, we have a mix of floating and fixed interest rate assets. Our loans are generally repaid gradually, with principal repayments being made over the life of the loan. Our housing loans at year-end fiscal 2010 were primarily floating rate loans where any change in the benchmark rate with reference to which these loans are priced, is general ly passed on to the borrower on the first day of the succeeding quarter or succeeding month, as applicable. Since January 1, 2004, we have used a single benchmark prime lending rate structure for all loans other than specific categories of loans advised by the Indian Banks’ Association. Effective July 1, 2010, as required by the Reserve Bank of India, our new loans are priced with reference to a base rate, called the ICICI Bank Base Rate. The Asset Liability Management Committee sets the ICICI Bank Base Rate based on the cost of funds, cost of operations and credit charge. Pricing for all fresh approvals and renewal of facilities is linked to the ICICI Bank Base Rate. The lending rates comprise the ICICI Bank Base Rate, term premium and transaction-specific credit and other charges. As specified by the Reserve Bank of India, the lending rates for loans and advances are not permitted to be lower than the ICICI Bank Base Rate, except in the categories of loans specified by the Reserve Bank of India from time to time. As prescribed in the guidelines an option has been given to the existing borrowers for migration to the base rate mechanism. Existing loans, other than cases where the borrower migrates to
base rate, would continue to be linked to a benchmark as stipulated in the existing loan agreements. We generally seek to eliminate interest rate risk on undisbursed commitments by fixing interest rates on rupee loans at the time of loan disbursement. Pursuant to regulatory reserve requirements, we maintain a large part of our assets in government of India securities and in interest-free balances with the Reserve Bank of India, which are funded mainly by wholesale deposits and borrowings. This exposes us to the risk of differential movement in the yield earned on statutory reserves and the related funding cost.
Almost all our foreign currency loans are floating rate loans. These loans are generally funded with floating rate foreign currency funds in the case of our overseas branches. We generally convert all our foreign currency borrowings into floating rate dollar liabilities through the use of interest rate and currency swaps with leading international banks. Our overseas subsidiaries in the UK and Canada have fixed rate retail term deposits as their prime funding sources, which reprice slowly, compared to their assets.
We use the duration of our government securities portfolio as a key variable for interest rate risk management. We increase or decrease the duration of our government securities portfolio to increase or decrease our interest rate risk exposure. In addition, we also use interest rate derivatives to manage asset and liability positions. We are an active participant in the interest rate swap market and are one of the largest counterparties in India.
For a discussion of our vulnerability to interest rate risk, see also “Risk Factors — Risks Relating to Our Business — Our banking and trading activities are particularly vulnerable to interest rate risk and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our income from treasury operations, the quality of our loan portfolio and our financial performance” and “Risk Factors — Risks Relating to Our Business — Our inability to effectively manage credit, market and liquidity risk and inaccuracy of our valuation models and accounting estimates may have an adverse effect on our earnings, capitalization, credit ratings and our cost of funds”.
The following table sets forth, at the date indicated, our asset-liability gap position.
| | | At March 31, 2010(1) | |
| | | Less than or equal to one year | | | Greater than one year and up to five years | | | Greater than five years | | | Total | |
| | | (in millions) | |
Loans, net | | Rs. | 1,806,684 | | | Rs. | 323,849 | | | Rs. | 127,248 | | | Rs. | 2,257,781 | |
Investments | | | 545,819 | | | | 449,827 | | | | 867,552 | | | | 1,863,198 | |
Fixed assets | | | 544 | | | | 2,776 | | | | 35,303 | | | | 38,623 | |
Other assets(2) | | | 164,869 | | | | 949 | | | | 568,053 | | | | 733,871 | |
Total assets | | | 2,517,916 | | | | 777,401 | | | | 1,598,156 | | | | 4,893,473 | |
| Stockholders’ equity and preference share capital | | | – | | | | – | | | | 512,965 | | | | 512,965 | |
Borrowings | | | 560,065 | | | | 309,003 | | | | 287,915 | | | | 1,156,983 | |
Deposits | | | 1,604,645 | | | | 374,199 | | | | 436,879 | | | | 2,415,723 | |
Other liabilities(2) | | | – | | | | – | | | | 807,802 | | | | 807,802 | |
Total liabilities | | | 2,164,710 | | | | 683,202 | | | | 2,045,561 | | | | 4,893,473 | |
| Total gap before risk management positions | | | 353,206 | | | | 94,199 | | | | (447,405 | ) | | | 0 | |
Risk management positions(3) | | | (236,427 | ) | | | 188,642 | | | | 48,950 | | | | 1,165 | |
| Total gap after risk management positions | | Rs. | 116,778 | | | Rs. | 282,841 | | | Rs. | (398,455 | ) | | Rs. | 1,165 | |
_____________
| (1) | Assets and liabilities are classified into the applicable categories based on residual maturity or repricing whichever is earlier. Classification methodologies are generally based on Asset Liability Management Guidelines issued by the Reserve Bank of India, effective April 1, 1999 and as revised time to time and pre-payment assumptions applied, based on behavioral studies done. Items that neither mature nor reprice are included in the “greater than five years” category. This includes equity share capital and a substantial part of fixed assets. Impaired loans are classified in “greater than one year and up to five years” and “greater than five years” categories based on their classification, as per local regulators norms. of the entities. |
| (2) | The categorization for these items is different from that reported in the financial statements. |
| (3) | The risk management positions comprise foreign currency and rupee swaps. |
The following table sets forth, at the date indicated, the amount of our loans with residual maturities greater than one year that had fixed and variable interest rates.
| | | | |
| | | | | | | | | | |
| | | (in millions) | |
Loans | | Rs. | 361,996 | | | Rs. | 1,072,114 | | | Rs. | 1,434,110 | |
The following table sets forth, using the balance sheet at year-end fiscal 2010 as the base, one possible prediction of the impact of adverse changes in interest rates on net interest income for fiscal 2011, assuming a parallel shift in the yield curve at year-end fiscal 2010.
| | | | | |
| | | Change in interest rates (in basis points) | | |
| | | | (100) | | | | (50) | | | | 50 | | | | 100 | |
| | | (in millions, except percentages) | | |
Rupee portfolio | | Rs. | (1,156 | ) | | Rs. | (578 | ) | | Rs. | 578 | | | Rs. | 1,156 | |
Foreign currency portfolio | | | (1,110 | ) | | | (555 | ) | | | 555 | | | | 1,110 | |
Total | | Rs. | (2,266 | ) | | Rs. | (1,133 | ) | | Rs. | 1,133 | | | Rs. | 2,266 | |
Based on our asset and liability position at year-end fiscal 2010, the sensitivity model shows that net interest income from the banking book for fiscal 2011 would rise by Rs. 2.3 billion if interest rates increased by 100 basis points during fiscal 2011. Conversely, the sensitivity model shows that if interest rates decreased by 100 basis points during fiscal 2011, net interest income for fiscal 2011 would fall by an equivalent amount of Rs. 2.3 billion. Based on our asset and liability position at year-end fiscal 2009, the sensitivity model showed that net interest income from the banking book for fiscal 2010 would have risen by Rs. 1.9 billion if interest rates increased by 100 basis points during fiscal 2010. Conversely, the sensitivity model showed that if interest rates decreased by 100 basis points during fiscal 2010, net interest income for fiscal 2010 would have fallen by an equivalent amount of Rs. 1.9 billion.
Sensitivity analysis, which is based upon static interest rate risk profile of assets and liabilities, is used for risk management purposes only and the model above assumes that during the course of the year no other changes are made in the respective portfolios. Actual changes in net interest income will vary from the model.
Price Risk (Trading book)
We undertake trading activities to enhance earnings through profitable trading for our own account. ICICI Securities Primary Dealership Limited is a primary dealer in government of India securities.
The following table sets forth, using the fixed income portfolio at year-end fiscal 2010 as the base, one possible prediction of the impact of changes in interest rates on the value of our rupee fixed income trading portfolio for fiscal 2011, assuming a parallel shift in yield curve.
| | | At March 31, 2010 | |
| | | Change in interest rates (in basis points) | |
| | | Portfolio Size | | | | (100) | | | | (50) | | | | 50 | | | | 100 | |
| | | (in millions) | |
Government of India securities | | Rs. | 17,072 | | | Rs. | 667 | | | Rs. | 333 | | | Rs. | (333 | ) | | Rs. | (667 | ) |
Corporate debt securities | | | 66,151 | | | | 289 | | | | 145 | | | | (145 | ) | | | (289 | ) |
Total | | Rs. | 83,223 | | | Rs. | 956 | | | Rs. | 478 | | | Rs. | (478 | ) | | Rs. | (956 | ) |
At year-end fiscal 2010, the total value of our rupee fixed income trading portfolio was Rs. 83.2 billion. The sensitivity model shows that if interest rates increase by 100 basis points during fiscal 2011, the value of this portfolio would fall by Rs. 1.0 billion. Conversely, if interest rates fell by 100 basis points during fiscal 2010, the value of this portfolio would rise by Rs. 1.0 billion. At year-end fiscal 2009, the total value of our rupee fixed
income trading portfolio was Rs. 69.5 billion. If interest rates had increased by 100 basis points during fiscal 2010, the value of this portfolio would have fallen by Rs. 3.3 billion. Conversely, if interest rates had fallen by 100 basis points during fiscal 2010, the value of this portfolio would have risen by Rs. 3.3 billion.
At year-end fiscal 2010, the total outstanding notional principal amount of our trading interest rate derivatives portfolio was Rs. 3,975.5 billion compared to Rs. 3,731.8 billion at year-end fiscal 2009. The sensitivity model shows that if interest rates increase by 100 basis points, the value of this portfolio would rise by Rs. 1.7 billion. At year-end fiscal 2010, the total outstanding notional principal amount of our trading currency derivatives (options and cross currency interest rate swaps) portfolio was Rs. 1,109.2 billion compared to Rs. 1,188.1 billion at year-end fiscal 2009. The sensitivity model shows that if interest rates increase by 100 basis points, the value of this cross currency interest rate swaps portfolio would fall by Rs. 1.2 billion.
Equity Risk
We assume equity risk both as part of our investment book and our trading book. At year-end fiscal 2010, we had a total equity investment portfolio of Rs. 33.8 billion. For further information on our trading and available for sale investments, see “— Business — Overview of Our Products and Services — Investment Banking — Treasury.”
We also invest in the corpus of equity capital/venture funds, primarily those managed by our subsidiary ICICI Venture Funds Management Company. These funds invest in equity/equity linked instruments. Our investments through these funds are similar in nature to other equity investments and are subject to the same risks. In addition, they are also subject to risks in the form of changes in regulation and taxation policies applicable to such equity funds.
Equity risk in the trading portfolio is monitored through Value-at-Risk and stop loss limits as stipulated in the Investment Policy.
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps, forwards, and currency options to clients, which are primarily banks and corporate customers. We actively use cross currency swaps, forwards, and options to hedge against exchange risks arising out of these transactions and for foreign currency loans that are originated in currencies different from the currencies of borrowings supporting them. Some of these transactions may not meet the hedge accounting requirements and are subject to mark to market. Trading activities in the foreign currency markets expose us to exchange rate risks. This risk is mitigated by setting counterparty limits, stipulating daily and cumulative stop-loss limits, and engaging in exception reporting.
Reserve Bank of India has authorized the dealing of foreign currency-rupee options by banks for hedging foreign currency exposures including hedging of balance sheet exposures. We have been offering such products primarily to corporate clients and other inter-bank counterparties and are one of the largest participants in the currency options market accounting for a significant share of daily trading volume. All the options are maintained within the limits specified in the Investment Policy. The foreign exchange rate risk is monitored through the net overnight open position limit approved by the Reserve Bank of India.
Derivative Instruments Risk
We enter into interest rate and currency derivative transactions for the purpose of hedging interest rate and foreign exchange mismatches and also engage in trading of derivative instruments on our own account.
We offer various derivative products, including options and swaps, to our clients for their risk management purposes. We generally do not carry market risk on client derivative positions as we cover ourselves in the inter-bank market. Profits or losses on account of currency movements on these transactions are borne by the clients. During fiscal 2009, due to high exchange rate volatility as a result of the financial crisis, a number of clients experienced significant mark-to-market losses in derivative transactions. On maturity or premature termination of the derivative contracts, these mark-to-market losses became receivables owed to us. Some clients did not pay their derivatives contract obligations to us in a timely manner and, in some instances, clients filed lawsuits to avoid
payment of derivatives contract obligations entirely. In other instances, at the request of clients, we converted overdue amounts owed to us into loans and advances.
In October 2008, the Reserve Bank of India issued guidelines requiring banks to classify derivative contract receivables overdue for 90 days or more as non-performing assets. Pursuant to these guidelines, we reverse derivative contracts receivables in our income statement when they are overdue for 90 days or more. After reversal, any expected recovery is accounted for only on actual receipt of payment.
We pursue a variety of recovery strategies to collect receivables owed in connection with derivative contracts. These strategies include, among other approaches, set-offs against any other payables to the same client, negotiated settlements, rescheduling of obligations, the exercise of rights against collateral (if available) and legal redress. We select collection strategies and make assessments of collectability based on all available financial information about a client account as well as economic and legal factors that may affect our recovery efforts.
We also invest in credit derivatives through our overseas branches and banking subsidiaries. Our derivative transactions are subject to risk of default on the underlying exposure and counterparty risk to the extent particular obligors are unable to make payment on contracts when due.
Credit Spread Risk
Credit spread risk arises out of our investments in fixed income securities and credit derivatives. Hence, volatility in the level of credit spreads would impact the value of these portfolios held by us. The portfolio is monitored closely and risk is monitored by setting reference entity exposure limits, value-at-risk limits, counterparty limits and stipulating daily and cumulative stop-loss limits.
Liquidity Risk
Liquidity risk is the current and prospective risk arising out of an inability to meet financial commitments as they fall due, through available cash flows or through the sale of assets at fair market value. It includes both, the risk of unexpected increases in the cost of funding an asset portfolio at appropriate maturities and the risk of being unable to liquidate a position in a timely manner at a reasonable price.
The goal of liquidity risk management is to be able, even under adverse conditions, to meet all liability repayments on time and to fund all investment opportunities by raising sufficient funds either by increasing liabilities or by converting assets into cash expeditiously and at reasonable cost.
The Bank manages liquidity risk in accordance with its asset liability management policy. This policy is framed as per the current regulatory guidelines and is approved by the board of directors. The asset liability policy is reviewed periodically to incorporate changes as required by regulatory stipulation or to realign the policy with changes in the economic landscape. The Asset-Liability Management Committee of the Bank formulates and reviews strategies and provides guidance for management of liquidity risk within the framework laid out in the asset liability management policy. The Asset-Liability Management Committee constitution comprises whole-time directors, Senior General Managers in charge of Risk, Treasury and Deputy Chief Financial Officer and heads of business groups. The Risk Committee of the Board, a Board Commit tee, has oversight of the Asset-Liability Management Committee.
The Bank uses various tools for the measurement of liquidity risk including the statement of structural liquidity, dynamic liquidity gap statements, liquidity ratios and stress testing through scenario analysis. The statement of structural liquidity is used as a standard tool for measuring and managing net funding requirements and the assessment of a surplus or shortfall of funds in various maturity buckets in the future. The cash flows pertaining to various assets, liabilities and off-balance sheet items are placed in different time buckets based on their contractual or behavioral maturity. The statement of structural liquidity is prepared periodically for the domestic and international operations of the Bank and the utilization against gap limits for various time buckets laid down for each bucket are reviewed by the Asset-Liability Man agement Committee.
The Bank also prepares dynamic liquidity statements, which in addition to scheduled cash flows, also considers the liquidity requirements pertaining to incremental business and the funding thereof. The dynamic liquidity
statements are prepared in close coordination with the business groups, and cash flow projections based on the statements are periodically presented to the Asset-Liability Management Committee. As a part of the stock and flow approach, the Bank also monitors various liquidity ratios, and limits are laid down for these ratios under the asset liability management policy.
The Bank has diverse sources of liquidity to allow for flexibility in meeting funding requirements. For the domestic operations, current accounts and savings deposits payable on demand form a significant part of the Bank’s funding and the Bank is implementing its strategy to sustain and grow this segment of deposits along with retail term deposits. These deposits are augmented by wholesale deposits, borrowings and through the issuance of bonds and subordinated debt from time to time. Loan maturities and sale of investments also provide liquidity. The Bank holds unencumbered, high quality liquid assets to protect against stress conditions.
For domestic operations, the Bank also has the option of managing liquidity by borrowing in the inter-bank market on a short-term basis. The overnight market, which is a significant part of the inter-bank market, is susceptible to volatile interest rates. To limit the reliance on such volatile funding, the asset liability management policy stipulates stringent limits for borrowing and lending in the inter-bank market. The Bank also has access to refinancing facilities extended by the Reserve Bank of India against refinance eligible assets.
For its overseas operations, the Bank also has a well-defined borrowing program. The US dollar is the base currency for the overseas branches of the Bank, apart from the branches where the local currency is not freely convertible. In order to maximize borrowings at a reasonable cost, liquidity in different markets and currencies is targeted. The wholesale borrowings are in the form of bond issuances, syndicated loans from banks, money market borrowings, inter-bank bilateral loans and deposits, including structured deposits. The Bank also raises refinance from other banks against the buyers credit and other trade assets. Those loans that meet the Export Credit Agencies’ criteria are refinanced as per the agreements entered into with these agencies. The Bank is also focused on increasing its share of retail deposit liabilities, in ac cordance with the regulatory framework in place in the host country.
We maintain prudential levels of liquid assets in the form of cash, balances with the central bank and government securities. Currently, as stipulated by the regulator, banks in India are required to maintain their statutory liquidity ratio at a level of 25% of net demand and time liabilities and their cash reserve ratio at a level of 6% of net demand and time liabilities. The Bank generally holds additional statutory liquidity ratio securities over and above the stipulated level. During the fortnight ended on August 27, 2010, the Bank maintained an average daily cash reserve of Rs. 149.2 billion with the Reserve Bank of India, which was 6.1% of net demand and time liabilities. At August 27, 2010, the Bank maintained statutory liquidity of Rs. 706.2 billion.
Further, the Bank has a board approved liquidity stress testing framework, under which the Bank estimates its liquidity position under a range of stress scenarios. These scenarios cover bank specific and market-wide stress situations and have been separately designed for the domestic and international operations of the Bank. The potential impact on profit of meeting the stress outflows under these scenarios is measured and is subject to a stress tolerance limit specified by the board of directors. The results of liquidity stress testing are reported to the Asset-Liability Management Committee on a monthly basis.
The Risk Committee of the board has further approved a Liquidity Contingency Plan which lays down a framework for ongoing monitoring of potential liquidity contingencies and an action plan to meet such contingencies. The Liquidity Contingency Plan lays down several triggers, which are monitored on a weekly basis and defines the protocol and responsibilities of various teams in the event of a liquidity contingency.
Similar frameworks to manage liquidity risk have been established at each of the overseas banking subsidiaries of the Bank addressing the risks they run and host country regulatory requirements as applicable. Our subsidiaries continue to be funded primarily out of term deposits, which are of tenors of one year and above and raised from their respective local markets. Our subsidiary in the United Kingdom offers an Internet-based online savings deposit product to depositors. The total amount of such deposits at year-end fiscal 2010 was US$ 1.3 billion. These deposits are payable on demand. At present, these deposits are classified as outflow in the less than eight days liquidity bucket as required by the Financial Services Authority of the United Kingdom under current regulations. We deploy
these funds in a portfolio of short-term money market placements and marketable securities. We may face liquidity risk in case of high volumes of deposit withdrawals.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Our rapid growth over the last few years both internationally and in India exposes us to a greater operational risk than banks in developed countries. Operational risk includes legal risk but excludes strategic and reputational risks. Legal risk includes, but not limited to, exposure to fines, penalties or punitive damages resulting from supervisory actions, as well as private settlements. For a discussion on our vulnerability to operational risk, see “Risk Factors — Risks Relating to Our Business — There is operational risk associated with financial industries which, when realized, may have an adverse impact on our business”.
The management of operational risk in the Bank is governed by the Operational Risk Management Policy approved by the board of directors. The policy is applicable across the Bank including overseas branches, ensuring that there is clear accountability and responsibility for management and mitigation of operational risk, developing a common understanding of operational risk, helping the business and operation groups units to improve internal controls, thereby reducing the probability and potential impact of losses from operational risks while meeting regulatory requirements. Operational risk can result from a variety of factors, including failure to obtain proper internal authorizations, improperly documented transactions, failure of operational and information security procedures, computer systems, software or equipment, fraud, inadequate training and employee errors. Operational risk is sought to be mitigated by maintaining a comprehensive system of internal controls, establishing systems and procedures to monitor transactions, maintaining key back-up procedures and undertaking regular contingency planning.
In each of the banking subsidiaries, local management is responsible for implementing operational risk management framework through the operational risk management policy approved by their respective boards.
Operational Controls and Procedures in Branches
The Bank has put in place comprehensive operating manuals detailing procedures for the processing of various banking transactions and the operation of the application software. Amendments to these manuals are implemented through circulars, which are accessible to our branch employees on the company intranet. Our core banking application software has multiple security features to protect the integrity of applications and data.
Transactions in customer accounts are processed based on built-in system checks and documented authorization procedures. Cash transactions over a specified limit are subjected to enhanced scrutiny to avoid potential money laundering.
Operational Controls and Procedures for Internet Banking
The Bank has put in place controls for transactions through internet banking including two levels of passwords. In addition to this, grid level authentication (a grid is a unique set of numbers printed on the debit card) is also required. Internet transactions using credit cards require password-based authentication. To prevent phishing and internet related fraud, the Bank regularly communicates with customers. The internet banking infrastructure is secured through the multi layer information security controls, including firewalls, intrusion prevention systems and network level access controls. These are supplemented by periodic penetration tests, vulnerability assessments and continuous security incident monitoring of internet banking servers.
Operational Controls and Procedures in Regional Processing Centers and Central Processing Center
The Bank has centralized operations at regional processing centers located at various cities across the country. These regional processing centers process clearing checks and inter-branch transactions, make inter-city check collections, and engage in back-office activities for account opening, standing instructions and auto-renewal of deposits. There are currency chests located at 32 locations in various cities across India, which cater to the replenishment of ATMs and the cash requirements of branches.
In Mumbai, centralized transaction processing is carried out for transactions including the issuance of ATM cards and personal identification number mailers, reconciliation of ATM transactions, issue of passwords to internet banking customers, internet banking bill payments, and processing of credit card transactions. Centralized processing has also been extended to activities like the issuance of personalized check books and activation of new account opening.
Operational Controls and Procedures in Treasury
The Bank has put in place a comprehensive internal control structure with respect to its treasury operations. The control measures include the segregation of duties between treasury front-office and treasury middle office, elaborate automated control procedures, continuous monitoring procedures through detailed reporting statements, and well defined code of conduct, for dealers the Bank has also set up limits in respect of treasury operations including deal-wise limits and product-wise limits. In order to mitigate the potential mis-selling risks, if any, elaborate labeling policy is implemented. Similarly in order to mitigate potential contractual risks, if any, negotiations for deals are recorded on a voice recording system. All key processes in treasury operations are documented and approved by the Bank’s Product and Process Appr oval Committee. Some of the control measures include deal validation, independent confirmation, documentation, limits monitoring, treasury accounting, settlement, reconciliation and regulatory compliance. Middle office group reviews the unconfirmed, unsettled deals if any, on a regular basis and follows up for timely confirmation or settlement. There is a mechanism of escalation to senior management in case of delays in settlement or confirmation beyond a time period. In addition to the above, concurrent and internal audits are also there in respect of treasury operations. The control structure in our treasury operations is designed to minimize errors, prevent potential frauds, and provide early-warning signals.
Operational Controls and Procedures in Retail Asset Operations
Retail asset operations comprise, decentralized retail asset operations and central asset operations. Activities of decentralized operations include disbursement and regular banking activities. Decentralized retail asset operations support operations relating to retail asset products across the country. Disbursements are done through automated processes like fund transfers through the National Electronic Funds Transfer system and the Real Time Gross Settlement system with sufficient internal checks. No single team has the full authority to complete a transaction and carry out financial reconciliation. An independent team conduct regular banking activity, reconciliation and publishes management reports to the senior management.
The central asset operations unit is located in Mumbai while regional operations units are located at Delhi and Chennai. These central and regional units support operations relating to retail asset products across the country. The central asset operations unit carries out activities like loan accounts maintenance, accounting and reconciliation, payouts, and repayment management activities for all retail asset products.
Operational Controls and Procedures for Corporate Banking
Corporate Banking is organized into a zonal structure. The front office is responsible for sourcing clients and performing credit analysis of the proposal. The credit risk is independently evaluated by the Risk Management Group. Operations regarding corporate banking products and services are supported by middle office and back office with well defined process ownership. The key processes and their ownership are documented through process notes which are reviewed periodically. The middle office conducts verification and scrutiny of the documents and memos to ensure mitigation of post approval risks. It also monitors adherence to the terms of approval by periodically publishing compliance monitoring reports. The back office in the corporate operations units is comprised units responsible for the execution of trade finance, cash management and general banking transactions based on the requests and instructions initiated through channels including branches.
Operational Controls and Procedures in Rural Loan Operations
Operational controls and procedures for corporate customers in rural and agricultural banking are similar to those for our corporate customers. For other loans, duly approved disbursement requests are submitted to local operations teams where they are checked for completeness and tallied with the terms of approval, before loans are disbursed. Account reconciliation and other monitoring activities are conducted centrally by an independent team.
Anti-Money Laundering Controls
We have taken several initiatives to implement the Know Your Customer /Anti-money Laundering /Combating of Financing of Terrorism guidelines issued by the Reserve Bank of India and the rules notified under Prevention of Money Laundering Act, 2002.
These initiatives include formulation of a Group Anti-money Laundering Policy with the approval of the board of directors of the Bank which also covers our overseas branches/subsidiaries, oversight by the Audit Committee on the implementation of the Anti-Money Laundering framework, appointment of a senior level officer as Money Laundering Reporting Officer who has the day-to-day responsibility for implementation of the anti-money laundering framework, implementation of adequate Know Your Customer procedures based on risk categorization of customer segments, screening of names of customers with negative lists issued by the regulators and customer risk categorization for classifying the customers into high, medium and low risk segments. The Know Your Customer procedures are based on basic due diligence for low risk customers, enhanced due diligence for high risk customers and simplified due diligence for small deposit accounts in terms of Reserve Bank of India guidelines.
We also adhere to the anti-money laundering reporting requirements as specified by the regulators of respective geographies. A dedicated anti-money laundering software has been implemented for the domestic as well as overseas operations of the Bank to facilitate the process of risk based transaction monitoring. The anti-money laundering framework is subject to audit by the Internal Audit Department and their observations are periodically reported to the Audit Committee. We have also taken appropriate steps to train our employees on Know Your Customer and anti-money laundering and to create customer awareness on this subject.
Audit
The Internal Audit Group undertakes a comprehensive audit of all business groups and other functions, in accordance with a risk-based audit plan. This plan allocates audit resources based on an assessment of the operational risks in the various businesses. The audit plan for every fiscal year is approved by the Audit Committee.
The Internal Audit Group also has a dedicated team responsible for information technology security audits. The annual audit plan covers various components of information technology including applications, databases, networks and operating systems.
The Reserve Bank of India requires banks to have a process of concurrent audits at branches handling large volumes, to cover a minimum of 50.0% of assets, liabilities and other exposure. We have a well defined process of concurrent audits, whereby external accounting firms are engaged to carry out the concurrent audits. Concurrent audits are also carried out at centralized and regional processing centers and at centralized operations to ensure existence of and adherence to internal controls.
The audit of overseas banking subsidiaries is carried out by a dedicated team of resident auditors attached to the respective subsidiaries. The resident audit team functionally reports to Internal Audit Group. The audit of overseas branches and representative offices is carried out by audit teams consisting of auditors from India as well as a resident auditor based at the Singapore branch. International operations outsourced to India are audited by a team of auditors in India.
Legal and Regulatory Risk
We are involved in various litigations and are subject to a wide variety of banking and financial services laws and regulations in each of the jurisdictions in which we operate. We are also subject to a large number of regulatory and enforcement authorities in each of these jurisdictions. The uncertainty of the enforceability of the obligations of our customers and counter-parties, including the foreclosure on collateral, creates legal risk. Changes in laws and regulations could adversely affect us. Legal risk is higher in new areas of business where the law is often untested by the courts. We seek to minimize legal risk by using stringent legal documentation, employing procedures designed to ensure that transactions are properly authorized and consulting internal and external legal advisors. See “Risk Factors—Risks Relating to Our Business—We are involved in various litigations. Any final judgment awarding material damages against us could have a material adverse impact on our future financial performance, our
stockholders’ equity and the price of the ADSs” and “Risk Factors—Risks relating to Our Business— The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment”.
Global Risk Management Framework
We have adopted a global risk management framework for our international banking operations, including overseas branches, offshore banking units and subsidiaries. Under this framework, our credit, investment, asset liability management and anti-money laundering policies apply to all our overseas branches and offshore banking units, with modifications to meet local regulatory or business requirements. These modifications may be made only with the approval of our board of directors. All overseas banking subsidiaries are required to adopt risk management policy frameworks to be approved by their board of directors or an appropriate committee of their board of directors, based on applicable laws and regulations as well as our corporate governance and risk management framework. Policies at the overseas banking subsidiaries are framed in consu ltation with the related groups in ICICI Bank.
The Compliance Group plays an oversight role in respect of regulatory compliance at the overseas branches and offshore banking units. Compliance risk assessment along with the key risk indicators pertaining to our domestic and international banking operations are presented to the Risk Committee of our board of directors on a quarterly basis. Management of regulatory compliance risk is considered as an integral component of the governance framework at the Bank and its subsidiaries along with the internal control and enterprise-wide risk management frameworks. The Bank has therefore adopted an appropriate framework for compliance, by formulating the Group Compliance Policy, which is approved by the board of directors and is reviewed from time to time. The Group Compliance Policy outlines a framework for identification and evaluation of the significant compliance risks, on a consolidated or Group-wide basis, in order to assess how these risks might affect our safety and soundness.
Risk Management in Key Subsidiaries
ICICI Securities Primary Dealership is a primary dealer and has government of India securities as a significant proportion of its portfolio. The Corporate Risk Management Group at ICICI Securities Primary Dealership has developed comprehensive risk management policies which seek to minimize risks generated by the activities of the organization. The Corporate Risk Management Group develops and maintains models to assess market risks which are constantly updated to capture the dynamic nature of the markets and in this capacity, participates in the evaluation and introduction of new products and business activities.
ICICI Securities Primary Dealership has constituted an internal Risk Management Committee comprising the Managing Director and CEO and senior executives from cross-functional areas. The Committee debates various aspects of risk management and among other things decides risk and investment policies for its various businesses and ensures compliance with regulatory guidelines on risk management as well as with all the prudential and exposure limits set by the board of directors.
ICICI Prudential Life Insurance Company is exposed to business risks arising out of the nature of products and underwriting, and market risk arising out of the investments made out of the corpus of premiums collected and the returns guaranteed to policyholders. The risk governance structure consists of the Board, Board Risk Committee, Executive Risk Committee and its sub-committees. The risk management model of the organization is comprised of a four stage continuous cycle: identification and assessment, measurement, monitoring and control of risks. The Company has in place a risk management policy which details the strategy and procedure adopted to identify, measure, monitor and control risk at the enterprise level. To manage investment risk, the Company has a prudent investment strategy to optimize risk-adjusted returns. ICICI Prudenti al Life Insurance Company’s asset-liability management framework is designed to cushion and mitigate the investment related risks of assets. Asset under management of unit-linked insurance product amount to over 90% of policyholders’ funds. There is minimal asset-liability mismatch risk to the linked portfolio. As part of asset-liability management for the non-linked portfolio, ICICI Prudential Life Insurance Company manages the risk due to guaranteed returns by investing only in fixed income instruments and manages the interest rate risk through monthly rebalancing of the portfolio, to manage the duration gap between assets and liabilities. In addition, for certain products, a cash flow matching strategy is also used. For the participating portfolio, the asset allocation strategy, which includes investments in equities, is designed to achieve the twin objectives of managing base guarantees and maximizing returns. The equity portfolio is
benchmarked against a market index. In addition, there are exposure limits to companies, groups and industries. ICICI Prudential Life Insurance Company’s Insurance Risk Committee assists the Executive Risk Committee in the identification, measurement, monitoring and control of insurance risks like demographic and expense risks. The Operational Risk Committee assists the Executive Risk Committee in identification, measurement, monitoring and control of operational risks The Company categorizes operational risk using the Basel II framework. For mitigating operational risks, the management assesses and rates the key risk indicators and prepares a mitigation plan. A risk report summarizing the key risks faced by the enterprise is placed before the Board Risk Committee on a periodic basis.
ICICI Lombard General Insurance Company is principally exposed to risks arising out of the nature of business underwritten and credit risk on its investment portfolio as well as the credit risk it carries on its reinsurers. In respect of business risk, ICICI Lombard General Insurance always seeks to diversify its insurance portfolio across industry sectors and geographical regions. The Company focuses on achieving a balance between the corporate and retail portfolio mix to achieve favorable claim ratio and risk diversification. The Company also has the ability to limit its risk exposure by way of re-insurance arrangements. Investments of the Company are governed by the investment policy approved by its board of directors within the norms stipulated by the Insurance Regulatory and Development Authority. The Investment Committee oversees t he implementation of this policy and reviews it periodically. Exposure to any single entity is normally restricted to 5.0% of the portfolio and to any industry to 10.0% of the portfolio. Investments in debt instruments are generally restricted to instruments with a domestic credit rating of AA or higher.
Controls and Procedures
We carried out an evaluation under the supervision and with the participation of management, including the Managing Director and Chief Executive Officer and the Executive Director and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act as of March 31, 2010.
As a result, it has been concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
However, as a result of our evaluation, we noted certain areas where our processes and controls could be improved. We are committed to continuing to implement and improve internal controls and our risk management processes, and this remains a key priority for us. We also have a process whereby business and financial officers throughout the Company attest to the accuracy of reported financial information as well as the effectiveness of disclosure controls, procedures and processes.
There are inherent limitations to the effectiveness of any system especially of disclosure controls and procedures, including the possibility of human error, circumvention or overriding of the controls and procedures, in a fast changing environment or when entering new areas of business or expanding geographic reach. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
We have experienced significant growth in a fast changing environment, and management is aware that this may pose significant challenges to the control framework. See “Risk Factors — Risks Relating to Our Business — There is operational risk associated with financial industries which, when realized, may have an adverse impact on our business”.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Our internal control system has been designed to provide reasonable assurance regarding the reliability of financial reporting and preparation and fair presentation of published financial statements in accordance with Generally Accepted Accounting Principles in India.
Management maintains an internal control system intended to ensure that financial reporting provides reasonable assurance that transactions are executed in accordance with the authorizations of management and the directors, assets are safeguarded and financial records are reliable.
Our internal controls include policies and procedures that:
| | · | pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the transactions and dispositions of our assets; |
| | · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with authorizations of management and the executive directors; and |
| | · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations, and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of internal control over financial reporting as of March 31, 2010 based on criteria set by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on the assessment, management concluded that our internal control over financial reporting was effective as of March 31, 2010. Effectiveness of our internal control over financial reporting as of March 31, 2009 has been audited by KPMG, an independent registered public accounting firm, as stated in their attestation report, which is included herein.
Change in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the period covered by this annual report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Our gross loan portfolio was Rs. 2,321.4 billion at year-end fiscal 2010, a decrease of 14.5% over the gross loan portfolio of Rs. 2,714.9 billion at year-end fiscal 2009. At year-end fiscal 2009, the gross loan portfolio increased 6.2% to Rs. 2,714.9 billion from Rs. 2,555.9 billion at year-end fiscal 2008. At year-end fiscal 2010, approximately 64% of our gross loans were rupee loans.
Loan Portfolio by Categories
The following table sets forth, at the dates indicated, our gross (net of write off) rupee and foreign currency loans by business category.
| | | At March 31, | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2010 | |
| | | (in millions) | |
Consumer loans and credit card receivables(1) | | Rs. | 910,871 | | | Rs. | 1,276,977 | | | Rs. | 1,408,271 | | | Rs. | 1,228,337 | | | Rs. | 954,245 | | | US$ | 21,229 | |
Rupee | | | 895,116 | | | | 1,248,484 | | | | 1,365,595 | | | | 1,181,368 | | | | 923,831 | | | | 20,552 | |
Foreign currency | | | 15,755 | | | | 28,493 | | | | 42,676 | | | | 46,969 | | | | 30,414 | | | | 677 | |
Commercial, financial, agricultural and others(2) | | | 665,549 | | | | 859,562 | | | | 1,147,276 | | | | 1,486,380 | | | | 1,367,175 | | | | 30,415 | |
| | | At March 31, | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2010 | |
| | | (in millions) | |
Rupee | | | 449,160 | | | | 495,464 | | | | 475,796 | | | | 587,644 | | | | 565,990 | | | | 12,591 | |
Foreign currency | | | 216,389 | | | | 364,098 | | | | 671,480 | | | | 898,736 | | | | 801,185 | | | | 17,824 | |
Leasing and related activities(3) | | | 736 | | | | 569 | | | | 329 | | | | 175 | | | | 17 | | | | 0 | |
Rupee | | | 695 | | | | 569 | | | | 329 | | | | 175 | | | | 17 | | | | 0 | |
Foreign currency | | | 41 | | | | – | | | | – | | | | – | | | | – | | | | – | |
Gross loans | | | 1,577,156 | | | | 2,137,108 | | | | 2,555,876 | | | | 2,714,892 | | | | 2,321,437 | | | | 51,644 | |
Rupee | | | 1,344,971 | | | | 1,744,517 | | | | 1,841,719 | | | | 1,769,187 | | | | 1,489,838 | | | | 33,069 | |
Foreign currency | | | 232,185 | | | | 392,591 | | | | 714,156 | | | | 945,705 | | | | 831,599 | | | | 18,575 | |
Total gross loans | | | 1,577,156 | | | | 2,137,108 | | | | 2,555,876 | | | | 2,714,892 | | | | 2,321,437 | | | | 51,644 | |
Allowance for loan losses | | | (14,553 | ) | | | (23,114 | ) | | | (41,859 | ) | | | (53,587 | ) | | | (63,656 | ) | | | (1,416 | ) |
Net loans | | Rs. | 1,562,603 | | | Rs. | 2,113,994 | | | Rs. | 2,514,017 | | | Rs. | 2,661,305 | | | Rs. | 2,257,781 | | | US$ | 50,228 | |
_____________
| (1) | Includes home loans, automobile loans, commercial business loans, two-wheeler loans, personal loans, credit card receivables and farm equipment loans. |
| (2) | Includes builder financing and dealer financing. |
| (3) | Leasing and related activities includes leasing and hire purchase. |
Our gross consumer loans and credit card receivables decreased to Rs. 954.3 billion, constituting 41.1% of our gross loans at year-end fiscal 2010 from Rs. 1,228.3 billion, constituting 45.2% of our gross loans at year-end fiscal 2009. Our gross foreign currency loans decreased from Rs. 945.7 billion, constituting 34.8% of our total gross loans at year-end fiscal 2009 to Rs. 831.6 billion, constituting 35.8% of our total gross loans at year-end fiscal 2010. Our gross foreign currency loans, in rupee terms, decreased by 12.1% at year-end fiscal 2010 from year-end fiscal 2009, almost entirely due to the impact of rupee appreciation in fiscal 2010. Our gross foreign currency loans decreased marginally in US dollar terms by 0.5% at year-end fiscal 2010 from year-end fiscal 2009.
At year-end fiscal 2010, we did not have outstanding cross-border loans (defined as loans made to borrowers outside of India) exceeding 1.0% of our assets in any country except Canada. We had outstanding cross-border loans to US borrowers amounting to between 0.25% and 0.50% of our assets.
Collateral — Completion, Perfection and Enforcement
Our loan portfolio consists largely of loans to retail customers, including home loans, automobile loans, two-wheeler loans, commercial business loans, personal loans and credit card receivables, project and corporate finance and working capital loans to corporate borrowers and agricultural financing. In general, our loans (other than personal loans, credit card receivables and some forms of corporate and agricultural financing, which are unsecured) are over-collateralized. In India, there are no regulations stipulating loan-to-collateral limits.
We have a mechanism by which we track the creation of security and follow up in case of any delay in creation of any security interest. The delays could be due to time taken for acquisition of the asset on which security interest is to be created (or completion of formalities related thereto), obtaining of requisite consents including legal, statutory or contractual obligations to obtain such consents, obtaining of legal opinions as to title and completion of necessary procedure for perfection of security in the respective jurisdictions.
Corporate finance and project finance loans are typically secured by a first charge on fixed assets, which normally consists of property, plant and equipment. These security interests are perfected by the registration of these interests within time limits stipulated under the Companies Act with the Registrar of Companies pursuant to the provisions of the Indian Companies Act when our clients are constituted as companies. This registration amounts to a constructive public notice to other business entities of the security interests created by such companies. Prior to creation of security interests on all assets, which are not stock-in-trade for the company, a no-objection certificate from the income tax authorities is required to create a charge on the asset. We may also take security of a pledge of financial assets like marketable securit ies (for which perfection of security interests by registration with the Registrar of Companies is not mandatory for companies under the Companies Act), and obtain corporate guarantees
and personal guarantees wherever appropriate. In certain cases, the terms of financing include covenants relating to sponsor shareholding in the borrower and restrictions on the sponsors’ ability to sell all or part of their shareholding. Covenants involving equity shares have top-up mechanism based on price triggers. For all immovable property and shares, which are secured in favor of offshore lenders, approval from the Reserve Bank of India is obtained prior to creation.
Working capital loans are typically secured by a first charge on current assets, which normally consist of inventory and receivables. Additionally, in some cases, we may take further security of a first or second charge on fixed assets, a pledge of financial assets like marketable securities, or obtain corporate guarantees and personal guarantees wherever appropriate.
A substantial portion of our loans to retail customers (other than personal loans and loans against credit card receivables, which are unsecured) is also secured by a first and exclusive charge on the assets financed (predominantly property and vehicles).
We also accept post dated checks and cash as additional comfort for the facilities provided to various entities.
We are entitled in terms of our security documents to enforce security and appropriate the proceeds towards the borrower’s loan obligations without reference to the courts or tribunals unless a client makes a reference to such courts or tribunals to challenge such enforcement.
Separately, in India, foreclosure on collateral of property generally requires a written petition to an Indian court or tribunal. An application, when made, may be subject to delays and administrative requirements that may result, or be accompanied by, a decrease in the value of the collateral. These delays can last for several years and therefore might lead to deterioration in the physical condition and market value of the collateral. In the event a corporate borrower is in financial difficulty and unable to sustain itself, it may opt for the process of voluntary winding up. In case a company becomes a sick unit, foreclosure and enforceability of collateral is stayed. In fiscal 2003, the Indian Parliament passed the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as amended, which st rengthened the ability of lenders to resolve non-performing assets by granting them greater rights as to enforcement of security including over immovable property and recovery of dues, without reference to the courts or tribunals. See “Overview of the Indian Financial Sector — Recent Structural Reforms — Legislative Framework for Recovery of Debts due to Banks”.
In case of consumer installment loans, we obtain direct debit mandates or post-dated checks towards repayment on pre-specified dates. Post dated checks, if dishonored entitle us on occurrence of certain events to initiate criminal proceedings against the issuer of the checks.
We recognize that our ability to realize the full value of the collateral in respect of current assets is difficult, due to, among other things, delays on our part in taking immediate action, delays in bankruptcy foreclosure proceedings, defects in the perfection of collateral (including due to inability to obtain approvals that may be required from various persons, agencies or authorities) and fraudulent transfers by borrowers and other factors, including current legislative provisions or changes thereto and past or future judicial pronouncements. However, cash credit facilities are so structured that we are able to capture the cash flows of our customers for recovery of past due amounts. In addition, we generally have a right of set-off for amounts due to us on these facilities. Also, we regularly monitor the cash flows of our working capital loan customers so that we can take any actions required before the loan becomes impaired. On a case-by-case basis, we may also stop or limit the borrower from drawing further credit from its facility.
Loan Concentration
We follow a policy of portfolio diversification and evaluate our total financing exposure in a particular industry in light of our forecasts of growth and profitability for that industry. ICICI Bank’s Global Credit Risk Management Group monitors all major sectors of the economy and specifically tracks industries in which ICICI Bank has credit exposures. We seek to respond to any economic weakness in an industrial segment by restricting new credits to that industry segment and any growth in an industrial segment by increasing new credits to that industry segment, resulting in active portfolio management. ICICI Bank’s policy is to limit its loan portfolio to any particular industry
(other than retail loans) to 15.0% of its total exposure. Between 2003 and 2006, the banking system as a whole saw significant expansion of retail credit, with retail loans accounting for a major part of overall systemic credit growth. Accordingly, during these years, we increased our financing to the retail finance segment. Given the uncertain economic environment, we accorded priority to risk containment, liquidity management and capital conservation. In view of high asset prices and the increase in interest rates since the second half of fiscal 2008, we followed a conscious strategy of moderation of retail disbursements, especially in the unsecured retail loans segment. At the same time, there has been an increase in demand for credit from the corporate sector. Following this trend, our loans and advances to the retail finance seg ment constituted 42.1% of our gross loans and advances at year-end fiscal 2010 compared to 46.4% at year-end fiscal 2009 and 57.0% at year-end fiscal 2008.
Pursuant to the guidelines of the Reserve Bank of India, our credit exposure to an individual borrower generally must not exceed 15.0% of our capital funds, unless the exposure is in respect of an infrastructure project. Capital funds comprise Tier 1 and Tier 2 capital calculated pursuant to the guidelines of the Reserve Bank of India, under Indian GAAP. Credit exposure to individual borrowers may exceed the exposure norm of 15.0% of our capital funds by an additional 5.0% (i.e. the aggregate exposure can be 20.0%) provided the additional credit exposure is on account of infrastructure financing. Our exposure to a group of companies under the same management control generally must not exceed 40.0% of our capital funds unless the exposure is in respect of an infrastructure project. The exposure to a group of companies under the same manag ement control, including exposure to infrastructure projects, may be up to 50.0% of our capital funds. Banks may, in exceptional circumstances, with the approval of their boards, enhance the exposure by 5.0% of capital funds (i.e., the aggregate exposure can be 20.0% of capital funds for an individual borrower and the aggregate exposure can be 45.0% of capital funds for a group of companies under the same management), making appropriate disclosures in their annual reports. Exposure for funded and non-funded credit facilities is calculated as the total committed amount or the outstanding amount whichever is higher (for term loans, as the sum of undisbursed commitments and the outstanding amount). Investment exposure is considered at book value. At year-end fiscal 2010, we were in compliance with these guidelines. During fiscal 2010, our exposure to ICICI Prudential Flexible Income Plan (a liquid debt plan) exceeded the stipulated ceiling of 15.0% of capital funds from July 20, 2009 to August 20, 2009. This ex cess exposure was duly approved/confirmed by the majority of directors, with exposure remaining within 20.0% of the capital funds in accordance with the guidelines issued by the Reserve Bank of India.
At year-end fiscal 2010, our largest non-bank borrower accounted for approximately 13.4% of our capital funds. The largest group of companies under the same management control accounted for approximately 28.9% of our capital funds.
The following table sets forth, at the dates indicated, the composition of our gross advances (net of write-offs)
| | | At March 31, | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | |
| | | Amount | | | As a % | | | Amount | | | As a % | | | Amount | | | As a % | | | Amount | | | As a % | | | Amount | | | Amount | | | As a % | |
| | | (in millions, except percentages) | |
| Retail finance(1) | | Rs. | 981,550 | | | | 62.2 | % | | Rs. | 1,364,472 | | | | 63.8 | % | | Rs. | 1,457,548 | | | | 57.0 | % | | Rs. | 1,259,908 | | | | 46.4 | % | | Rs. | 976,481 | | | US$ | 21,7244 | | | | 42.1 | % |
| Services — non finance | | | 47,289 | | | | 3.0 | | | | 64,342 | | | | 3.0 | | | | 168,139 | | | | 6.6 | | | | 244,367 | | | | 9.0 | | | | 223,535 | | | | 4,973 | | | | 9.6 | |
| Crude petroleum/refining & petrochemicals | | | 46,185 | | | | 2.9 | | | | 49,656 | | | | 2.3 | | | | 65,136 | | | | 2.6 | | | | 163,027 | | | | 6.0 | | | | 150,170 | | | | 3,341 | | | | 6.5 | |
| Road, port, telecom, urban development & other infrastructure | | | 30,114 | | | | 1.9 | | | | 29,873 | | | | 1.4 | | | | 57,707 | | | | 2.3 | | | | 116,138 | | | | 4.3 | | | | 112,339 | | | | 2,499 | | | | 4.8 | |
| Iron & steel and products | | | 51,717 | | | | 3.3 | | | | 52,071 | | | | 2.5 | | | | 100,441 | | | | 3.9 | | | | 113,931 | | | | 4.2 | | | | 89,673 | | | | 1,995 | | | | 3.9 | |
| Services — finance | | | 74,356 | | | | 4.7 | | | | 111,500 | | | | 5.2 | | | | 65,373 | | | | 2.6 | | | | 88,432 | | | | 3.3 | | | | 69,483 | | | | 1,546 | | | | 3.0 | |
| Food & beverages | | | 41,491 | | | | 2.6 | | | | 50,863 | | | | 2.4 | | | | 76,802 | | | | 3.0 | | | | 73,218 | | | | 2.7 | | | | 84,888 | | | | 1,888 | | | | 3.7 | |
| Electronics & engineering | | | 24,129 | | | | 1.5 | | | | 21,863 | | | | 1.0 | | | | 39,294 | | | | 1.5 | | | | 51,473 | | | | 1.9 | | | | 45,205 | | | | 1,006 | | | | 1.9 | |
| Chemicals & fertilizers | | | 32,241 | | | | 2.1 | | | | 53,768 | | | | 2.5 | | | | 43,346 | | | | 1.7 | | | | 61,758 | | | | 2.3 | | | | 55,627 | | | | 1,237 | | | | 2.4 | |
Power | | | 28,127 | | | | 1.8 | | | | 41,917 | | | | 2.0 | | | | 62,479 | | | | 2.4 | | | | 59,105 | | | | 2.2 | | | | 82,171 | | | | 1,828 | | | | 3.5 | |
| Drugs & pharmaceuticals | | | 4,968 | | | | 0.3 | | | | 10,014 | | | | 0.5 | | | | 26,568 | | | | 1.0 | | | | 37,495 | | | | 1.4 | | | | 31,377 | | | | 698 | | | | 1.4 | |
Construction | | | 9,822 | | | | 0.6 | | | | 15,285 | | | | 0.7 | �� | | | 30,340 | | | | 1.2 | | | | 35,820 | | | | 1.3 | | | | 23,269 | | | | 517 | | | | 1.0 | |
| Wholesale/retail trade | | | 14,842 | | | | 1.0 | | | | 28,625 | | | | 1.3 | | | | 26,728 | | | | 1.0 | | | | 28,187 | | | | 1.0 | | | | 49,683 | | | | 1,106 | | | | 2.1 | |
| | | At March 31, | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | |
| | | Amount | | | As a % | | | Amount | | | As a % | | | Amount | | | As a % | | | Amount | | | As a % | | | Amount | | | Amount | | | As a % | |
| | | (in millions, except percentages) | |
Metal & products (excluding iron & steel) | | | 19,335 | | | | 1.2 | | | | 1,462 | | | | 0.1 | | | | 28,925 | | | | 1.2 | | | | 23,642 | | | | 0.8 | | | | 35,993 | | | | 801 | | | | 1.5 | |
Others(2) | | | 171,216 | | | | 10.9 | | | | 241,904 | | | | 11.3 | | | | 308,517 | | | | 12.0 | | | | 358,391 | | | | 13.2 | | | | 291,544 | | | | 6,486 | | | | 12.6 | |
Gross loans | | | 1,577,382 | | | | 100.0 | | | | 2,137,615 | | | | 100.0 | | | | 2,557,343 | | | | 100.0 | | | | 2,714,892 | | | | 100.0 | | | | 2,321,438 | | | | 51,645 | | | | 100.0 | |
| Allowance for loan losses and interest suspense | | | (14,778 | ) | | | | | | | (23,621 | ) | | | | | | | (43,327 | ) | | | | | | | (53,587 | ) | | | | | | | (63,655 | ) | | | (1,416 | ) | | | | |
Net loans | | Rs. | 1,562,604 | | | | | | | Rs. | 2,113,994.4 | | | | | | | Rs. | 2,514,016 | | | | | | | Rs. | 2,661,305 | | | | | | | Rs. | 2,257,783 | | | US$ | 50,229 | | | | | |
| (1) | Includes home loans, automobile loans, commercial business loans, two wheeler loans, personal loans, credit cards receivables, dealer funding, developer financing and overdraft products loans. |
| (2) | Other industries primarily include automobiles, cement, agriculture and allied activities, fast-moving consumer goods, gems and jewelry, manufacturing products excluding metal, mining, shipping, textiles etc. |
Our gross loan portfolio at year-end fiscal 2010 decreased by 14.5% compared to the gross loan portfolio at year-end fiscal 2009. Retail finance was 42.1% of gross loans at year-end fiscal 2010 compared to 46.4% at year-end fiscal 2009 and 57.0% at year-end fiscal 2008. Our gross loans to the services — non-finance sector as a percentage of gross loans increased to 9.6% at year-end fiscal 2010 compared to 9.0% at year-end fiscal 2009. Our gross loans to the crude petroleum/refining and petrochemicals sector as a percentage of gross loans increased to 6.5% at year-end fiscal 2010 compared to 6.0% at year-end fiscal 2009.
At year-end fiscal 2010, our twenty largest borrowers accounted for approximately 16.9% of our gross loan portfolio, with the largest borrower accounting for approximately 3.3% of our gross loan portfolio. The largest group of companies under the same management control accounted for approximately 4.5% of our gross loan portfolio.
Geographic Diversity
Our portfolios are geographically diversified. The state of Maharashtra accounted for the largest proportion of our domestic gross loans outstanding at year-end fiscal 2010.
Directed Lending
The Reserve Bank of India requires banks to lend to certain sectors of the economy. Such directed lending comprises priority sector lending and export credit.
Priority Sector Lending
The Reserve Bank of India guidelines require banks to lend 40.0% of their adjusted net bank credit, or the credit equivalent amount of off balance sheet exposure, whichever is higher, to certain specified sectors called priority sectors. The definition of adjusted net bank credit does not include certain exemptions and includes certain investments and is computed with reference to the outstanding amount at March 31 of the previous year. Priority sectors include agricultural sector, food and agri-based industries, small and micro enterprises and small businesses and housing finance up to certain limits. Out of the 40.0%, banks are required to lend a minimum of 18.0% of their adjusted net bank credit to the agriculture sector (of which 13.5% is required towards direct agriculture) and the balance to certain specified sectors, including sma ll enterprises (defined as enterprises engaged in manufacturing/production, processing and services businesses with a certain limit on investment in plant and machinery), small road and water transport operators, small businesses, professional and self-employed persons, and all other service enterprises, micro credit, education and housing loans up to Rs. 2 million to individuals for purchase/construction of a dwelling unit per family.
In its letter dated April 26, 2002, which granted its approval for the amalgamation, the Reserve Bank of India stipulated that since the loans of erstwhile ICICI Limited (ICICI) transferred to us were not subject to the priority sector lending requirement, we are required to maintain priority sector lending of 50.0% of our adjusted net bank credit on the residual portion of our advances (i.e. the portion of total advances excluding advances of ICICI at year-end fiscal 2002, referred to as “residual adjusted net bank credit”). This additional 10.0% priority sector lending
requirement will apply until such time as our aggregate priority sector advances reach a level of 40.0% of our total adjusted net bank credit. The Reserve Bank of India’s existing instructions on sub-targets under priority sector lending and eligibility of certain types of investments/funds for qualification as priority sector advances apply to ICICI Bank.
Any shortfall in the amount required to be lent to the priority sectors may be required to be deposited with government sponsored Indian development banks like the National Bank for Agriculture and Rural Development, the Small Industries Development Bank of India and the National Housing Bank. These deposits have a maturity of up to seven years and carry interest rates lower than market rates. At year-end fiscal 2010, total investments in such bonds were Rs. 101.1 billion. See “Supervision and Regulation — Directed Lending — Priority Sector Lending”.
As per the Reserve Bank of India guidelines, banks are also required to lend to the weaker sections 10.0% of adjusted net bank credit or credit equivalent amount of off-balance sheet exposures, whichever is higher. In order to ensure that the sub-target of lending to the weaker sections is achieved, with effect from year-end fiscal 2009, the Reserve Bank of India has decided to take into account the shortfall in lending to weaker sections also, as on the last reporting Friday of March of each year, for the purpose of allocating amounts to the domestic scheduled commercial banks for contribution to the Rural Infrastructure Development Fund maintained with the National Bank for Agriculture and Rural Development or funds with other financial institutions, as specified by the Reserve Bank of India.
ICICI Bank is required to comply with the priority sector lending requirements on the last “reporting Friday” of each fiscal year. At March 26, 2010, which was the last reporting Friday for fiscal 2010, ICICI Bank’s priority sector loans were Rs. 627.0 billion, constituting 51.3% of its residual adjusted net bank credit against the requirement of 50.0%. At that date, qualifying agricultural loans were 18.7% of ICICI Bank’s residual adjusted net bank credit as against the requirement of 18.0%, out of which advances to direct agriculture amounted to Rs. 173.3 billion constituting 14.2% of its residual adjusted net bank credit against the requirement of 13.5%. ICICI Bank’s advances to weaker sections were Rs. 56.3 billion, constituting 4.6% of its residual adjusted net bank credit against the requirement of 10. 0%.
The following table sets forth ICICI Bank’s priority sector loans, classified by the type of borrower, at the last reporting Friday of fiscal 2010.
| | | | |
| | | | | | % of total priority sector lending | | | % of residual adjusted net bank credit | |
| | | (in billion, except percentages) | |
Agricultural sector(1) | | Rs. | 228.3 | | | US$ | 5.1 | | | | 36.4 | % | | | 18.7 | % |
Small enterprises(2) | | | 78.1 | | | | 1.7 | | | | 12.5 | | | | 6.4 | |
| Others including residential mortgage less than Rs. 2 million | | | 320.6 | | | | 7.2 | | | | 51.1 | | | | 26.2 | |
Total | | Rs. | 627.0 | | | US$ | 14.0 | | | | 100.0 | % | | | 51.3 | % |
_____________
| (1) | Includes direct agriculture lending of Rs. 173.3 billion constituting 14.2% of our residual adjusted net bank credit against the requirement of 13.5%. |
| (2) | Small enterprises include enterprises engaged in manufacturing/processing and whose investment in plant and machinery does not exceed Rs. 50 million and enterprises engaged in providing/rendering of services and whose investment in equipment does not exceed Rs. 20 million. |
Export Credit
As part of directed lending, the Reserve Bank of India also requires banks to make loans to exporters at concessional rates of interest. Export credit is provided for pre-shipment and post-shipment requirements of exporter borrowers in rupees and foreign currencies. At least 12.0% of a bank’s adjusted net bank credit is required to be in the form of export credit. This requirement is in addition to the priority sector
lending requirement but credits extended to exporters that are small scale industries or small businesses may also meet part of the priority sector lending requirement. The Reserve Bank of India provides export refinancing for an eligible portion of total outstanding export loans in rupee in line with the prevalent Reserve Bank of India guidelines in India as amended from time to time. The interest income earned on export credits is supplemented through fees and commissions earned from these exporter customers from other fee-based products and services taken by them from us, such as foreign exchange products and bill handling. At March 26, 2010 (the last Friday of March 2010), our export credit was Rs. 21.1 billion being 1.7% of residual adjusted net bank credit.
Loan Pricing
As required by the Reserve Bank of India guidelines effective July 1, 2010, ICICI Bank prices its loans with reference to a base rate, called the ICICI Bank Base Rate. The Asset Liability Management Committee sets the base rate based on ICICI Bank’s current cost of funds, likely changes in the Bank’s cost of funds, market rates, interest rate outlook and other systemic factors. Pricing for all fresh approvals and renewal of facilities are linked to the Base Rate and comprise the base rate, term premium and transaction-specific credit and other charges. The Reserve Bank of India has also stipulated that a bank’s lending rates cannot be lower than its base rate, except for certain categories of loans as may be specified by the Reserve Bank of India from time to time. ICICI Bank has set its base rate at 7.50% per annum pay able monthly, effective July 1, 2010. As prescribed in the guidelines of the Reserve Bank of India, an option has been given to existing borrowers for migration to base rate mechanism. All loans approved before July 1, 2010, and where the borrowers choose not to migrate to the base rate mechanism, would continue to be based on earlier benchmark rate regime.
We classify our assets as performing and non-performing in accordance with the Reserve Bank of India’s guidelines except in the case of ICICI Home Finance Company and our banking subsidiaries in Canada, Russia and the United Kingdom. ICICI Home Finance Company classifies its loans and other credit facilities as per the guidelines of its regulator namely, the National Housing Bank. Loans made by our Canadian, Russian and UK subsidiaries are classified as impaired when there is no longer a reasonable assurance of the timely collection of the full amount of principal or interest. Under the Reserve Bank of India guidelines, an asset is classified as non-performing if any amount of interest or principal remains overdue for more than 90 days in respect of term loans. In respect of overdraft or cash credit, an asset is classified as non-p erforming if the account remains out of order for a period of 90 days and, in respect of bills, if the account remains overdue for more than 90 days. Further, non-performing assets are classified into sub-standard, doubtful and loss assets based on the criteria stipulated by the Reserve Bank of India. The Reserve Bank of India has separate guidelines for restructured loans. See below “— Restructured Loans”.
The classification of assets in accordance with the Reserve Bank of India guidelines is detailed below.
| Standard assets: | | Assets that do not disclose any problems or which do not carry more than normal risk attached to the business are classified as standard assets. |
| | | |
| Sub-standard assets: | | Sub-standard assets comprise assets that are non-performing for a period not exceeding 12 months. |
| | | |
| Doubtful assets: | | Doubtful assets comprise assets that are non-performing for more than 12 months. |
| | | |
| Loss assets: | | Loss assets comprise assets (i) the losses on which are identified or (ii) that are considered uncollectible. |
Our non-performing assets include loans and advances as well as credit substitutes, which are funded credit exposures. In compliance with regulations governing the presentation of financial information by banks, we report only non-performing loans and advances in our financial statements.
See also “Supervision and Regulation — Reserve Bank of India Regulations — Loan Loss Provisions and Non-performing Assets — Asset Classification”.
Restructured Loans
The Reserve Bank of India has separate guidelines for restructured loans. A fully secured standard loan can be restructured by the rescheduling of principal repayments and/or the interest element, but must be separately disclosed as a restructured loan in the year of restructuring. The diminution in the fair value of the loan, if any, measured in present value terms, is either written off or provision is made to the extent of the diminution involved. For restructured loans, provisions are made in accordance with the guidelines issued by the Reserve Bank of India, which require that the difference between the fair value of the loan before and after restructuring be provided at the time of restructuring. There are certain conditions stipulated by the Reserve Bank of India for conti nuing to classify a restructured standard loan as a standard asset. Similar guidelines apply to sub-standard and doubtful loans. The sub-standard and doubtful loans which have been subjected to restructuring, whether in respect of principal installment or interest amount, are eligible to be upgraded to the standard category only after the specified period, i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. The restructured loans continue to be classified as such until they complete one year of payment in accordance with the restructured terms.
From December 2008, the Reserve Bank of India permitted banks to restructure loans classified as real estate exposures, up to June 30, 2009 while maintaining these loans as standard loans. Similarly, banks were also permitted to undertake, for loans that were previously restructured, a second restructuring without downgrading the loan to the non-performing category, up to June 30, 2009. The Reserve Bank of India also permitted banks to restructure as standard loans all eligible loans which meet the basic criteria for restructuring, and which were classified as standard as at September 1, 2008, irrespective of their subsequent asset classification. This was subject to the receipt by banks of an application from the borrower for restructuring the advance on or before March 31, 2009 and implementing the restructuring package within 120 days from the date of receipt of the application. We classify loans as restructured in line with these guidelines.
Provisioning and Write-Offs
We make provisions and write-offs in accordance with the Reserve Bank of India’s guidelines; see “Supervision and Regulation — Reserve Bank of India Regulations — Loan Loss Provisions and Non-Performing Assets — Provisioning and Write-offs”. The Reserve Bank of India guidelines on provisioning and write-offs are as described below.
| Standard assets: | | As per the Reserve Bank of India guidelines issued in September 2005, banks were required to make general provision at 0.40% on standard loans (excluding loans to the agriculture sector and to small and medium enterprises). As per the Reserve Bank of India guidelines issued in May 2006, the general provisions for personal loans, loans and advances qualifying as capital market exposure, residential housing loans beyond Rs. 2 million and commercial real estate loans was increased to 1.00% from 0.40%. In January 2007, the Reserve Bank of India increased the provisioning requirement in respect of the loans to the real estate sector (excluding residential housing loans), outstanding credit card receivables, loans and advances qualifying as capital market exposure, personal loans and exposures to systemically important non-deposit taking non-banking financial companies to 2.00%. In November 2008, the Reserve Bank of India reinstated the provisioning for standard assets to a uniform rate of 0.40% for all types of standard assets except in the case of direct advances to the agricultural and small and medium enterprise sectors, which continue to attract a provisioning of 0.25%, as was previously the case. The revised norms were effective prospectively but the provisions held by banks could not be reversed. In November 2009, the Reserve Bank of India increased the provisioning rate on standard assets in the commercial real estate sector to 1.0%. |
| Sub-standard assets: | | A provision of 10% is required for all sub-standard assets. An additional provision of 10% is required for accounts that are ab initio unsecured. In April 2010, an exception was given to unsecured infrastructure loan accounts classified as sub-standard, which attract a provisioning of 15%. |
| | | |
| Doubtful assets: | | A 100% provision/write-off is required in respect of the unsecured portion of the doubtful asset. A 100% provision is required to be made for the secured portion of assets classified as doubtful for more than three years in a phased manner. |
| | | |
| Loss assets: | | The entire asset is required to be written off or provided for. |
| | | |
| Restructured loans: | | Until August 27, 2008, a provision equal to the difference between the present value of the future interest as per the original loan agreement and the present value of future interest on the basis of rescheduled terms at the time of restructuring, was required to be made. For loans restructured after August 27, 2008, a provision equal to the difference between the fair value of the loan before and after restructuring is required to be made. The fair value of the loan before restructuring is computed as the present value of cash flows representing the interest at the existing rate charged on the loan before restructuring and the principal. The fair value of the loan after restructuring is computed as the present value of cash flows representing the interest at the rate charged on the loan on restructuring and the principal. Both sets of cash flows are discounted by the bank’s Benchmark Prime Lending Rate as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. |
In its mid-term review of policy statement for fiscal 2009, the Reserve Bank of India has required banks to increase the total provisioning coverage ratio, including floating provisions, to 70% by September 30, 2010. In its clarification on the same, the Reserve Bank of India allowed the banks’ prudential/technical write-off to be added to both the gross non-performing assets and the provisions held in the calculation of provisioning coverage ratio. The Reserve Bank of India has permitted us to achieve the stipulated level of 70% provisioning coverage ratio in a phased manner by March 31, 2011. The Bank’s provisioning coverage ratio at March 31, 2010 computed as per the Reserve Bank of India guidelines mentioned above is 59.5%.
Our Policy
ICICI Bank provides for corporate non-performing assets in line with the Reserve Bank of India guidelines. ICICI Bank provides for retail non-performing assets on a bucketing basis based on days past due, subject to minimum provision requirements set by the Reserve Bank of India. Loss assets and the unsecured portion of doubtful assets are fully provided for or written off. We hold specific provisions against non-performing loans and general provision against performing loans.
For restructured loans, provisions are made in accordance with the guidelines issued by the Reserve Bank of India, which require that the difference between the fair value of the loan before and after restructuring be provided at the time of restructuring. The fair value of the loan before restructuring is computed as the present value of cash flows representing the interest at the existing rate charged on the loan before restructuring and the principal. The fair value of the loan after restructuring is computed as the present value of cash flows representing the interest at the rate charged on the loan on restructuring and the principal. Both sets of cash flows are to be discounted by the Bank’s Benchmark Prime Lending Rate as on the date of restructuring plus the appropri ate term premium and credit risk premium for the borrower category on the date of restructuring. For loans restructured prior to August 27, 2008, a provision equal to the difference between the present value of the future interest as per the original loan agreement and the present value of future interest on the basis of rescheduled terms at the time of restructuring, was required to be made.
Impact of Economic Environment on Commercial and Consumer Loan Borrowers
In the late 1990s, increased domestic competition due to the opening up of the Indian economy, high levels of debt relative to equity and a downturn in the commodities markets globally led to stress on the operating performance of Indian businesses, impairment of a significant amount of assets in the financial system and approval of restructuring programs for a large number of companies. This led to an increase in the level of restructured and non-performing loans in the Indian financial system, including us, from fiscal 2001 to fiscal 2004. While restructured and non-performing loans subsequently declined, the deterioration in the global economic environment during fiscal 2009, in particular following the bankruptcy of Lehman Brothers in September 2008, adversely impacted the operations of several Indian companies. Indian businesses wer e impacted by the lack of access to financing/ refinancing from global debt capital markets, losses on existing inventories due to the sharp decline in commodity prices, reduction in demand for and prices of output and reduction in cash accruals and profitability. This led to additional restructuring of loans in the Indian banking system, including ours.
From fiscal 2002, we rapidly grew our consumer loans and credit card receivables portfolio based on the untapped potential in residential mortgages and other retail credit products in the Indian market. These included credit cards and unsecured personal loans. The Indian retail credit market expanded rapidly from fiscal 2002 to fiscal 2007 driven by growth in household incomes, decline in interest rates and increased availability of retail credit. Since fiscal 2007, the retail credit market has slowed down significantly following increases in systemic interest rates and home prices, which reduced affordability for borrowers. During fiscal 2008 and fiscal 2009, we experienced an increase in non-performing loans in our consumer loans and credit card receivables portfolio. The primary reasons for this increase was the seasoning of the overa ll portfolio and the increase in defaults on the unsecured personal loans and credit card receivables due to challenges in collections and deterioration in the macroeconomic environment. During fiscal 2010, although the addition to non-performing loans in consumer loans and credit card receivables continued, we experienced a decrease in the level of additions to non-performing loans in our consumer loans and credit card receivables portfolio compared to fiscal 2009.
See also “Risk Factors” and “Business — Strategy”.
Restructured Assets
The following table sets forth, at the dates indicated, our gross restructured rupee and foreign currency loan portfolio by business category.
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Consumer loans & credit card receivables | | Rs. | – | | | Rs. | – | | | Rs. | – | | | Rs. | 1,933 | | | Rs. | 3,704 | | | US$ | 83 | |
Rupee | | | – | | | | – | | | | – | | | | 1,933 | | | | 3,704 | | | | 83 | |
Foreign currency | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
Commercial, financial, agricultural and others (1) | | | 55,463 | | | | 50,407 | | | | 48,411 | | | | 59,435 | | | | 58,958 | | | | 1,313 | |
Rupee | | | 49,582 | | | | 45,965 | | | | 45,535 | | | | 53,713 | | | | 38,824 | | | | 865 | |
Foreign currency | | | 5,881 | | | | 4,442 | | | | 2,876 | | | | 5,722 | | | | 20,134 | | | | 448 | |
Total restructured loans | | | 55,463 | | | | 50,407 | | | | 48,411 | | | | 61,368 | | | | 62,662 | | | | 1,396 | |
Rupee | | | 49,582 | | | | 45,965 | | | | 45,535 | | | | 55,646 | | | | 42,528 | | | | 948 | |
Foreign currency | | | 5,881 | | | | 4,442 | | | | 2,876 | | | | 5,722 | | | | 20,134 | | | | 448 | |
Gross restructured loans(2) | | | 55,463 | | | | 50,407 | | | | 48,411 | | | | 61,368 | | | | 62,662 | | | | 1,396 | |
Provision for loan losses | | | (2,305 | ) | | | (1,581 | ) | | | (1,572 | ) | | | (1,736 | ) | | | (2,758 | ) | | | (62 | ) |
Net restructured loans | | Rs. | 53,158 | | | Rs. | 48,826 | | | Rs. | 46,839 | | | Rs. | 59,632 | | | Rs. | 59,904 | | | US$ | 1,334 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Gross customer assets (2) | | Rs. | 1,638,525 | | | Rs. | 2,234,339 | | | Rs. | 2,687,999 | | | Rs. | 2,892,808 | | | Rs. | 2,601,135 | | | US$ | 57,932 | |
| Net customer assets . | | Rs. | 1,622,675 | | | Rs. | 2,209,078 | | | Rs. | 2,642,697 | | | Rs. | 2,836,439 | | | Rs. | 2,536,941 | | | US$ | 56,502 | |
| Gross restructured loans as a percentage of gross customer assets | | | 3.4 | % | | | 2.3 | % | | | 1.8 | % | | | 2.1 | % | | | 2.4 | % | | | | |
| Net restructured loans as a percentage of net customer assets | | | 3.3 | % | | | 2.2 | % | | | 1.8 | % | | | 2.1 | % | | | 2.4 | % | | | | |
| (1) | Includes working capital finance. |
| (2) | Includes loans of ICICI Bank and its subsidiaries and credit substitutes of ICICI Bank, net of write-offs. |
The following table sets forth, at the dates indicated, gross restructured loans by borrowers’ industry or economic activity and as a percentage of total gross restructured loans.
| | | | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Power | | | 1,703 | | | | 3.1 | | | | – | | | | – | | | | 14,971 | | | | 30.9 | | | | 16,059 | | | | 26.2 | | | Rs. | 16,993 | | | US$ | 378 | | | | 27.1 | % |
| Road, port, telecom, urban development & other infrastructure | | | 18,733 | | | | 33.8 | | | | 17,790 | | | | 35.3 | | | | 8,117 | | | | 16.8 | | | | 10,438 | | | | 17.0 | | | | 8,631 | | | | 192 | | | | 13.8 | |
| Services-non finance | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 11,778 | | | | 262 | | | | 18.9 | |
Textiles | | | 344 | | | | 0.6 | | | | 86 | | | | 0.1 | | | | 71 | | | | 0.1 | | | | 993 | | | | 1.6 | | | | 3,702 | | | | 82 | | | | 5.9 | |
| Iron/steel & products | | | 4,834 | | | | 8.7 | | | | 4,922 | | | | 9.8 | | | | – | | | | – | | | | – | | | | – | | | | 2,788 | | | | 62 | | | | 4.4 | |
| Automobile (including trucks) | | | 391 | | | | 0.7 | | | | 151 | | | | 0.3 | | | | 106 | | | | 0.2 | | | | 2,955 | | | | 4.8 | | | | 2,785 | | | | 62 | | | | 4.4 | |
| Food & beverages | | | 220 | | | | 0.4 | | | | – | | | | – | | | | 120 | | | | 0.3 | | | | 456 | | | | 0.7 | | | | 2,779 | | | | 62 | | | | 4.4 | |
| Chemicals & fertilizers | | | 2,345 | | | | 4.2 | | | | 985 | | | | 2.0 | | | | 536 | | | | 1.1 | | | | 133 | | | | 0.2 | | | | 2,023 | | | | 45 | | | | 3.2 | |
| Electronics & engineering | | | 565 | | | | 1.0 | | | | – | | | | – | | | | 1,295 | | | | 2.7 | | | | 1,026 | | | | 1.7 | | | | 1,003 | | | | 22 | | | | 1.6 | |
Cement | | | 1,406 | | | | 2.5 | | | | 1,065 | | | | 2.0 | | | | 401 | | | | 0.8 | | | | 297 | | | | 0.5 | | | | 483 | | | | 11 | | | | 0.8 | |
| Paper & paper products | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 285 | | | | 6 | | | | 0.5 | |
| Manufacturing products (excluding metals) | | | 1,393 | | | | 2.5 | | | | 235 | | | | 0.5 | | | | – | | | | – | | | | – | | | | – | | | | 19 | | | | – | | | | – | |
Shipping | | | 798 | | | | 1.4 | | | | 839 | | | | 1.7 | | | | – | | | | – | | | | 15 | | | | – | | | | 16 | | | | – | | | | – | |
| Crude petroleum/ refining & petrochemicals | | | 19,169 | | | | 34.6 | | | | 21,004 | | | | 41.7 | | | | 22,542 | | | | 46.6 | | | | 23,961 | | | | 39.0 | | | | – | | | | – | | | | – | |
| Metal & products (excluding iron & steel) | | | 3,528 | | | | 6.4 | | | | 3,296 | | | | 6.5 | | | | – | | | | – | | | | – | | | | – | | | | 293 | | | | 7 | | | | 0.5 | |
| Services-finance | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 913 | | | | 1.5 | | | | 312 | | | | 7 | | | | 0.5 | |
Retail finance | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,933 | | | | 3.1 | | | | 3,704 | | | | 83 | | | | 5.9 | |
Others(1) | | | 34 | | | | 0.1 | | | | 34 | | | | 0.1 | | | | 251 | | | | 0.5 | | | | 2,189 | | | | 3.7 | | | | 5,067 | | | | 113 | | | | 8.1 | |
| Gross restructured loans | | | 55,463 | | | | 100.0 | | | | 50,407 | | | | 100.0 | | | | 48,411 | | | | 100.0 | | | | 61,368 | | | | 100.0 | | | | 62,661 | | | | 1,394 | | | | 100.0 | |
| Aggregate provision for loan losses | | | (2,305 | ) | | | | | | | (1,581 | ) | | | | | | | (1,572 | ) | | | | | | | (1,736 | ) | | | | | | | (2,758 | ) | | | (62 | ) | | | | |
| Net restructured loans | | Rs. | 53,158 | | | | | | | Rs. | 48,826 | | | | | | | Rs. | 46,839 | | | | | | | Rs. | 59,632 | | | | | | | Rs. | 59,903 | | | US$ | 1,332 | | | | | |
| (1) | Others primarily include construction, real estate and manufacturing products excluding metal. |
Gross restructured standard loans increased from Rs. 61.4 billion at year-end fiscal 2009 to Rs. 62.7 billion at year-end fiscal 2010. The increase in gross restructured loans includes the restructuring of loans aggregated Rs. 37.8
billion during fiscal 2010 and Rs. 11.1 billion during fiscal 2009, for certain borrowers experiencing stress in the services non-finance and textiles industries. Upon restructuring, the Bank monitors the payment performance for minimum period of 12 months from the first due date of repayment of principal and/or interest as per restructuring terms. Upon satisfactory performance, the restructured account is upgraded and removed from this category. We upgraded certain corporate borrower accounts in the oil and petrochemical sector, which aggregated to Rs. 33.5 billion during fiscal 2010, based on payment performance. There were no such upgrades in fiscal 2009. Our net restructured standard loans were Rs. 59.9 billion at year-end fiscal 2010 compared to Rs. 59.6 billion at year-end fiscal 2009. See also “Risk Factors — The l evel of restructured loans in our portfolio may increase and the failure of our restructured loans to perform as expected could affect our business”.
Non-Performing Assets
The following table sets forth, at the dates indicated, our gross non-performing rupee and foreign currency customer asset portfolio by business category.
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Consumer loans & credit card receivables(1) | | Rs. | 13,836 | | | Rs. | 30,000 | | | Rs. | 54,954 | | | Rs. | 72,201 | | | Rs. | 69,462 | | | US$ | 1,547 | |
Rupee | | | 13,828 | | | | 29,991 | | | | 54,948 | | | | 72,105 | | | | 69,111 | | | | 1,539 | |
Foreign currency | | | 8 | | | | 9 | | | | 6 | | | | 96 | | | | 351 | | | | 8 | |
Commercial, financial, agricultural and others(2) | | | 9,187 | | | | 12,200 | | | | 22,483 | | | | 27,188 | | | | 35,923 | | | | 800 | |
Rupee | | | 7,178 | | | | 11,074 | | | | 21,119 | | | | 23,892 | | | | 25,337 | | | | 564 | |
Foreign currency | | | 2,009 | | | | 1,126 | | | | 1,364 | | | | 3,296 | | | | 10,586 | | | | 236 | |
| Leasing and related activities | | | 63 | | | | 357 | | | | 526 | | | | 532 | | | | 436 | | | | 10 | |
Rupee | | | 63 | | | | 357 | | | | 526 | | | | 532 | | | | 436 | | | | 10 | |
Foreign currency | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Total non-performing assets | | | 23,086 | | | | 42,557 | | | | 77,963 | | | | 99,921 | | | | 105,821 | | | | 2,357 | |
Rupee | | | 21,069 | | | | 41,422 | | | | 76,593 | | | | 96,529 | | | | 94,884 | | | | 2,113 | |
Foreign currency | | | 2,017 | | | | 1,135 | | | | 1,370 | | | | 3,392 | | | | 10,937 | | | | 244 | |
Gross non-performing assets(3)(4) | | | 23,086 | | | | 42,557 | | | | 77,963 | | | | 99,921 | | | | 105,821 | | | | 2,357 | |
Provision for loan losses | | | (12,280 | ) | | | (22,249 | ) | | | (42,031 | ) | | | (52,580 | ) | | | (59,083 | ) | | | (1,316 | ) |
| Net non-performing assets | | Rs. | | | | Rs. | 20,308 | | | Rs. | 35,932 | | | Rs. | 47,341 | | | Rs. | 46,738 | | | US$ | 1,041 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Gross customer assets(3) | | Rs. | 1,638,525 | | | Rs. | 2,234,339 | | | Rs. | 2,687,999 | | | Rs. | 2,892,808 | | | Rs. | 2,601,135 | | | US$ | 57,932 | |
| Net customer assets . | | Rs. | 1,622,674 | | | Rs. | 2,209,078 | | | Rs. | 2,642,697 | | | Rs. | 2,836,439 | | | Rs. | 2,536,941 | | | US$ | 56,502 | |
| Gross non-performing assets as a percentage of gross customer assets | | | 1.4 | % | | | 1.9 | % | | | 2.9 | % | | | 3.5 | % | | | 4.1 | % | | | | |
| Net non-performing assets as a percentage of net customer assets | | | 0.7 | % | | | 0.9 | % | | | 1.4 | % | | | 1.7 | % | | | 1.8 | % | | | | |
| (1) | Includes home loans, automobile loans, commercial business loans, two-wheeler loans, personal loans, credit card receivables and farm equipment loans. |
| (2) | Includes working capital finance. |
| (3) | Includes loans of ICICI Bank and its subsidiaries and credit substitutes of ICICI Bank, net of write-offs. |
| (4) | Includes loans identified as impaired in line with the guidelines issued by regulators of the respective subsidiaries. |
The following table sets forth, at the dates indicated, gross (net of write-offs) non-performing assets by borrowers’ industry or economic activity and as a percentage of total non-performing assets.
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Chemicals & fertilizers | | Rs. | 1,654 | | | | 7.2 | % | | Rs. | 1,642 | | | | 3.9 | % | | Rs. | 1,935 | | | | 2.5 | % | | Rs. | 1,958 | | | | 2.0 | % | | Rs. | 2,472 | | | US$ | 55 | | | | 2.3 | % |
Services-finance | | | 126 | | | | 0.5 | | | | 722 | | | | 1.7 | | | | 1,293 | | | | 1.7 | | | | 1,291 | | | | 1.3 | | | | 3,672 | | | | 82 | | | | 3.5 | |
| Wholesale/retail trade | | | 45 | | | | 0.2 | | | | 45 | | | | 0.1 | | | | 83 | | | | 0.1 | | | | 1,470 | | | | 1.5 | | | | 2,172 | | | | 48 | | | | 2.1 | |
Textiles | | | 1,675 | | | | 7.3 | | | | 834 | | | | 2.0 | | | | 1,097 | | | | 1.4 | | | | 1,767 | | | | 1.8 | | | | 1,904 | | | | 42 | | | | 1.8 | |
Food & beverages | | | 670 | | | | 2.9 | | | | 1,247 | | | | 2.9 | | | | 608 | | | | 0.8 | | | | 1,033 | | | | 1.0 | | | | 4,046 | | | | 90 | | | | 3.8 | |
| Iron/steel & products | | | 209.5 | | | | 0.9 | | | | 772 | | | | 1.8 | | | | 1,214 | | | | 1.6 | | | | 359 | | | | 0.4 | | | | 1,600 | | | | 36 | | | | 1.5 | |
| Electronics & engineering | | | 550 | | | | 2.4 | | | | 626 | | | | 1.5 | | | | 563 | | | | 0.7 | | | | 793 | | | | 0.8 | | | | 700 | | | | 16 | | | | 0.7 | |
| Metal & products (excluding iron & steel) | | | 11 | | | | 0.1 | | | | 11 | | | | – | | | | 116 | | | | 0.1 | | | | 203 | | | | 0.2 | | | | 908 | | | | 20 | | | | 0.9 | |
| Automobiles (including trucks) | | | 32 | | | | 0.1 | | | | 61 | | | | 0.1 | | | | 76 | | | | 0.1 | | | | 323 | | | | 0.3 | | | | 2,274 | | | | 51 | | | | 2.1 | |
Services — non-finance | | | 976 | | | | 4.2 | | | | 632 | | | | 1.5 | | | | 413 | | | | 0.5 | | | | 347 | | | | 0.3 | | | | 378 | | | | 8 | | | | 0.4 | |
Power | | | – | | | | – | | | | – | | | | – | | | | 143 | | | | 0.2 | | | | 147 | | | | 0.1 | | | | 141 | | | | 3 | | | | 0.1 | |
| Paper & paper products | | | 74 | | | | 0.3 | | | | 66 | | | | 0.2 | | | | 39 | | | | – | | | | 44 | | | | – | | | | 33 | | | | 1 | | | | – | |
Shipping | | | 13 | | | | 0.1 | | | | 13 | | | | – | | | | 1,006 | | | | 1.3 | | | | 1,022 | | | | 1.0 | | | | 13 | | | | – | | | | – | |
Cement | | | – | | | | – | | | | – | | | | – | | | | 25 | | | | – | | | | 15 | | | | – | | | | 9 | | | | – | | | | – | |
| Road, port, telecom, urban development & other infrastructure | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 567 | | | | 13 | | | | 0.5 | |
Retail finance(1) | | | 14,423 | | | | 62.5 | | | | 31,316 | | | | 73.6 | | | | 55,824 | | | | 71.6 | | | | 72,301 | | | | 72.4 | | | | 66,984 | | | | 1,492 | | | | 63.3 | |
Others(2) | | | 2,626 | | | | 11.3 | | | | 4,570 | | | | 10.7 | | | | 13,528 | | | | 17.4 | | | | 16,848 | | | | 16.9 | | | | 17,948 | | | | 400 | | | | 17.0 | |
Gross non-performing assets | | | 23,086 | | | | 100.0 | % | | | 42,557 | | | | 100.0 | % | | | 77,963 | | | | 100.0 | % | | | 99,921 | | | | 100.0 | % | | | 105,821 | | | | 2,357 | | | | 100.0 | % |
| Aggregate provision for loan losses | | | (12,280.0 | ) | | | | | | | (22,249 | ) | | | | | | | (42,031 | ) | | | | | | | (52,580 | ) | | | | | | | (59,083 | ) | | | (1,316 | ) | | | | |
| Net non-performing assets | | Rs. | 10,806 | | | | | | | Rs. | 20,308 | | | | | | | Rs. | 35,932 | | | | | | | Rs. | 47,341 | | | | | | | Rs. | 46,738 | | | US$ | 1,041 | | | | | |
| (1) | Includes home loans, automobile loans, commercial business loans, two-wheeler loans, personal loans, credit card receivables, retail overdraft loans, dealer funding and developer financing. |
| (2) | Other industries primarily include construction, manufacturing products excluding metal, crude petroleum, drugs and pharmaceuticals, gems & jewelry, fast-moving consumer goods, mining, and other agriculture and allied activities. |
Gross non-performing assets increased 5.9% from Rs. 99.9 billion at year-end fiscal 2009 to Rs. 105.8 billion at year-end fiscal 2010, net of write-off of unsecured and small value secured retail loans aggregating Rs. 27.5 billion during fiscal 2010. These loans were fully provided for at the date of write-off. The coverage ratio (i.e. total provisions as a percentage of the gross non-performing assets) was 56.4% at year-end fiscal 2010 compared to 53.2% at year-end fiscal 2009. In fiscal 2010, our non-performing assets in foreign currency increased mainly due to certain borrowers from the food and beverages, auto and services — finance industries experiencing financial difficulties or being extended concessionary modifications in the repayment of loans in our overseas banking subsidiaries. Retail finance non-performing loans const ituted 63.3% of gross non-performing assets at year-end fiscal 2010 compared to 72.4% of gross non-performing assets at year-end fiscal 2009. We experienced an increase in the non-performing loans in our retail portfolio in fiscal 2009 and fiscal 2010, due to the seasoning of the portfolio and higher level of defaults in unsecured personal loans and credit card receivables due to challenges in collections and impact of the adverse macroeconomic environment in fiscal 2009.
Net non-performing assets constituted 1.8% of net customer assets at year-end fiscal 2010, compared to 1.7% at year-end fiscal 2009. The net non-performing loans in the retail portfolio as a percentage of net retail loans increased from 2.6% at year-end fiscal 2009 to 2.8% at year-end fiscal 2010, primarily due to a decline in net retail loans.
The ten largest net non-performing assets were approximately 8.5% of total net non-performing assets at year-end fiscal 2010.
Non-Performing Asset Strategy
In respect of unviable non-performing assets, where companies have lost financial viability, we adopt an aggressive approach aimed at out-of-court settlements, enforcing collateral and driving consolidation. Our focus is on time value of recovery and a pragmatic approach towards settlements. The strong collateral against our loan assets is the critical factor towards the success of our recovery efforts. In addition, we continually focus on proactive management of accounts under supervision. Our strategy constitutes a proactive approach towards identification, aimed at early stage solutions to incipient problems.
Our strategy for resolution of non-performing assets includes sales of financial assets to asset reconstruction companies in exchange for receipt of securities in the form of pass-through instruments issued by asset reconstruction companies, wherein payments to holders of the securities are based on the actual realized cash flows from the transferred assets. Under Indian GAAP, these instruments are valued at the net asset values as declared by the asset reconstruction companies in accordance with the Reserve Bank of India guidelines. Under US GAAP, the assets we sell in exchange for security receipts are not accounted for as sales in terms of FASB ASC Topic 860, “Transfers and Servicing” either because we retain beneficial interests in the transferred assets in the form of security receipts, or due to consolidation of certain funds or trusts, which are variable interest entities within the definition provided in ASC Subtopic 810–10, to which these loans have been transferred. These assets are considered under US GAAP as restructured assets. See “Supervision and Regulation — Reserve Bank of India Regulations — Regulations relating to Sale of Assets to Asset Reconstruction Companies”. We sold Rs. 7.6 billion including mortgage loans of Rs. 7.5 billion of our net non-performing assets during fiscal 2010 and Rs. 6.8 billion of our net non-performing assets including mortgage loans of Rs. 5.6 billion during fiscal 2009 to asset reconstruction companies registered with the Reserve Bank of India. At, year-end fiscal 2010, we had an outstanding net investment of Rs. 33.9 billion in security receipts issued by asset reconstruction companies in relation to sales of our non-performing assets.
We monitor migration of the credit ratings of our borrowers to enable us to take proactive remedial measures to prevent loans from becoming non-performing. We review the industry outlook and analyze the impact of changes in the regulatory and fiscal environment. Our periodic review system helps us to monitor the health of accounts and to take prompt remedial measures.
A substantial portion of our loans to retail customers is also secured by a first and exclusive lien on the assets financed (predominantly property and vehicles). We are entitled in terms of our security documents to repossess security comprising assets such as plant, equipment and vehicles without reference to the courts or tribunals unless a client makes a reference to such courts or tribunals to stay our actions. In respect of our retail loans, we adopt a standardized collection process to ensure prompt action for follow-up on overdues and recovery of defaulted amounts.
Our loans, primarily corporate loans and mortgages, have historically been sufficiently over-collateralized so that once collateral is realized we recover a substantial amount of our loan outstanding. However, recoveries may be subject to delays of up to several years, due to the long legal process in India. This leads to delay in enforcement and realization of collateral. We maintain the non-performing assets on our books for as long as the enforcement process is ongoing. Accordingly, a non-performing asset may continue for a long time in our portfolio until the settlement of loan account or realization of collateral, which may be longer than that for US banks under similar circumstances.
See also “— Loan portfolio — Collateral — Completion, Perfection and Enforcement”.
Provision for Loan Losses
The following table sets forth, at the dates indicated, movement in our provisions for loan losses for non-performing customer assets.
| | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions) | |
| Aggregate provision for loan losses at the beginning of the year | | Rs. | 14,606 | | | Rs. | 12,009 | | | Rs. | 21,745 | | | Rs. | 40,574 | | | Rs. | 52,580 | | | US$ | 1,171 | |
| Add: Provisions for loan losses | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer loans & credit card receivables(1) | | | 1,938 | (3) | | | 8,821 | | | | 14,937 | | | | 27,764 | | | | 29,147 | | | | 649 | |
| Commercial, financial, agricultural and others(2) | | | 1,453 | | | | 2,463 | | | | 4,210 | | | | 4,376 | | | | 5,538 | | | | 123 | |
Leasing & related activities | | | (18 | ) | | | 48 | | | | 95 | | | | 54 | | | | (90 | ) | | | (1 | ) |
| Total provisions for loan losses, net of releases of provisions | | Rs. | 17,979 | | | Rs. | 23,341 | | | Rs. | 40,987 | | | Rs. | 72,768 | | | Rs. | 87,175 | | | US$ | 1,942 | |
Loans charged-off | | | (5,970 | ) | | | (1,596 | ) | | | (413 | ) | | | (20,188 | ) | | | (28,092 | ) | | | (626 | ) |
| Aggregate provision for loan losses at the end of the year | | Rs. | 12,009 | | | Rs. | 21,745 | | | Rs. | 40,574 | | | Rs. | 52,580 | | | Rs. | 59,083 | | | US$ | 1,316 | |
| (1) | Includes home loans, automobile loans, commercial business loans, two-wheeler loans, personal loans, credit cards and farm equipment loans. |
| (2) | Includes project finance, working capital finance, corporate finance and receivables financing, excluding leasing and related activities. |
| (3) | Provision for loan losses for consumer loans and credit card receivables in fiscal 2006 were net of write-back of provisions of Rs. 1.7 billion which were in excess of regulatory requirements. |
Provision for loan losses for consumer loans and credit card receivables increased from Rs. 27.8 billion in fiscal 2009 to Rs. 29.1 billion in fiscal 2010. The Indian retail credit market expanded rapidly from fiscal 2002 to fiscal 2007, driven by growth in household incomes, decline in interest rates and the increased availability of retail credit. Since fiscal 2007, the retail credit market has slowed down significantly following increases in systemic interest rates and home prices, which reduced affordability for borrowers. During fiscal 2008 and fiscal 2009, we experienced an increase in non-performing loans in our consumer loans and credit card receivables portfolio. The primary reasons for this increase are the seasoning of the portfolio and higher level of defaults in unsecured personal loans and credit card receivables due to challenges in collections and adverse macro-economic environment in fiscal 2009. Provision for loan losses for commercial, financial, agricultural and others loans increased from Rs. 4.4 billion at year-end fiscal 2009 to Rs. 5.5 billion at year-end fiscal 2010, primarily due to provision requirements for restructured loans.
The following table sets forth, certain information relating to our subsidiaries, associates and joint ventures at March 31, 2010.
| | | | | | | | | | | | | | | | |
| | | | | | | (in millions, except percentages) | |
| ICICI Venture Funds Management Company Limited | | January 1988 | | Private Equity/venture capital fund management | | | 100.00 | % | | Rs. | 1,965 | | | Rs. | 958 | | | Rs. | 3,726 | |
| ICICI Securities Primary Dealership Limited | | February 1993 | | Securities investment, trading and underwriting | | | 100.00 | % | | | 3,212 | | | | 5,621 | | | | 39,139 | |
| ICICI Prudential Asset Management Company Limited(4) | | June 1993 | | Asset management company for ICICI Prudential Mutual Fund | | | 51.00 | % | | | 4,674 | | | | 1,051 | | | | 2,078 | |
| ICICI Prudential Trust Limited(4) | | June 1993 | | Trustee company for ICICI Prudential Mutual Fund | | | 50.80 | % | | | 6 | | | | 10 | | | | 12 | |
ICICI Securities Limited | | March 1995 | | Securities broking & merchant banking | | | 100.00 | % | | | 7,560 | | | | 2,802 | | | | 8,682 | |
| TCW/ICICI Investment Partners LLC(5) | | April 1995 | | Asset management | | | 50.00 | % | | | — | | | | 22 | | | | 22 | |
| | | | | | | | | | | | | | | | |
| | | | | | | (in millions, except percentages) | |
ICICI International Limited | | January 1996 | | Asset management | | | 100.00 | % | | | 48 | | | | 68 | | | | 76 | |
ICICI Bank Eurasia LLC | | May 1998 | | Banking | | | 100.00 | % | | | 1,673 | | | | 3,100 | | | | 18,460 | |
| ICICI Trusteeship Services Limited | | April 1999 | | Trusteeship services | | | 100.00 | % | | | 1 | | | | 3 | | | | 3 | |
| ICICI Home Finance Company Limited | | May 1999 | | Housing finance | | | 100.00 | % | | | 15,900 | | | | 12,814 | | | | 134,039 | |
| ICICI Investment Management Company Limited | | March 2000 | | Asset management | | | 100.00 | % | | | 9 | | | | 114 | | | | 125. | |
ICICI Securities Holdings Inc . | | June 2000 | | Holding company | | | 100.00 | % | | | 61 | | | | 596 | | | | 646 | |
ICICI Securities Inc . | | June 2000 | | Securities brokering | | | 100.00 | % | | | 66 | | | | 13 | | | | 119 | |
| ICICI Prudential Life Insurance Company Limited(4) | | July 2000 | | Life insurance | | | 73.89 | % | | | 341,743 | | | | 12,817 | | | | 583,800 | |
| ICICI Lombard General Insurance Company Limited(4) | | October 2000 | | General insurance | | | 73.72 | % | | | 43,432 | | | | 17,924 | | | | 66,863 | |
ICICI Bank UK PLC | | February 2003 | | Banking | | | 100.00 | % | | | 17,190 | | | | 28,134 | | | | 333,107 | |
ICICI Bank Canada | | September 2003 | | Banking | | | 100.00 | % | | | 11,729 | | | | 42,450 | | | | 251,397 | |
| ICICI Wealth Management Inc(6) | | July 2006 | | Wealth management | | Not applicable | | | | — | | | Not applicable | | | Not applicable | |
| ICICI Prudential Pension Funds Management Company Limited(7) | | April 2009 | | Pension fund management | | | 100.00 | % | | | 5 | | | | 110 | | | | 113 | |
| (1) | Total income represents gross income from operations and other income. |
| (2) | Net worth represents share capital/unit capital, share application money and reserves and surplus. |
| (3) | Total assets represent fixed assets, advances, investments and gross current assets (including cash and bank balances). |
| (4) | The financial statements of these jointly controlled entities have been consolidated as per AS 21 on “Consolidated Financial Statements” consequent to the limited revision to AS 27 on “Financial Reporting of Interests in Joint Ventures”. |
| (5) | The entity has been consolidated as per the proportionate consolidation method as prescribed by AS 27 on “Financial Reporting of Interests in Joint Ventures”. |
| (6) | ICICI Wealth Management Inc. has been dissolved with effect from December 31, 2009. |
| (7) | ICICI Prudential Pension Funds Management Company Limited, a wholly owned subsidiary of ICICI Prudential Life Insurance Company Limited, was incorporated on April 22, 2009. |
The following table sets forth certain information on other significant entities whose results were included in the consolidated financial statements under Indian GAAP at March 31, 2010.
| | | | | | | | | | | | | | | | |
| | | | | | | (in millions, except percentages) | |
| ICICI West Bengal Infrastructure Development Corporation Limited | | December 1995 | | Infrastructure development consultancy | | | 75.99 | % | | Rs. | 32 | | | Rs. | 36 | | | Rs. | 56 | |
ICICI Kinfra Limited | | January 1996 | | Infrastructure development consultancy | | | 76.00 | % | | | 7 | | | | 14 | | | | 18 | |
Prize Petroleum Company Limited(4) | | October 1998 | | Oil exploration and production | | | 35.00 | % | | | 28 | | | | 311 | | | | 346 | |
ICICI Equity Fund | | March 2000 | | Unregistered venture capital fund | | | 100.00 | % | | | 225 | | | | 2,246 | | | | 2,358 | |
| ICICI Eco-net Internet & Technology Fund | | October 2000 | | Venture capital fund | | | 92.12 | % | | | 5 | | | | 160 | | | | 162 | |
| ICICI Emerging Sectors Fund | | March 2002 | | Venture capital fund | | | 99.31 | % | | | 37 | | | | 1,780 | | | | 1,784 | |
| ICICI Strategic Investments Fund | | February 2003 | | Unregistered venture capital fund | | | 100.00 | % | | | 114 | | | | 4,012 | | | | 4,013 | |
I-Ven Biotech Limited | | December 2003 | | Investment in research and development of biotechnology | | | 100.00 | % | | | 0.2 | | | | 349 | | | | 349 | |
| I-Process Services (India) Private Limited(4) | | April 2005 | | Services related to back end operations | | | 19.00 | % | | | 686 | | | | (35 | ) | | | 246 | |
| I-Solutions Providers (India) Private Limited(4) | | April 2005 | | Services related to sales and promotion activities | | | 19.00 | % | | | 2 | | | | 2 | | | | 135 | |
| ICICI Venture Value Fund | | June 2005 | | Unregistered venture capital fund | | | 54.35 | % | | | 82 | | | | 0.04 | | | | 0.30 | |
| Loyalty Solutions & Research Limited | | February 2006 | | Customer relationship management, data mining and analytics and marketing services | | | 82.74 | % | | | 540 | | | | 343 | | | | 1,317 | |
| Financial Information Network and Operations Limited(4) | | June 2006 | | Support services for financial inclusion | | | 28.28 | % | | | 1,075 | | | | 914 | | | | 1,810 | |
| NIIT Institute of Finance, Banking and Insurance Training Limited(4) | | June 2006 | | Education and training in banking and finance | | | 19.00 | % | | | 128 | | | | (58 | ) | | | 89 | |
Rainbow Fund(4) | | March 2008 | | Unregistered venture capital fund | | | 23.91 | % | | | 4 | | | | 24 | | | | 24 | |
| ICICI Merchant Services Private Limited(4) | | July 2009 | | Merchant servicing | | | 19.00 | % | | | 190 | | | | 1,737 | | | | 3,981 | |
| (1) | Total income represents gross income from operations and other income. |
| (2) | Net worth represents share capital/unit capital (in case of venture capital funds) and reserves and surplus. |
| (3) | Total assets represent fixed assets, advances, and investments and gross current assets (including cash and bank balances). |
| (4) | These entities have been accounted as per the equity method as prescribed by AS 23 on ‘accounting for investments in associates in consolidated financial statements’. |
| (5) | During fiscal 2010, Crossdomain Solutions Private Limited and Contests2win.com India Private Limited ceased to be associates and accordingly, these entities have not been accounted as per the equity method as prescribed by AS 23. |
| (6) | During fiscal 2010, Transafe Services Limited ceased to be a consolidating entity and accordingly, has not been consolidated. |
At year-end fiscal 2010, all of our subsidiaries and joint ventures were incorporated in India, except the following seven companies:
| | · | ICICI Securities Holdings Inc., incorporated in the United States; |
| | · | ICICI Securities Inc., incorporated in the United States; |
| | · | ICICI Bank UK PLC (formerly ICICI Bank UK Limited), incorporated in the United Kingdom; |
| | · | ICICI Bank Canada, incorporated in Canada; |
| | · | ICICI Bank Eurasia Limited Liability Company, incorporated in Russia; |
| | · | ICICI International Limited, incorporated in Mauritius; and |
| | · | TCW/ICICI Investment Partners Limited Liability Company, incorporated in Mauritius. |
ICICI Securities Holdings Inc. is a wholly owned subsidiary of ICICI Securities Limited and ICICI Securities Inc. is a wholly owned subsidiary of ICICI Securities Holdings Inc. ICICI Securities Holdings Inc. and ICICI Securities Inc. are consolidated in ICICI Securities’ Limited financial statements. ICICI International Limited holds a 50.0% stake in TCW/ICICI Investment Partners.
We continue to endeavor to be at the forefront of usage of technology in the financial services sector. We strive to use information technology as a strategic tool for our business operations, to gain a competitive advantage and to improve our overall productivity and efficiency. Our technology initiatives are aimed at enhancing value, offering customers enhanced convenience and improved service while optimizing costs. Our focus on technology emphasizes:
| | · | Electronic and online channels to: |
| | · | offer easy access to our products and services; |
| | · | reduce distribution and transaction costs; |
| | · | reach new target customers; |
| | · | enhance existing customer relationships; and |
| | · | The application of information systems to: |
| | · | manage our large scale of operations efficiently; |
| | · | effectively market to our target customers; |
| | · | monitor and control risks; |
| | · | identify, assess and capitalize on market opportunities; and |
| | · | assist in offering improved products to customers. |
We also seek to leverage our domestic technology capabilities in our international operations.
Technology Organization
We have dedicated technology groups for our products and services for retail, corporate, international and rural customers. Our Technology Management Group determines the enterprise-wide technology initiatives. Our Technology Infrastructure Group provides the technology infrastructure platform across all business technology groups to gain synergies in operation. The business technology groups review the individual requirements of the various business groups and of the Information Security Group.
Banking Application Software
We use banking applications like a core banking system, loan management system, and credit card management system, all of which are flexible and scalable and allow us to serve our growing customer base. A central stand-in server ensures services all days of the week, throughout the year, to the various delivery channels. While we currently have a data center in Mumbai for centralized data base management, data storage and retrieval, a new data center is slated to become operational in the next quarter.
Electronic and Online Channels
We use a combination of physical and electronic delivery channels to maximize customer choice and convenience, which has helped to differentiate our products in the marketplace. Our branch banking software is flexible and scalable and integrates well with our electronic delivery channels. Our ATMs are sourced from some of the world’s leading vendors. At year-end fiscal 2010, we had 5,219 ATMs across India. We offer a number of online banking services to our customers for both corporate and retail products and services. Our call centers across locations at Thane and Hyderabad are operational around the clock and are well equipped with multiple systems such as an interactive voice response system, automatic call distribution, computer telephony integration and voice recorders. We seek to use the latest technology in these call center s to provide an integrated customer database that allows the call agents to get a complete overview of the customer’s relationship with us. The database enables customer segmentation and assists the call agent in identifying cross-selling opportunities.
We offer mobile banking services in India in line with our strategy to offer multi-channel access to our customers. This service has now been extended to all mobile telephone service providers across India and non-resident Indian customers in certain other countries where we have a presence.
High-Speed Electronic Communications Infrastructure
We have a nationwide data communications network linking all our channels and offices. The network is designed to provide for reach and redundancy, which are imperative in as vast a country as India. The communications network is monitored 24 hours a day using advanced network management software.
Operations Relating to Commercial Banking for Corporate Customers
Our corporate banking back office operations are centralized and we have a business process management solution to automate our activities in the areas of trade services and general banking operations. Through integration of the workflow system with the imaging and document management system, we have achieved substantial savings and practically eliminated the use of paper for these processes.
We have centralized the systems of the treasuries of all our international branches and subsidiaries. As a result, the processing of transactions as well as the applications used for deal entry are now centrally located and maintained out of India.
Customer Relationship Management
We have implemented a customer relationship management solution for the automation of customer handling in all key retail products. The solution helps in tracking and timely resolution of various customer queries and issues. The solution has been deployed at the telephone banking call centers as well as at a large number of branches.
Data Warehousing and Data Mining
We have a data warehouse for customer data aggregation. This data warehouse also provides a platform for data mining initiatives. We have implemented an enterprise application integration initiative across our retail and corporate products and services, to link various products, delivery and channel systems. This initiative follows from our multi-channel customer service strategy and seeks to deliver customer related information consistently across access points. It also aims to provide us with valuable information to compile a unified customer view and creates various opportunities associated with cross-selling other financial products.
Data Center and Disaster Recovery System
While our primary data center is located in Mumbai, a separate disaster recovery data center has been set up in another city and is connected to the main data center in Mumbai. The disaster recovery data center can host all critical banking applications in the event of a disaster at the primary site.
We have developed a business continuity plan, which would help facilitate continuity of critical businesses in the event of a disaster. These plans are tested periodically under live or simulated scenarios. These plans have been prepared in line with the guidelines issued by Reserve Bank of India and have been approved by our Board of Directors.
We face competition in all our principal areas of business from Indian and foreign commercial banks, housing finance companies, mutual funds and investment banks. We are the largest private sector bank in India and the second largest bank among all banks in the country, in terms of total assets. We seek to gain competitive advantage over our competitors by offering innovative products and services, using technology, building customer relationships and developing a team of highly motivated and skilled employees. We evaluate our competitive position separately in respect of our products and services for retail and corporate customers.
Commercial Banking Products and Services for Retail Customers
In the retail markets, competition is primarily from foreign and Indian commercial banks and housing finance companies. Foreign banks have product and delivery capabilities but are likely to focus on limited customer segments and geographical locations since they have a smaller branch network than Indian commercial banks. Foreign banks in aggregate had only 287 branches in India at December 31, 2009. Indian public sector banks have wide distribution networks but generally relatively less strong technology and marketing capabilities while private sector banks have a relatively smaller branch network but stronger technology capabilities. With the implementation of technology based core banking solutions, public sector banks have become more competitive in selling products and servicing to retail customers. In addition some specialized non- bank finance companies have increased market share in certain segments of retail banking products. We seek to compete in this market through a full product portfolio and effective distribution channels, which include branches, agents, robust credit processes and collection mechanisms, experienced professionals and superior technology.
Commercial banks attract the majority of retail bank deposits, historically the preferred retail savings product in India. We have sought to capitalize on our corporate relationships to gain individual customer accounts through payroll management products and will continue to pursue a multi-channel distribution strategy utilizing physical branches, ATMs, telephone banking call centers and the internet to reach customers. Further, following a strategy focused on customer profiles and product segmentation, we offer differentiated liability products to customers of various ages and income profiles. Mutual funds are another source of competition to us. Mutual funds offer tax advantages and have the capacity to earn competitive returns and hence present a competitive alternative to bank deposits.
Commercial Banking Products and Services for Corporate Customers
In products and services for corporate customers, we face strong competition primarily from public sector banks, foreign banks and other new private sector banks. Our principal competition in these products and services comes from public sector banks, which have built extensive branch networks that have enabled them to raise low-cost deposits and, as a result, price their loans and fee-based services very competitively. Their wide geographical reach facilitates the delivery of banking products to their corporate customers located in most parts of the country. We seek to compete based on our service and prompt turnaround times that we believe are significantly faster than public sector banks. We seek to compete with the large branch networks of the public sector banks through our multi-channel distribution approach and technology-driven d elivery capabilities.
Traditionally, foreign banks have been active in providing treasury-related products and services, trade finance, fee-based services and other short-term financing products to top tier Indian corporates. We compete with foreign
banks in cross-border trade finance based on our wider geographical reach relative to foreign banks and our customized trade financing solutions. We have established strong fee-based cash management services and leverage our balance sheet size, wider branch network, technology and our international presence to compete in treasury-related products and services.
Other new private sector banks also compete in the corporate banking market on the basis of efficiency, service delivery and technology. However, we believe that our size, capital base, strong corporate relationships, wider geographical reach and ability to use technology to provide innovative, value-added products and services provide us with a competitive edge.
In project finance, ICICI’s primary competitors were established long-term lending institutions. In recent years, Indian and foreign commercial banks have sought to expand their presence in this market. We believe that we have a competitive advantage due to our strong market reputation and expertise in risk evaluation and mitigation. We believe that our in-depth sector specific knowledge and capabilities in understanding risks and policy related issues as well as our advisory, structuring and syndication services have allowed it to gain credibility with project sponsors, overseas lenders and policy makers.
Commercial Banking Products and Services for International Customers
Our international strategy focused on India-linked opportunities in the initial stages. In our international operations, we face competition from Indian public sector banks with overseas operations, foreign banks with products and services targeted at non-resident Indians and Indian businesses and other service providers like remittance services. Foreign banks have became more competitive in providing financing to Indian businesses leveraging their strength of access to lower cost foreign currency funds. We are seeking to position ourselves as an Indian bank offering globally-benchmarked products and services with an extensive distribution network in India to gain competitive advantage. We seek to leverage our technology capabilities developed in our domestic businesses to offer convenience and efficient services to our international cus tomers. We also seek to leverage our strong relationships with Indian corporates in our international business.
Commercial Banking Products and Services for Agricultural and Rural Customers
In our commercial banking operations for agricultural and rural customers, we face competition from public sector banks that have large branch networks in rural India. Other private sector banks and non-banking financial companies also provide products and services in rural India. We also face competition from specialized players such as rural finance institutions and gold loan companies. We seek to compete in this business based on our product strategy and multiple channels.
Insurance and Asset Management
Our insurance and asset management joint ventures face competition from existing dominant public sector players as well as new private sector players. We believe that the key competitive strength of our insurance joint ventures is the combination of our experience in the Indian financial services industry with the global experience and skills of our joint venture partners. We believe that ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company and ICICI Prudential Asset Management Company have built strong product, distribution and risk management capabilities, achieving market leadership positions in their respective businesses. According to data published by the Insurance Regulatory and Development Authority of India, ICICI Prudential Life Insurance Company had a retail market share of about 9.3% in new busines s written (on retail weighted received premium basis) during fiscal 2010. ICICI Lombard General Insurance Company had a market share of about 9.5% in gross written premiums during fiscal 2010. See also “Business — Insurance”. ICICI Prudential Asset Management Company manages the ICICI Prudential Mutual Fund, which was among the top three mutual funds in India in terms of average funds under management in March 2010 with a market share of about 10.8%.
At year-end fiscal 2010, we had 74,056 employees, including sales executives and employees on fixed term contracts and interns, compared to 91,777 employees at year-end fiscal 2009 and 108,393 employees at year-end
fiscal 2008. Of these, 41,068 employees were employed by ICICI Bank in fiscal 2010, a decrease from 51,835 at year-end fiscal 2009. The reduction in the employee base is due to a decrease in the number of contractual employees, reduced staffing requirements in certain product lines and functions and our cost reduction and productivity improvement initiatives. Of our 74,056 employees at year-end fiscal 2010, approximately 29,091 were professionally qualified, holding degrees in management, accountancy, engineering, law, computer science, economics or banking. We expect an increase in the number of employees of ICICI Bank in view of the anticipated growth in our business.
We dedicate a significant amount of senior management time to ensuring that employees remain highly motivated and perceive the organization as a place where opportunities abound, innovation is fuelled, teamwork is valued and success is rewarded. Employee compensation is clearly tied to performance and we encourage the involvement of our employees in our overall performance and profitability of the Bank. A performance appraisal system has been implemented to assist management in career development and succession planning. Management believes that it has good relationships with its employees.
ICICI Bank has an employee stock option scheme to encourage and retain high-performing employees. Pursuant to the employee stock option scheme as amended by the Scheme of Amalgamation and further amended in September 2004, up to 5.0% of the aggregate of our issued equity shares at the time of grant of the stock options can be allocated under the employee stock option scheme. The stock options entitle eligible employees to apply for equity shares. The grant of stock options is approved by ICICI Bank’s Board of Directors on the recommendations of the Board Governance, Remuneration and Nomination Committee. The eligibility of each employee is determined based on an evaluation including the employee’s work performance, technical knowledge and leadership qualities. See also “Management — Compensation and Benefits to Di rectors and Officers — Employee Stock Option Scheme.”
ICICI Bank has training centers, where various training programs designed to meet the changing skill requirements of its employees are conducted. These training programs include orientation sessions for new employees and management development programs for mid-level and senior executives. The training centers regularly offer courses conducted by faculty, both national and international, drawn from industry, academia and ICICI Bank’s own organization. Training programs are also conducted for developing functional as well as managerial skills. Products and operations training are also conducted through web-based training modules.
In addition to basic compensation, employees of ICICI Bank are eligible to receive loans from ICICI Bank at subsidized rates and to participate in its provident fund and other employee benefit plans. The provident fund, to which both ICICI Bank and its employees contribute a defined amount, is a savings scheme, required by government regulation, under which ICICI Bank at present is required to pay to employees a minimum annual return as specified from time to time which has been specified at 9.5% for fiscal 2010. If such return is not generated internally by the fund, ICICI Bank is liable for the difference. ICICI Bank’s provident fund has generated sufficient funds internally to meet the minimum annual return requirement since inception of the funds. ICICI Bank has also set up a superannuation fund to which it contributes defined amounts. The employees have been given an option to opt out of the superannuation fund and in such cases the defined amounts are paid as part of monthly salary. In addition, ICICI Bank contributes specified amounts to a gratuity fund set up pursuant to Indian statutory requirements.
The following table sets forth, at the dates indicated, the number of employees in ICICI Bank and its consolidated subsidiaries and other consolidated entities.
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
ICICI Bank Limited | | | 63,098 | | | | 58.2 | % | | | 51,835 | | | | 56.5 | % | | | 41,068 | | | | 55.9 | % |
| ICICI Prudential Life Insurance Company Limited | | | 29,007 | | | | 26.8 | % | | | 24,518 | | | | 26.7 | % | | | 20,295 | | | | 27.8 | |
| ICICI Lombard General Insurance Company Limited | | | 5,570 | | | | 5.1 | % | | | 5,697 | | | | 6.2 | % | | | 4,650 | | | | 6.3 | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| ICICI Home Finance Company Limited | | | 4,818 | | | | 4.4 | % | | | 4,221 | (2) | | | 4.6 | % | | | 3,077 | (3) | | | 4.1 | |
| ICICI Prudential Asset Management Company Limited | | | 1,142 | | | | 1.1 | % | | | 935 | | | | 1.0 | % | | | 774 | | | | 1.0 | |
ICICI Securities Limited | | | 3,869 | | | | 3.6 | % | | | 3,692 | | | | 4.0 | % | | | 3,480 | | | | 4.0 | |
| ICICI Securities Primary Dealership Limited | | | 70 | | | | 0.1 | % | | | 75 | | | | 0.1 | % | | | 75 | | | | 0.1 | |
Others | | | 819 | | | | 0.8 | % | | | 804 | | | | 0.9 | % | | | 637 | | | | 0.8 | |
Total number of employees (1) | | | 108,393 | | | | 100.0 | % | | | 91,777 | | | | 100.0 | % | | | 74,056 | | | | 100.0 | % |
| (1) | Includes interns, sales executives and employees on fixed-term contracts totaling 6,456 at year-end fiscal 2010, 18,415 at year-end fiscal 2009 and 24,079 at year-end fiscal 2008. |
| (2) | Including 886 employees deputed from ICICI Bank. |
| (3) | Including 715 employees deputed from ICICI Bank. |
Our registered office is located at Landmark, Race Course Circle, Vadodara 390 007, Gujarat, India. Our corporate headquarters is located at ICICI Bank Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
ICICI Bank had a principal network consisting of 1,707 branches and 5,219 ATMs at year-end fiscal 2010. As of August 31, 2010 we had a network of 2,502 branches including the branches of the Bank of Rajasthan, which merged with us effective from the close of business at August 12, 2010. These facilities are located throughout India. In addition to the branches, extension counters and ATMs, ICICI Bank has 32 controlling/administrative offices including the registered office at Vadodara and the corporate headquarters at Mumbai, 53 regional processing centers in various cities and one central processing center at Mumbai. We have a branch each in Bahrain, Dubai, Hong Kong, Qatar, Singapore, Sri Lanka and the United States and one representative office each in Abu Dhabi, Bangladesh, China, Dubai, Indonesia, Malaysia, South Africa and Thailand . ICICI Bank also provides residential and holiday home facilities to employees at subsidized rates. At March 31, 2010, ICICI Bank had 565 apartments for its employees.
We are involved in various litigations and are subject to a wide variety of banking and financial services laws and regulations in each of the jurisdictions in which we operate. We are also subject to a large number of regulatory and enforcement authorities in each of these jurisdictions. We are involved in a number of legal proceedings and regulatory relationships in the ordinary course of our business. However, we are not a party to any proceedings and no proceedings are known by us to be contemplated by governmental authorities or third parties, which, if adversely determined, may have a material adverse effect on our financial condition or results of operations.
The following penalties were imposed and paid by us in the past:
| | · | In fiscal 2006, the Reserve Bank of India imposed a penalty of Rs. 0.5 million on us in connection with our role as collecting bankers in certain public equity offerings by companies in India. |
| | · | The Reserve Bank of India imposed a penalty of Rs. 0.5 million on us in connection with Know Your Customer guidelines. |
| | · | The Securities and Futures Commission, Hong Kong charged us with carrying on the business of dealing in securities in Hong Kong between June 15, 2004 and March 8, 2006, without having the requisite license. |
The Eastern Magistrate’s Court, Hong Kong, on April 10, 2007 fined us a sum of HK$ 40,000 and ordered us to reimburse prosecution costs of HK$ 54,860.
See also “Risk Factors — Risks Relating to Our Business — We have experienced rapid international growth in earlier years which has increased the complexity of the risks that we face,” “— There is operational risk associated with the financial industry which, when realized, may have an adverse impact on our business,” “— We are involved in various litigations. Any final judgment awarding material damages against us could have a material adverse impact on our future financial performance, our stockholders’ equity and the price of the ADSs” and “— The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment.”
At year-end fiscal 2010, we had been assessed an aggregate of Rs. 35.1 billion in excess of the provision made in our accounts mainly pertaining to income tax and sales tax/value added tax by the government of India’s tax authorities for past years. We have appealed each of these tax demands. Based on consultation with counsel and favorable decisions in our own and other cases as set out below, management believes that the tax authorities are not likely to be able to substantiate their tax assessments and accordingly we have not provided for these tax demands at year-end fiscal 2010.
| | · | Rs. 5.6 billion relates to appeals filed by the tax authorities against decisions in our favor. The matters are currently pending adjudication. |
| | · | Rs. 951 million relates to sales tax/value added tax assessment, where we are relying on a favorable decision in our own/other precedent cases and opinions from counsel. |
| | · | Rs. 28.6 billion relates to an appeal filed by us in respect of assessments mainly pertaining to income tax, where we are relying on favorable precedent decisions of the appellate court and expert opinions. |
| | · | Rs. 13.4 billion relates to bad debts written off. Bad debts written off as irrecoverable by the Bank have been disallowed by the tax authorities on the ground that we have not established that the debts written off during the year are irrecoverable. In recent judgments in the Bank’s own case for some years, the appellate authorities have allowed the claim of bad debts on the ground that after an amendment to the Income tax Act, 1961 with effect from April 1, 1989, it is not obligatory for the assessee to prove that the debts written-off are bad and it shall suffice if the assessee writes off its bad debts as irrecoverable in the accounts during the said year. In a recent Supreme Court ruling in another matter, it was held that after the amendment of the Income tax Act, it is not necessary for the taxpayer to establish that the debt has actually become irrecoverable to claim a deduction of bad debt s. |
| | · | Rs. 4.1 billion relates to the disallowance of depreciation claims on leased assets, which is an industry-wide issue involving multiple litigations across the country. In respect of depreciation claimed by us for fiscal 1993 and fiscal 1994 on two sale and leaseback transactions, the Income Tax Appellate Tribunal, Mumbai held that these transactions were tax planning tools and no depreciation was allowable. Because the Income Tax Appellate Tribunal’s decision is based on the facts of two specific transactions, we believe that the Income Tax Appellate Tribunal’s decision will not have an adverse tax impact on other sale and leaseback transactions entered into by us. In subsequent judgments in our own case, the appellate authorities have held that the lease transactions are genuine and have allowed depreciation on finance leases including sale and leaseback transactions. |
| | · | A penalty amounting to Rs. 3.9 billion has been levied on us by the tax authorities on contentious issues involving judicial interpretation. In recent judgments in our own and other cases, the appellate authorities have ruled that penalties are not leviable on debatable issues which cannot be said to be in the nature of concealment of income. |
| | · | Rs. 2.4 billion relates to whether interest expenses can be attributed to tax-exempt dividend income. We believe no interest can be allocated thereto as there are no borrowings earmarked for investment in shares and our interest free funds are sufficient to cover investments in the underlying shares. In a recent judgment in another matter, the Bombay High Court has laid down the principle that if there are |
sufficient interest free funds available to an assessee to fund its investments, it can be presumed that the investments were made from the interest free funds available.
| | · | Rs. 2.0 billions relates to taxability of amounts withdrawn from the Special Reserve. ICICI had maintained two special reserve accounts, “Special Reserve created up to Assessment Year 1997-98” and “Special Reserve created and maintained from Assessment Year 1998-99”. Withdrawal made from the “Special Reserve created up to Assessment Year 1997-98” was assessed as taxable by the tax authorities. The Bank has disputed the levy of tax as the special reserve created through this account was not required to be maintained without withdrawal. In a recent judgment in our own case, the appellate authority has granted relief in respect of withdrawal from this special reserve. |
Accordingly, we have not provided for these tax demands but have disclosed them as a contingent liability in the financial statements.
A number of litigation and claims against ICICI Bank and its directors are pending in various forums. The claims on ICICI Bank mainly arise in connection with civil cases involving allegations of service deficiencies, property or labor disputes, fraudulent transactions, economic offences and other cases filed in the normal course of business. The Bank is also subject to counterclaims arising in connection with its enforcement of contracts and loans. In accordance with FASB ASC 450 – “Contingencies”, a provision is created where an unfavorable outcome is deemed probable and in respect of which a reliable estimate can be made. In view of inherent unpredictability of litigation and cases where claims sought are substantially high, actual cost of resolving litigations may be substantially different than the provision held.
We held a total provision of Rs. 108 million at year-end fiscal 2010 for 430 cases with claims totaling approximately Rs. 221 million, where an unfavorable outcome was deemed probable and in respect of which a reliable estimate could be made. Of the total provision made, Rs. 85 million is provided for 426 cases with claims of Rs. 140 million and Rs. 23 million is provided for four cases with amount of Rs. 81 million which is the claims of sale proceeds received from the court against an undertaking.
For cases where an unfavorable outcome is deemed to be reasonably possible but not probable, we have included the amount of claims against us in our contingent liabilities. At year-end fiscal 2010, such claims amounted to a total of Rs. 104 million in connection with 48 cases. It is not possible to estimate the possible loss or range of possible losses for these cases due to the nature of the cases.
For cases where the possibility of an unfavorable outcome is deemed remote, we have not made a provision, nor have we included the amount of the claims in these cases in our contingent liabilities.
In some instances, civil litigants name our directors as co-defendants in lawsuits against ICICI Bank. There were 402 such cases at year-end fiscal 2010.
Management believes, based on consultation with counsel, that the claims and counterclaims filed against us in the above legal proceedings are frivolous and untenable and their ultimate resolution will not have a material adverse effect on our results of operations, financial condition or our liquidity. Based on a review of other litigations with legal counsel, management also believes that the outcome of such other matters will also not have a material adverse effect on our financial position, results of operations or cash flows.
At year-end fiscal 2010, there were 42 litigations each involving a claim of Rs. 10 million and more against us, in the aggregate amount of approximately Rs. 90.5 billion (to the extent quantifiable and including amounts claimed jointly and severally from us and other parties). The following are the litigations where amounts claimed from us are Rs. 1.0 billion or higher:
| | · | We filed a recovery application against Mardia Chemicals Limited and its guarantors before the Debt Recovery Tribunal, Mumbai for the recovery of Rs. 1.4 billion. In response, Mardia Chemicals Limited filed a counterclaim of Rs. 56.3 billion against us. We had instituted proceedings for rejection of the counterclaim. The Debt Recovery Tribunal, by its order dated May 10, 2010, rejected the counterclaim |
since there was no oral or documentary evidence submitted by the borrower to prove their claim and accordingly from that date, the case is closed.
| | · | The promoters of Mardia Chemicals Limited, in their capacity as guarantors, filed a suit against us, for damages amounting to Rs. 20.8 billion before the Debt Recovery Tribunal Mumbai as a counterclaim to the original application filed by us against the guarantors. The Debt Recovery Tribunal, by its order dated May 10, 2010, rejected the counterclaim filed against us by the Promoters/Guarantors of the Borrower, and consequently, from that date, the case stands closed. |
| | · | In 2002, we filed a suit before the Debt Recovery Tribunal, Ahmedabad against Gujarat Telephone Cables Limited for the recovery of term loans, debentures and working capital finance provided by us. We sold our exposure to the Asset Reconstruction Company (India) Limited in 2004. The borrower has filed a suit claiming damages of Rs. 10.0 billion jointly and severally from the State Bank of India, Bank of Baroda, United Western Bank, UTI Bank, Bank of India, Asset Reconstruction Company (India) Limited and us. We have filed an application for rejection of the suit to which Gujarat Telephone Cables Limited has filed its reply. We have filed our rejoinder. The company in the meanwhile has gone into liquidation and the notice has been served to the official liquidator. The matter is adjourned to September 29, 2010. |
| | · | In 1999, we filed a suit in the Debt Recovery Tribunal, Delhi against Esslon Synthetics Limited and its Managing Director (in his capacity as guarantor) for recovery of amounts totaling Rs. 169 million due from Esslon Synthetics Ltd. In May 2001, the guarantor filed a counterclaim for an amount of Rs. 1.0 billion against us and other lenders who had extended financial assistance to Esslon Synthetics on the grounds that he had been coerced by officers of the lenders into signing an agreement between LML Limited, Esslon Synthetics and the lenders on account of which he suffered, among other things, loss of business. Esslon Synthetics Limited filed an application to amend the counterclaim in January 2004. We have filed our reply to the application for amendment. The guarantor has also filed an interim application on the ground that certain documents have not been exhibited to which we have filed our reply stating that the required documents are neither relevant nor necessary for adjudicating the dispute between the parties. In the meantime, Industrial Development Bank of India has challenged the order of the Debt Recovery Tribunal, Delhi, whereby the Debt Recovery Tribunal allowed LML Limited to be included in the list of parties. The Debt Recovery Appellate Tribunal, Delhi has passed an interim stay order against the Debt Recovery Tribunal proceedings. The Debt Recovery Tribunal will next hear the matter on October 7, 2010. In the liquidation proceeding before the High Court at Allahabad, the official liquidator attached to the Allahabad High Court has sold the assets of Esslon Synthetics for Rs. 61 million in November 2002. We have filed the claim with the official liquidator attached to the Allahabad High Court for our dues. The official liquidator has informed us that the claim of the Bank has been allowed and the amount payable to the Bank is Rs. 12 million. We will be filing an affidavit be fore the official liquidator for disbursement of the amount |
In addition, we have experienced rapid international expansion into banking in multiple jurisdictions which exposes us to a new variety of regulatory and business challenges and risks, including cross-cultural risk, and which increased the complexity of our risks in a number of areas including currency risks, interest rate risks, compliance risk, regulatory risk, reputational risk and operational risk. As a result of this rapid growth and increased complexity, we or our employees may be subject to regulatory investigations or enforcement proceedings in multiple jurisdictions in a variety of contexts. Despite our best efforts at regulatory compliance and internal controls, we, or our employees, may from time to time, and as is common in the financial services industry, be the subject of confidential examinations or investigations that mig ht, or might not, lead to proceedings against us or our employees. In any such situation it would be our policy to conduct an internal investigation, co-operate with the regulatory authorities and, where appropriate, suspend or discipline employees, including terminating their services.
In fiscal 2010, two individuals filed a whistleblower retaliation complaint against us with the Occupational Safety and Health Administration, US Department of Labor (“OSHA”) pursuant to procedures set forth under 29 CFR 1980 covered by Section 806 of the Sarbanes Oxley Act, 2002. The complaint alleges that in our annual report on Form 20-F for fiscal 2008, as filed with the Securities and Exchange Commission, we misrepresented that we have anti-money laundering processes in place, and/or failed to follow such processes. The individuals demanded (i) immediate reinstatement at ICICI Bank, payment of back pay, payment of special damages and payment of
attorney’s fees; and (ii) that their visa status be protected so that they may remain within the United States. Upon receipt of the complaint, we commenced an internal investigation of our operations at the New York branch, including an investigation of our compliance with the US Patriot Act. It was determined that the New York branch complied with all applicable banking regulations and has appropriate internal controls in place. The New York branch and its processes are also subject to ongoing supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), and the branch has informed the OCC of this matter. We filed our response to the complaint with OSHA. OSHA has completed the initial phase of its investigation and had issued an initial response lette r dated January 4, 2010 finding, based on information gathered thus far, reasonable cause to believe that a violation under Section 806 has occurred. We submitted a rebuttal, along with supporting documents, to OSHA on February 8, 2010. Pending receipt of the final determination of the investigation by OSHA and on its suggestion, the parties have pursued informal resolution of the complaint to reach a mutually acceptable resolution. OSHA has reserved its decision on the matter pending the outcome of the informal resolution process.
We cannot predict the timing or form of any future regulatory or law enforcement initiatives, which we note are increasingly common for international banks, but we would expect to co-operate with any such regulatory investigation or proceeding.
Fees and Charges Payable by Holders of our ADSs
The fees and charges payable by holders of our ADSs include the following:
| | (i) | a fee not in excess of US $0.05 per ADS is charged for each issuance of ADSs including issuances resulting from distributions of shares, share dividends, share splits, bonuses and rights distributions; |
| | (ii) | a fee not in excess of US $0.05 per ADS is charged for each surrender of ADSs in exchange for the underlying deposited securities; and |
| (iii) | a fee for the distribution of the deposited securities pursuant to the deposit agreement, such fee being an amount equal to the fee for the execution and delivery of ADSs referred to in item (i) above which would have been charged as a result of the deposit of such securities, but which securities were instead distributed by the depositary to ADR holders. |
Additionally, under the terms of our deposit agreement, the depositary is entitled to charge each registered holder the following:
| | (i) | taxes and other governmental charges incurred by the depositary or the custodian on any ADS or an equity share underlying an ADS including any applicable penalties thereon; |
| | (ii) | transfer or registration fees for the registration or transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities, including those of a central depository for securities (where applicable); |
| (iii) | any cable, telex, facsimile transmission and delivery expenses incurred by the depositary; and |
| (iv) | customary expenses incurred by the depositary in the conversion of foreign currency, including, without limitation, expenses incurred on behalf of registered holders in connection with compliance with foreign exchange control restrictions and other applicable regulatory requirements, together with all expenses, transfer and registration fees, taxes, duties, governmental or other charges payable by the Depositary. |
In the case of cash distributions, fees, if applicable, are generally deducted from the cash being distributed. Other fees may be collected from holders of ADSs in a manner determined by the depositary with respect to ADSs registered in the name of investors (whether certificated or in book-entry form) and ADSs held in brokerage and custodian accounts (via DTC). In the case of distributions other than cash (i.e., stock dividends, etc.), the depositary charges the applicable ADS record date holder concurrently with the distribution. In the case of ADSs registered in
the name of the investor (whether certificated or in book-entry form), the depositary sends invoices to the applicable record date ADS holders.
If any tax or other governmental charge is payable by the holders and/or beneficial owners of ADSs to the depositary, the depositary, the custodian or the Bank may withhold or deduct from any distributions made in respect of deposited securities and may sell for the account of the holder and/or beneficial owner any or all of the deposited securities and apply such distributions and sale proceeds in payment of such taxes (including applicable interest and penalties) or charges, with the holder and the beneficial owner thereof remaining fully liable for any deficiency.
Fees and Other Payments Made by the Depositary
Since the commencement of the Bank’s most recent fiscal year, the Bank has not received any direct payments or reimbursements from the depositary relating to the Bank’s ADR program. The Bank has not received any other reimbursements or payments from the depositary, either directly or indirectly, during fiscal 2010.
The following discussion and table are based on our audited consolidated financial statements and accompanying notes prepared in accordance with Indian GAAP. For a reconciliation of net income and stockholders’ equity to US GAAP, a description of significant differences between Indian GAAP and US GAAP and certain additional information required under US GAAP, see notes 22 and 23 to our consolidated financial statements included in this annual report. For selected financial data in accordance with US GAAP see “Selected US GAAP Financial Data.”
Certain reclassifications have been made in the financial statements for prior years to conform to classifications used in the current year. These changes have no impact on previously reported results of operations or stockholders’ equity. The accounting and reporting policies used in the preparation of our financial statements reflect general industry practices and conform with Indian GAAP, including the Accounting Standards issued by the Institute of Chartered Accountants of India and guidelines issued by the Reserve Bank of India and the Insurance Regulatory and Development Authority and the National Housing Bank as applicable to ICICI Bank and specific subsidiaries and joint ventures.
The consolidated financial statements for fiscal 2006 were audited by S.R. Batliboi & Co., Chartered Accountants, and for fiscal 2007, 2008, 2009 and 2010 by BSR & Co. Chartered Accountants, under auditing standards issued by the Institute of Chartered Accountants of India. The consolidated financial statements for fiscal 2007, 2008, 2009 and 2010 have also been audited by KPMG, an independent registered public accounting firm in India, in accordance with the auditing standards of the United States Public Company Accounting Oversight Board. Our Indian GAAP financial statements, along with the reconciliation of net profit and stockholders’ equity to US GAAP, including the notes to these financial statements, audited by KPMG are set forth at the end of this annual report.
Our annual report prepared and distributed to our shareholders under Indian law and regulations include consolidated along with unconsolidated Indian GAAP financial statements and analysis of our results of operations and financial condition based on unconsolidated Indian GAAP financial statements.
You should read the following data with the more detailed information contained in “Operating and Financial Review and Prospects” and our consolidated financial statements. Historical results do not necessarily predict our results in the future.
Operating Results Data
The following table sets forth, for the periods indicated, our operating results data.
| | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions, except per common share data) | |
| Selected income statement data: | | | | | | | | | | | | | | | | | | |
Interest income(2) (3) (4) | | Rs. | 143,336 | | | Rs. | 240,026 | | | Rs. | 340,950 | | | Rs. | 362,507 | | | Rs. | 301,537 | | | US$ | 6,708 | |
Interest expense | | | (101,015 | ) | | | (176,757 | ) | | | (257,670 | ) | | | (264,873 | ) | | | (207,292 | ) | | | (4,611 | ) |
Net interest income | | | 42,321 | | | | 63,268 | | | | 83,280 | | | | 97,634 | | | | 94,245 | | | | 2,097 | |
Non-interest income(4) | | | 102,819 | | | | 173,612 | | | | 259,581 | | | | 279,024 | | | | 294,461 | | | | 6,551 | |
Total income | | | 145,140 | | | | 236,881 | | | | 342,861 | | | | 376,658 | | | | 388,706 | | | | 8,648 | |
| Non-interest expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses (5) | | | (47,626 | ) | | | (79,289 | ) | | | (110,070 | ) | | | (108,136 | ) | | | (94,343 | ) | | | (2,098 | ) |
| Direct marketing agency expenses(6) | | | (11,912 | ) | | | (15,602 | ) | | | (15,750 | ) | | | (6,122 | ) | | | (2,413 | ) | | | (54 | ) |
Depreciation on leased assets | | | (2,771 | ) | | | (1,883 | ) | | | (1,821 | ) | | | (2,101 | ) | | | (1,417 | ) | | | (32 | ) |
| Expenses pertaining to insurance business(7) | | | (43,389 | ) | | | (83,358 | ) | | | (142,793 | ) | | | (165,499 | ) | | | (179,160 | ) | | | (3,986 | ) |
Total non-interest expenses | | | (105,698 | ) | | | (180,132 | ) | | | (270,434 | ) | | | (281,858 | ) | | | (277,333 | ) | | | (6,170 | ) |
| Operating profit before provisions | | | 39,443 | | | | 56,749 | | | | 72,427 | | | | 94,800 | | | | 111,373 | | | | 2,478 | |
Provisions and contingencies | | | (8,455 | ) | | | (22,774 | ) | | | (30,178 | ) | | | (45,117 | ) | | | (45,587 | ) | | | (1,014 | ) |
Profit before tax | | | 30,988 | | | | 33,975 | | | | 42,249 | | | | 49,684 | | | | 65,786 | | | | 1,464 | |
Provision for tax(8) | | | (6,998 | ) | | | (7,641 | ) | | | (11,097 | ) | | | (15,889 | ) | | | (17,352 | ) | | | (386 | ) |
Profit after tax | | | 23,990 | | | | 26,334 | | | | 31,152 | | | | 33,794 | | | | 48,434 | | | | 1,078 | |
Minority interest | | | 211 | | | | 1,272 | | | | 2,830 | | | | 1,975 | | | | (1,731 | ) | | | (39 | ) |
Net profit | | Rs. | 24,201 | | | Rs. | 27,606 | | | Rs. | 33,982 | | | Rs. | 35,769 | | | Rs. | 46,703 | | | US$ | 1,039 | |
| Per common share: | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share-basic(9) | | Rs. | 30.96 | | | Rs. | 30.92 | | | Rs. | 32.19 | | | Rs. | 32.13 | | | Rs. | 41.93 | | | US$ | 0.93 | |
Earnings per share-diluted(10) | | | 30.64 | | | | 30.75 | | | | 32.00 | | | | 32.07 | | | | 41.72 | | | | 0.93 | |
Dividend per share(11) | | | 8.50 | | | | 10.00 | | | | 11.00 | | | | 11.00 | | | | 12.00 | | | | 0.27 | |
Book value(12) | | | 242.75 | | | | 256.72 | | | | 385.73 | | | | 396.15 | | | | 436.48 | | | | 9.71 | |
| Equity shares outstanding at the end of the period (in millions of equity shares) | | | 890 | | | | 899 | | | | 1,113 | | | | 1,113 | | | | 1,115 | | | | 1,115 | |
| Weighted average equity shares outstanding - basic (in millions of equity shares) | | | 782 | | | | 893 | | | | 1,056 | | | | 1,113 | | | | 1,114 | | | | 1,114 | |
| Weighted average equity shares outstanding – diluted (in millions of equity shares) | | | 790 | | | | 898 | | | | 1,062 | | | | 1,115 | | | | 1,118 | | | | 1,118 | |
| (1) | Rupee amounts for fiscal 2010 have been translated into US dollars using the exchange rate of Rs. 44.95 = US$ 1.00 as set forth in the H.10 statistical release of the Federal Reserve Board at March 31, 2010. |
| (2) | Interest income includes interest on rupee and foreign currency loans and advances (including bills) and hire purchase receivables and gains/(losses) on sell-down of loans. Interest income also includes interest on income tax refund of Rs. 416 million, Rs. 1.0 billion, Rs. 880 million, Rs. 3.4 billion Rs. 1.3 billion for fiscal 2006, 2007, 2008, 2009 and 2010 respectively. Commission paid to direct marketing agents/dealers for origination of retail automobile loans which was being reduced from “Interest Income” up to fiscal 2006 has been reclassified to “Direct marketing agency expenses”. This reclassification also impacts the reported net interest income, net interest margin and spread. Prior period figures have been reclassified to conform to the current classification. |
| (3) | Interest income includes gains/(losses) on the sell-down of loans. In February 2006, the Reserve Bank of India issued guidelines on accounting for securitization of standard assets. In accordance with these guidelines, with effect from February 1, 2006, we account for any loss arising on securitization immediately at the time of sale and the profit/premium arising on account of securitization is amortized over the life of the asset. Prior to February 1, 2006, profit arising on account of securitization was recorded at the time of sale. |
| (4) | As per general clarification from the Reserve Bank of India dated July 11, 2007 on circular DBOD.BP.BC.87/21.04.141/2006-07 dated April 20, 2007, we have deducted the amortization of premium on government securities from income on investments included in “Interest income”, which was up to fiscal 2007 deducted from “Profit/(Loss) on revaluation of investments (net)” included in “Non-interest income”. This reclassification also impacts the reported net interest income, net interest margin and spread. Prior period figures have been reclassified to conform to the current classification. |
| (5) | Operating expenses primarily includes employee expenses, establishment expenses, depreciation on fixed assets, amortization of expenses related to early retirement option scheme and other general office expenses. Operating expenses for fiscal years 2006 to 2008 include Rs. 384.0 million in each year, Rs. 117.9 million for fiscal 2009 and Nil for fiscal 2010 on account of amortization of expenses related to our early retirement option scheme over a period of five years as approved by the Reserve Bank of India. |
| (6) | Includes commissions paid to direct marketing agents or associates in connection with sourcing our retail assets. These commissions are expensed upfront and not amortized over the life of the loan. |
| (7) | The amount of premium ceded on re-insurance has been reclassified from expenses pertaining to insurance business and netted off from non-interest income from fiscal 2007. |
| (8) | Includes income tax (net of deferred tax), wealth tax and fringe benefit tax (up to fiscal 2009). The levy of fringe benefit tax is not applicable as Finance (No. 2) Act, 2009 has abolished fringe benefit tax with effect from fiscal 2010. |
| (9) | Earning per share is computed based on weighted average number of shares and represents net profit/(loss) per share before dilutive impact. |
| (10) | Earning per share is computed based on weighted average number of shares and represents net profit/(loss) per share adjusted for full dilution. Options to purchase 5,000; 123,500; 40,000; 5,098,000 and 2,500 equity shares granted to employees at a weighted average exercise price of Rs. 569.6, Rs. 849.2, Rs. 1,135.3, Rs. 914.4 and Rs. 901.8 were outstanding in fiscal 2006, 2007, 2008, 2009 and 2010 respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the equity shares during the period. |
| (11) | In India, dividends for a fiscal year are normally declared and paid in the following year. For fiscal 2006, we declared dividend of Rs. 8.50 per equity share which was paid out in fiscal 2007. For fiscal 2007, we declared dividend of Rs. 10.00 per equity share which was paid out in fiscal 2008. We declared a dividend of Rs. 11.00 per equity share for each of fiscal years 2008 and 2009, which were paid out in fiscal 2009 and fiscal 2010 respectively. We declared a dividend of Rs. 12.00 per equity share for fiscal 2010 which was paid out in fiscal 2011. The dividend per equity share shown above is based on the total amount of dividends declared for the year, exclusive of dividend tax. |
| (12) | Represents equity share capital and reserves and surplus reduced by deferred tax asset, goodwill, debit balance in the profit and loss account and early retirement option expenses, not written off. |
The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of average total assets for the respective period. For fiscal years 2006 through 2008, the average balances for a fiscal year are the average of quarterly balances outstanding at the end of March of the previous fiscal year and June, September, December and March of that year. For fiscal 2009 and 2010, the average balances are the sum of the daily average balances outstanding of ICICI Bank and the average of quarterly balances outstanding at the end of March of the previous fiscal year and June, September, December and March of that year for subsidiaries.
| | | | |
| | | | | | | | | | | | | | | | |
| Selected income statement data: | | | | | | | | | | | | | | | |
Interest income | | | 6.61 | % | | | 7.38 | % | | | 7.82 | % | | | 7.40 | % | | | 6.12 | % |
Interest expense | | | (4.66 | ) | | | (5.44 | ) | | | (5.91 | ) | | | (5.41 | ) | | | (4.21 | ) |
Net interest income | | | 1.95 | | | | 1.94 | | | | 1.91 | | | | 1.99 | | | | 1.91 | |
Non-interest income | | | 4.75 | | | | 5.34 | | | | 5.95 | | | | 5.70 | | | | 5.98 | |
Total income | | | 6.70 | | | | 7.28 | | | | 7.86 | | | | 7.69 | | | | 7.89 | |
Operating expenses | | | (2.20 | ) | | | (2.44 | ) | | | (2.53 | ) | | | (2.21 | ) | | | (1.91 | ) |
Direct marketing agency expenses | | | (0.56 | ) | | | (0.48 | ) | | | (0.36 | ) | | | (0.12 | ) | | | (0.05 | ) |
Depreciation on leased assets | | | (0.13 | ) | | | (0.06 | ) | | | (0.04 | ) | | | (0.04 | ) | | | (0.03 | ) |
| Expenses pertaining to insurance business | | | (2.00 | ) | | | (2.56 | ) | | | (3.27 | ) | | | (3.38 | ) | | | (3.64 | ) |
Non-interest expenses | | | (4.89 | ) | | | (5.54 | ) | | | (6.20 | ) | | | (5.75 | ) | | | (5.63 | ) |
Operating profit before provisions | | | 1.81 | | | | 1.74 | | | | 1.66 | | | | 1.94 | | | | 2.26 | |
Provisions and contingencies | | | (0.39 | ) | | | (0.70 | ) | | | (0.69 | ) | | | (0.92 | ) | | | (0.93 | ) |
Profit before tax | | | 1.42 | | | | 1.04 | | | | 0.97 | | | | 1.01 | | | | 1.34 | |
Provision for tax | | | (0.32 | ) | | | (0.24 | ) | | | (0.25 | ) | | | (0.32 | ) | | | (0.35 | ) |
Profit after tax | | | 1.10 | | | | 0.80 | | | | 0.72 | | | | 0.69 | | | | 0.98 | |
Minority interest | | | 0.01 | | | | 0.04 | | | | 0.06 | | | | 0.04 | | | | (0.04 | ) |
Net profit | | | 1.11 | % | | | 0.84 | % | | | 0.78 | % | | | 0.73 | % | | | 0.95 | % |
The following table sets forth, for the periods indicated, our selected financial data.
| | | At or for the year ended March 31, | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Selected balance sheet data: | | | | | | | | | | | | | | | | | | |
Total assets | | Rs. | 2,772,296 | | | Rs. | 3,943,347 | | | Rs. | 4,856,166 | | | Rs. | 4,826,910 | | | Rs. | 4,893,473 | | | US$ | 108,865 | |
Investments | | | 840,139 | | | | 1,206,167 | | | | 1,600,468 | | | | 1,481,070 | | | | 1,863,198 | | | | 41,450 | |
Advances, net | | | 1,562,603 | | | | 2,113,994 | | | | 2,514,016.7 | | | | 2,661,305 | | | | 2,257,781 | | | | 50,229 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-performing customer assets (gross)(2) | | | 23,086 | | | | 42,557 | | | | 77,963 | | | | 99,921 | | | | 105,821 | | | | 2,354 | |
Total liabilities | | | 2,549,878 | | | | 3,703,697 | | | | 4,408,944 | | | | 4,359,134 | | | | 4,380,508 | | | | 97,453 | |
Deposits | | | 1,724,510 | | | | 2,486,136 | | | | 2,769,832 | | | | 2,618,558 | | | | 2,415,723 | | | | 53,742 | |
| Borrowings (includes subordinated debt and redeemable non-cumulative preference shares) | | | 560,858 | | | | 832,307 | | | | 1,073,238 | | | | 1,160,663 | | | | 1,156,983 | | | | 25,739 | |
Equity share capital | | | 8,898 | | | | 8,993 | | | | 11,127 | | | | 11,133 | | | | 11,149 | | | | 254 | |
Reserves and surplus | | | 213,520 | | | | 230,657 | | | | 436,095 | | | | 456,642 | | | | 501,816 | | | | 11,164 | |
Period average(3): | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 2,166,897 | | | | 3,250,679 | | | | 4,361,169 | | | | 4,898,664 | | | | 4,930,720 | | | | 109,693 | |
Interest-earning assets | | | 1,806,601 | | | | 2,728,532 | | | | 3,627,576 | | | | 4,182,862 | | | | 4,060,883 | | | | 90,342 | |
Advances, net | | | 1,200,315 | | | | 1,763,886 | | | | 2,284,649 | | | | 2,578,553 | | | | 2,395,300 | | | | 53,288 | |
Total liabilities(4) | | | 2,004,677 | | | | 3,018,689 | | | | 3,994,367 | | | | 4,415,984 | | | | 4,418,129 | | | | 98,290 | |
| Interest-bearing liabilities | | | 1,795,244 | | | | 2,707,456 | | | | 3,503,058 | | | | 3,878,871 | | | | 3,713,343 | | | | 82,611 | |
Borrowings | | | 540,464 | | | | 692,462 | | | | 964,858 | | | | 1,301,193 | | | | 1,308,823 | | | | 29,117 | |
Stockholders’ equity | | | 162,220 | | | | 231,990 | | | | 366,802 | | | | 482,680 | | | | 512,591 | | | | 11,404 | |
| Profitability: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net profit as a percentage of: | | | | | | | | | | | | | | | | | | | | | | | | |
Average total assets | | | 1.11 | % | | | 0.84 | % | | | 0.78 | % | | | 0.73 | % | | | 0.95 | % | | | | |
| Average stockholders’ equity | | | 14.92 | | | | 11.90 | | | | 9.26 | | | | 7.41 | | | | 9.05 | | | | | |
| Dividend payout ratio(5) | | | 31.33 | | | | 32.91 | | | | 36.13 | | | | 34.24 | | | | 28.65 | | | | | |
Spread(6) | | | 2.31 | | | | 2.27 | | | | 2.04 | | | | 1.93 | | | | 1.93 | | | | | |
Net interest margin(7) | | | 2.34 | | | | 2.32 | | | | 2.30 | | | | 2.43 | | | | 2.40 | | | | | |
Cost-to-income ratio(8) | | | 41.82 | | | | 40.38 | | | | 36.89 | | | | 30.50 | | | | 24.98 | | | | | |
| Cost-to-average assets ratio(9) | | | 2.75 | | | | 2.92 | | | | 2.89 | | | | 2.33 | | | | 1.96 | | | | | |
Capital(10): | | | | | | | | | | | | | | | | | | | | | | | | |
| Average stockholders’ equity as a percentage of average total assets | | | 7.49 | % | | | 7.14 | % | | | 8.41 | % | | | 9.85 | % | | | 10.40 | % | | | | |
| Average stockholders’ equity (including preference share capital) as a percentage of average total assets | | | 7.65 | % | | | 7.24 | % | | | 8.49 | % | | | 9.92 | % | | | 10.47 | % | | | | |
| Asset quality: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net restructured assets as a percentage of net customer assets | | | 3.28 | % | | | 2.21 | % | | | 1.77 | % | | | 2.10 | % | | | 2.36 | % | | | | |
| Net non-performing assets as a percentage of net customer assets | | | 0.67 | % | | | 0.92 | % | | | 1.36 | % | | | 1.67 | % | | | 1.84 | % | | | | |
| Provision on restructured assets as a percentage of gross restructured assets | | | 4.16 | % | | | 3.14 | % | | | 3.25 | % | | | 2.83 | % | | | 4.40 | % | | | | |
| Provision on non-performing assets as a percentage of gross non-performing assets | | | 53.19 | % | | | 52.28 | % | | | 53.91 | % | | | 52.62 | % | | | 55.83 | % | | | | |
| Provision as a percentage of gross customer assets(11) | | | 1.31 | % | | | 1.71 | % | | | 2.20 | % | | | 2.45 | % | | | 3.02 | % | | | | |
| (1) | Rupee amounts at March 31, 2010 have been translated into US dollars using the exchange rate of Rs. 44.95 = US$ 1.00 as set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2010. |
| (2) | Includes suspended interest and claims received from Export Credit Guarantee Corporation of India/Deposit Insurance Credit Guarantee Corporation on working capital loans. |
| (3) | For fiscal years 2006 through 2008, the average balances for a fiscal year are the average of quarterly balances outstanding at the end of March of the previous fiscal year and June, September, December and March of that year. For fiscal 2009 and 2010, the average balances |
are the sum of daily average balances outstanding for ICICI Bank and the average of quarterly balances outstanding at the end of March of the previous fiscal year and June, September, December and March of that year for subsidiaries.
| (4) | Includes preference share capital and minority interest, but does not include stockholders’ equity. |
| (5) | Represents the ratio of total dividends paid on equity share capital, exclusive of dividend tax, as a percentage of net profit. |
| (6) | Represents the difference between yield on average interest-earning assets and cost of average interest-bearing liabilities. Yield on average interest-earning assets is the ratio of interest income to average interest-earning assets. Cost of average interest-bearing liabilities is the ratio of interest expense to average interest-bearing liabilities. |
| (7) | Represents the ratio of net interest income to average interest-earning assets. The difference in net interest margin and spread arises due to the difference in the amount of average interest-earning assets and average interest-bearing liabilities. If average interest-earning assets exceed average interest-bearing liabilities, net interest margin is greater than spread, and if average interest-bearing liabilities exceed average interest-earning assets, net interest margin is less than spread. |
| (8) | Represents the ratio of non-interest expense (excluding lease depreciation and expenses pertaining to insurance business) to the sum of net interest income and non-interest income (net of lease depreciation). |
| (9) | Represents the ratio of non-interest expense (excluding lease depreciation and expenses pertaining to insurance business) to average total assets. |
| (10) | ICICI Bank’s capital adequacy is computed in accordance with the Basel II norms stipulated by the Reserve Bank of India and is based on unconsolidated financial statements prepared in accordance with Indian GAAP and based on consolidated financial statements as per the Reserve Bank of India guidelines on consolidated prudential report. At year-end fiscal 2010, ICICI Bank’s total capital adequacy ratio at the standalone level was 19.41% with a tier I capital adequacy ratio of 13.96% and a tier II capital adequacy ratio of 5.45%. At year-end fiscal 2010, the total capital adequacy ratio of the Bank at the consolidated level was 19.15% with a tier I capital adequacy ratio of 12.92% and a tier II capital adequacy ratio of 6.23%. |
| (11) | Includes general provision on standard assets. |
Selected US GAAP Financial Data
The following table sets forth, certain selected financial data under generally accepted accounting principles adopted in the United States.
| | | At or for the year ended March 31, | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions) | |
| Net income/(loss) | | Rs. | 20,040 | | | Rs. | 31,271 | | | Rs. | 33,111 | | | Rs. | 34,449 | | | Rs. | 45,250 | | | US$ | 1,007 | |
| Total assets | | | 2,817,328 | | | | 3,995,402 | | | | 4,993,632 | | | | 5,012,346 | | | | 4,820,604 | | | | 107,244 | |
| Stockholders’ equity | | | 218,647 | | | | 240,980 | | | | 464,755 | | | | 485,847 | | | | 523,063 | | | | 11,637 | |
| Other comprehensive income/(loss) | | | 522 | | | | (3,241 | ) | | | (4,611 | ) | | | (5,741 | ) | | | (246 | ) | | | (5 | ) |
| Per equity share | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income/(loss) from continuing operation-basic(2) | | | 25.64 | | | | 35.02 | | | | 31.37 | | | | 30.95 | | | | 40.63 | | | | 0.90 | |
| Net income/(loss) from continuing operation-diluted(3) | | | 25.34 | | | | 34.79 | | | | 30.87 | | | | 30.78 | | | | 40.35 | | | | 0.90 | |
| Dividend(4) | | Rs. | 8.50 | | | Rs. | 8.50 | | | Rs. | 10.00 | | | Rs. | 11.00 | | | Rs. | 11.00 | | | US$ | 0.24 | |
| (1) | Rupee amounts for fiscal 2010 have been translated into US dollars using the exchange rate of Rs. 44.95 = US$ 1.00 as set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2010. |
| (2) | Represents net income/(loss) before dilutive impact. |
| (3) | Represents net profit/(loss) adjusted for full dilution. Options to purchase 5,000, 123,500, 40,000, 5,098,000 and 9,238,020 equity shares granted to employees at a weighted average exercise price of Rs. 569.6, Rs. 849.2, Rs. 1,135.3, Rs. 914.4 and Rs. 926.3 were outstanding in fiscal 2006, 2007, 2008, 2009 and 2010 respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the equity shares during the period. |
| (4) | In India, dividends for a fiscal year are normally declared and paid in the following year. We declared a dividend of Rs. 8.50 per equity share for each of fiscal years 2006 , which were paid out in fiscal 2007 . For fiscal 2007, we declared dividend of Rs. 10.00 per equity share which was paid out in fiscal 2008. For fiscal 2008, we declared dividend of Rs. 11.00 per equity share, which was paid out in fiscal 2009. For fiscal 2009, we declared dividend of Rs. 11.00 per equity share, which was paid out in fiscal 2010. For fiscal year 2010, we declared dividend of Rs. 11.00 per equity share which was paid out in fiscal 2011. The dividend per equity share shown above is based on the total amount of dividends paid for the year, exclusive of |
dividend tax. This was different from the dividend declared for the year. In US dollar terms, the dividend paid was US$ 0.24 per equity share for fiscal 2010
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements. The following discussion is based on our audited consolidated financial statements and accompanying notes prepared in accordance with Indian GAAP, which varies in certain significant respects from US GAAP. For a reconciliation of net income and stockholders’ equity to US GAAP, a description of significant differences between Indian GAAP and US GAAP and certain additional US GAAP information, see notes 22 and 23 to our consolidated financial statements included herein.
Executive Summary
Introduction
We are a diversified financial services group offering a wide range of banking and financial services to corporate and retail customers through a variety of delivery channels. ICICI Bank is the largest private sector bank in India and the second largest bank in India, in terms of total assets. Apart from banking products and services, we offer investment banking, life and general insurance, asset management, securities brokering and private equity products and services through specialized subsidiaries. Our total assets at year-end fiscal 2010 were Rs. 4,893.5 billion (US$ 108.9 billion). Our net worth at year-end fiscal 2010 was Rs. 501.6 billion (US$ 11.2 billion). During fiscal 2010, we earned a net profit of Rs. 46.7 billion (US$ 1.0 billion) compared to Rs. 35.8 billion (US$ 796 million) during fiscal 2009.
Our primary business consists of commercial banking operations for corporate and retail customers. We provide a range of commercial banking and project finance products and services, including loan products, fee and commission-based products and services, deposit products and foreign exchange and derivatives products to India’s leading corporations, middle market companies and small and medium enterprises. Our commercial banking operations for retail customers consist of retail lending and deposit taking and distribution of third party investment products. We deliver our products and services through a variety of channels, including bank branches, ATMs, call centers, the internet and mobile phones. We had a network of 2,501 branches and 5,665 ATMs in India at August 19, 2010. These figures include 463 branches and 127 ATMs of the B ank of Rajasthan, an old private sector bank that merged with us effective from the close of business at August 12, 2010. We also offer agricultural and rural banking products. We earn interest and fee income from our commercial banking operations.
In our international banking operations, our primary focus is on persons of Indian origin and Indian businesses. Our international branches and banking subsidiaries take deposits, raise borrowings and make loans primarily to Indian companies for their overseas operations as well as for their foreign currency requirements in India. They also engage in advisory and syndication activities for fund-raising by Indian companies and their overseas operations. We currently have subsidiaries in the United Kingdom, Canada and Russia, branches in Singapore, Dubai, Sri Lanka, Hong Kong, Qatar, the United States and Bahrain and representative offices in China, the United Arab Emirates, Bangladesh, South Africa, Malaysia, Thailand and Indonesia. Our subsidiary in the United Kingdom has established a branch in Antwerp, Belgium and a branch in Frankfurt , Germany.
Our treasury operations include maintenance and management of regulatory reserves, proprietary trading in equity and fixed income and a range of foreign exchange and derivatives products and services for corporate customers, such as forward contracts, swaps and options. We take advantage of movements in markets to earn treasury income. Our international branches and subsidiaries also have investments in credit derivatives, in bonds of non-India financial institutions and in asset backed securities.
We are also engaged in insurance, asset management, securities business and private equity fund management through specialized subsidiaries. Our subsidiaries ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company and ICICI Prudential Asset Management Company provide a wide range of life and general insurance and asset management products and services to retail and corporate customers. ICICI Prudential Life Insurance Company was the largest private sector life insurance company in India during fiscal 2010, with a market share of 9.3% of new business written (on a retail weighted received premium basis). ICICI Lombard General Insurance Company was the largest private sector general insurance company in India during fiscal 2010, with a market share of 9.5% of gross written premium. ICICI Prudential Asset Management Company manages the
ICICI Prudential Mutual Fund, which was among the top three mutual funds in India in terms of average funds under management in March 2010, with a market share of 10.8%. We cross-sell the products of our insurance and asset management subsidiaries and other asset management companies to our retail and corporate customers. Our subsidiaries ICICI Securities Limited and ICICI Securities Primary Dealership Limited are engaged in equity underwriting and brokerage and primary dealership in government securities respectively. ICICI Securities owns icicidirect.com, a leading online brokerage platform. ICICI Securities Limited has a subsidiary in the United States, ICICI Securities Holdings Inc., which in turn has an operating subsidiary in the United States, ICICI Securities Inc., engaged in brokerage services. Our private equity fund management subsidiary ICICI Venture Funds Management Company manages funds that make private equity investments.
Business environment
Our loan portfolio, financial condition and results of operations have been and, in the future, are expected to be influenced by economic conditions in India, global economic developments affecting the business activities of our corporate customers, such as changes in commodity prices, and conditions in global financial markets and economic conditions in the United States and in foreign countries where we have a significant presence. For ease of understanding the following discussion of our results of operations, you should consider these macroeconomic factors and other key factors.
During fiscal 2010, India witnessed a significant revival in economic activity following the moderation in fiscal 2009, with the momentum increasing in the second half of fiscal 2010. Industrial activity, as reflected by the Index of Industrial Production, increased by 10.5% during fiscal 2010 as against 2.8% in fiscal 2009. The growth in Index of Industrial Production was largely driven by the manufacturing sector which recorded a growth of 10.9% in fiscal 2010 compared to 2.7% in fiscal 2009.
India’s gross domestic product grew by 7.4% during fiscal 2010, compared to 6.7% in fiscal 2009, led by a 10.4% growth in industry and an 8.3% growth in the services sector. However, the agricultural sector recorded a growth of only 0.2%, primarily due to below normal monsoon rainfall. During the first quarter of fiscal 2011, India’s gross domestic product grew by 8.8% primarily due to an 11.4% growth in industry and a 9.4% growth in the services sector. The agricultural sector grew by 2.8% in this period.
Liquidity in the Indian financial system remained comfortable throughout fiscal 2010, with average liquidity adjustment facility balances (short-term lending by banks to the Reserve Bank of India) in excess of Rs. 1.00 trillion for most of the year. During the second half of fiscal 2010, inflationary pressures increased driven largely by food price inflation. Inflation as measured by the wholesale price index increased from a low of –1.0% in June 2009 to 11.0% in March 2010. In view of increasing inflationary pressures and initial signs of economic recovery, the Reserve Bank of India in its quarterly review of monetary policy in October 2009 increased the statutory liquidity ratio by 100 basis points to 25.0% and withdrew certain special liquidity facilities instituted in response to the global financial crisis. In the third quarter review of monetary policy in January 2010, the Reserve Bank of India increased the cash reserve ratio by 75 basis points from 5.0% to 5.75% in a phased manner starting in February 2010. On March 19, 2010, the Reserve Bank of India increased the benchmark repo and reverse repo rates by 25 basis points with immediate effect. The yield on the benchmark ten-year government of India securities increased from 7.01% at year-end fiscal 2009 to 7.82% at year-end fiscal 2010. The fiscal deficit has increased from 2.7% of GDP in fiscal 2008 to 6.0% in fiscal 2009 and to 6.7% in fiscal 2010 mainly due to fiscal stimulus measures undertaken during the financial crisis, expenditure on various government schemes and lower than targeted tax revenues.
In response to ample systemic liquidity and a low interest rate environment, scheduled commercial banks reduced their deposit rates for various maturities by 25-250 basis points during March-December 2009. The impact of the lower cost of funds for banks was also transmitted to interest rates on loans, with the benchmark prime lending rates of banks declining by 25-100 basis points during the same period. Deposit rates, however, increased by about 25 basis points in the fourth quarter of fiscal 2010 reflecting an increasing interest rate environment. Despite the decrease in interest rates, credit growth remained subdued during fiscal 2010. Non-food credit growth moderated to a low of 10.1% at October 30, 2009 on a year-on-year basis, compared to 28.3% at October 31, 2008. Lower loan growth and high liquidity led to incr eased price competition in the banking sector and introduction of products such as home loans with lower rates in the initial years. However, credit growth gained momentum from November 2009 onwards, with year-on-year growth of 16.9% at March 26, 2010 compared to year-on-year growth of 17.5% at
March 27, 2009. Banking system deposits increased by 17.2% on a year-on-year basis at March 26, 2010 compared to 19.9% at March 27, 2009. Demand deposits increased by 23.4% on a year-on-year basis at March 26, 2010 compared to a decline of 0.2% at March 27, 2009.
Equity markets appreciated significantly during fiscal 2010 with the benchmark equity index, the BSE SENSEX, increasing by 80.5% to 17,528 at year-end fiscal 2010 from 9,709 at year-end fiscal 2009. Foreign institutional investments revived with net inflows of US$ 32.4 billion during fiscal 2010 compared to net outflows of US$ 14.0 billion in fiscal 2009. Net foreign direct investments at US$ 19.7 billion during fiscal 2010 were also higher compared to US$ 17.5 billion during fiscal 2009. The revival in trade combined with strong capital inflows improved India’s balance of payments, which recorded a surplus of US$ 13.4 billion in fiscal 2010 compared to a deficit of US$ 20.1 billion in fiscal 2009. As a result, the rupee appreciated by 11.4% against the US dollar from Rs. 51.0 per US dollar at year-end fiscal 200 9 to Rs. 44.9 per US dollar at year-end fiscal 2010 after a depreciation of 27.1% during fiscal 2009.
The recovery in economic activity and improvement in financial markets during fiscal 2010 led to a recovery in the demand for financial savings and investment products, resulting in a recovery in the life insurance and mutual fund sectors. First year retail underwritten premium in the life insurance sector increased by 16.7% (on a weighted received premium basis) to Rs. 550.2 billion in fiscal 2010 compared to a decrease of 10.4% in fiscal 2009. Total assets under management (on an average assets basis) of mutual funds increased by 51.5% from Rs. 4,932.9 billion in March 2009 to Rs. 7,475.3 billion in March 2010 compared to a decrease of 8.4% in March 2009 over March 2008. Until January 1, 2007, almost 70.0% of the general insurance market was subject to price controls under a tariff regime. The general insurance indus try was de-tariffed with effect from January 1, 2007 resulting in reduction in premium rates and in the rate of growth of the industry. Gross premiums in the general insurance sector (excluding specialized insurance institutions) grew by 13.4% to Rs. 347.6 billion in fiscal 2010 compared to 9.2% growth in fiscal 2009 and 12.3% growth in fiscal 2008 with the private sector’s market share at 40.9% in fiscal 2010.
There were a number of key regulatory developments in the Indian financial sector during fiscal 2010:
| | · | Banks were allowed to open offsite ATMs without prior approval of the Reserve Bank of India. Banks were allowed to open branches in tier 3-6 cities (cities with a population of up to 49,999) as defined on the basis of population size in the 2001 census without the prior approval of the Reserve Bank of India. |
| | · | The Reserve Bank of India issued guidelines relating to the issuance and operation of mobile phone based payment instruments. |
| | · | The Reserve Bank of India issued a schedule for the introduction of advanced approaches for the measurement of risks (credit, market and operational) under the Basel II framework. Under this schedule, banks are permitted to apply to the Reserve Bank of India for migration to an internal models approach for market risk and the standardized approach for operational risk from April 1, 2010 and for advanced measurement approach for operational risk and internal ratings based approaches for credit risk from April 1, 2012. The Reserve Bank of India increased the capital requirements relating to securitization exposures and provided enhanced guidance on valuation adjustments for illiquid investments and derivatives. The guidelines also increased disclosure requirements for the mitigation of credit risk and securitized exposures. |
| | · | The Reserve Bank of India issued guidelines revising the method of payment of interest on savings accounts to a daily average basis effective April 1, 2010 which will result in an increase in cost of savings deposits for banks from fiscal 2011. |
| | · | In December 2009, the Reserve Bank of India directed banks to achieve a total provisioning coverage ratio of 70.0% on non-performing advances by September 30, 2010. The provisioning requirement for advances to commercial real estate classified as standard assets was increased from 0.4% to 1.0%. |
| | · | In June 2009, the Securities and Exchange Board of India issued guidelines stating that mutual funds could not apply any entry charges to investors investing in mutual funds. |
| | · | In July 2009, the Insurance Regulatory and Development Authority introduced a cap on charges of unit linked insurance products. These included a cap on the difference between gross and net yields on linked funds and the fund management charges included therein. |
Business overview
While assessing our performance we monitor key financial variables such as movement in yield on assets, cost of funds and net interest margin, movement in fee income, cost ratios, loan loss provisions and return on assets and equity. We also monitor key business indicators such as deposit growth, funding mix, loan disbursements and loan delinquency trends. We also analyze changes in economic indicators such as interest rates, liquidity and exchange rates. In addition to these financial indicators, we monitor other non-financial indicators such as quality of customer service and the extent and nature of customer complaints and estimates of market share in key product lines.
Following the merger of ICICI with ICICI Bank in 2002, we experienced rapid growth in our business. The growth of our rupee loan portfolio was driven primarily by retail loans, including home loans, vehicle loans and unsecured personal loans and credit card receivables. We also commenced our strategy of international expansion and established subsidiaries and branches in several foreign countries. The growth of our international loan portfolio was driven primarily by foreign currency financing to Indian companies and their international operations, including financing for their overseas acquisitions. We also experienced robust growth in our insurance subsidiaries. These activities led to a rapid growth in our fee incomes from both retail and corporate customers. During this period, our branch network in India continued to be limited relative to the size of our balance sheet, and while deposits were our primary source of domestic funding, we had a high share of term deposits in our total deposits, including term deposits from companies and financial intermediaries. Our international branches were funded primarily by international bond issuances and other wholesale funding sources. Our principal international subsidiaries in the United Kingdom and Canada were funded primarily by deposits. Our subsidiary in the United Kingdom had a sizeable proportion of demand deposits in its deposit base, and made investments in bonds of US and European banks and investment banks as a liquidity management strategy. From fiscal 2003 to fiscal 2008, we raised capital to support our growth. In fiscal 2008, we issued equity shares in India and American Depository Shares in the United States, aggregating approximately Rs. 200.0 billion.
Following the onset of the global financial crisis, although we did not have any material direct exposure to US sub-prime assets, we were adversely impacted by mark-to-market and realized losses on our international investments and credit derivatives portfolios on account of the widening of credit spreads in general. More generally the global financial crisis impacted the Indian markets and led to reduced demand for retail savings and investment products and lower levels of corporate investment and merger and acquisition activity during the second half of fiscal 2009, which had a negative impact on our fee and other non-interest income (including dividends from subsidiaries). While we capitalized on opportunities in the fixed income markets due to a reduction in interest rates during the third quarter of fiscal 2009, o ur equity and credit derivatives portfolios were negatively impacted due to weaker equity markets and a widening of credit spreads during fiscal 2009. The global and Indian economic slowdown and its impact on equity and debt markets also adversely impacted the profitability of some of our borrowers and their ability to access equity and debt financing. We experienced an increase in the level of restructured loans in fiscal 2009 and fiscal 2010. We experienced an increase in the non-performing loans in our retail portfolio in fiscal 2009 and fiscal 2010, due to the seasoning of the portfolio and a higher level of defaults in unsecured personal loans and credit card receivables due to challenges in collections and the impact of adverse macroeconomic environment in fiscal 2009.
Given the volatile economic environment in fiscal 2009, we focused on capital conservation, liquidity management and risk containment. We tightened our lending norms, especially in the unsecured retail segment and moderated our credit growth. We expanded our branch network with a focus on increasing our low cost and retail deposit base. At the same time, we maintained a rigorous control on operating expenses. In fiscal 2010, we focused on repositioning our balance sheet for the next phase of growth. We increased the proportion of low cost current and savings account deposits; reduced the level of net non-performing loans; continued to keep a rigorous control on operating expenses; reduced the level of unsecured retail loans and maintained a high level of capital adequacy. Our non-banking subsidiaries engaged in asset m anagement, securities brokering and life insurance have benefited from the stabilization and improvement in economic conditions and the revival of the equity markets in India. Total premiums of our life insurance subsidiary increased by 7.7% during fiscal 2010 as a result of a 19.4% increase in
renewal premium. Our life insurance company recorded its first year of accounting profit during fiscal 2010 with a net profit of Rs. 2.6 billion compared to a net loss of Rs. 7.8 billion during fiscal 2009. Stabilization in the markets also led to a reduction of mark-to-market losses on our equity, fixed income and credit derivatives portfolios.
Our net profit increased by 30.4% from Rs. 35.8 billion in fiscal 2009 to Rs. 46.7 billion in fiscal 2010.
Non-interest income increased by 5.5% driven by an increase in income from insurance business from Rs. 183.6 billion in fiscal 2009 to Rs. 204.8 billion in fiscal 2010, and an increase in treasury-related income from Rs. 21.9 billion in fiscal 2009 to Rs. 26.2 billion in fiscal 2010. The increase in treasury-related income in fiscal 2010 was primarily due to higher profits from our equity portfolio and the contraction in credit spreads on account of improved global market conditions resulting in the reduction of mark-to-market losses on our fixed income and credit derivatives portfolio. Non-interest expense decreased by 1.6% primarily due to a decrease of 5.8% in employee expenses, 18.7% in other administrative expenses due to cost reduction initiatives undertaken by us, and 60.6% decrease in direct marketing agency ex penses due to lower retail loan origination volumes.
The increase in non-interest income and decrease in non-interest expense was partly offset by a decrease of 3.5% in net interest income and an increase of 1.0% in provisions (excluding provision for tax). The decrease in net interest income was mainly due to a 7.1% decrease in average advances primarily due to a decrease in retail advances. Provisions and contingencies (excluding provisions for tax) increased by 1.0% from Rs. 45.1 billion in fiscal 2009 to Rs. 45.6 billion in fiscal 2010, primarily due to a higher level of specific provisioning on non-performing retail loans and restructured corporate loans. This was partly offset by a reduction in impairment provision for investments. The increase in retail credit losses primarily reflects the seasoning of the secured loan portfolio and relatively higher losses on the unsecured portfolio due to challenges in collections and the impact of the adverse macroeconomic environment in fiscal 2009.
Net non-performing assets (including loans and credit substitutes) decreased from Rs. 47.3 billion at year-end fiscal 2009 to Rs. 46.7 billion at year-end fiscal 2010, with the increase in gross non-performing assets offset by higher provisioning. Net restructured assets increased from Rs. 59.6 billion at year-end fiscal 2009 to Rs. 59.9 billion at year-end fiscal 2010 primarily due to stress experienced by certain borrowers in the services and textiles sectors. The increase in restructured assets was partly offset by the reclassification of a portion of the existing restructured assets out of the restructured asset category based on satisfactory payment performance.
Loans decreased by 15.2% from Rs. 2,661.3 billion at year-end fiscal 2009 to Rs. 2,257.8 billion at year-end fiscal 2010 primarily due to a decrease in retail loans. Deposits decreased by 7.7% from Rs. 2,618.6 billion at year-end fiscal 2009 to Rs. 2,415.7 billion at year-end fiscal 2010, primarily due to our conscious strategy of reducing wholesale term deposits. ICICI Bank’s current and savings account deposits as a percentage of total deposits increased from 28.7% at year-end fiscal 2009 to 41.7% at year-end fiscal 2010. We continued to expand our branch network in India during the year. Our branch network in India increased from 1,419 branches and extension counters at year-end fiscal 2009 to 1,707 branches and extension counters at year-end fiscal 2010. We also increased our ATM network from 4,713 ATMs at ye ar-end fiscal 2009 to 5,219 ATMs at year-end fiscal 2010. Our network in India increased to 2,501 branches and 5,665 ATMs at August 19, 2010. This includes 463 branches and 127 ATMs of the Bank of Rajasthan, a private sector bank that merged with us effective from the close of business at August 12, 2010.
The total capital adequacy ratio of ICICI Bank on a standalone basis at year-end fiscal 2010, in accordance with the Reserve Bank of India guidelines on Basel II increased to 19.4% with a tier I capital adequacy ratio of 14.0% from a total capital adequacy of 15.5% and tier I capital adequacy of 11.8% at year-end fiscal 2009. Our total capital adequacy ratio on a consolidated basis at year-end fiscal 2010, in accordance with the Reserve Bank of India guidelines on Basel II increased to 19.1% with a tier I capital adequacy of 12.9% from a total capital adequacy of 14.7% and tier I capital adequacy of 10.3% at year-end fiscal 2009.
Business outlook
The outlook for GDP growth in fiscal 2011 has improved significantly, given the broad-based and robust recovery seen since the last quarter of fiscal 2010. The key drivers are the buoyant performance of the industrial sector, increased monsoon rains and the sustained resilience of the services sector. Investment demand has
accelerated sharply since the last quarter of fiscal 2010 and trends in the growth of production of capital goods in the first quarter of fiscal 2011 suggest a continuation of the momentum. Private consumption demand, as seen from recent trends in corporate sales, consumer durables production and automobile sales growth, is showing a gradual improvement. Although concerns about a possible weakening of global recovery persist, domestic risks to growth have receded significantly. As a result, the Reserve Bank of India has placed its GDP growth projection for fiscal 2011 at 8.5%.
While the growth outlook for fiscal 2011 remains robust, inflation has emerged as an area of concern. Headline inflation has remained close to double digits in fiscal 2011. The fiscal deficit continues to remain high and this may lead to macroeconomic risks ranging from higher inflation to lower savings and the crowding out of private investment. Further, during fiscal 2011 to date, deposit growth in the banking system has lagged non-food credit growth.
We see favorable prospects for the Indian economy over the long-term. India’s strong domestic consumption and investment drivers are expected to continue to support healthy rates of growth. Against this backdrop, we expect increasing household incomes and consumption to lead to opportunities in retail savings, investment and loan products; significant industrial and infrastructure investment potentially leading to opportunities in project and corporate finance; and increasing globalization of India leading to opportunities in international banking for Indian corporates and non-resident Indians.
Over the last two years we have rebalanced our deposit profile, reduced costs, reduced net non-performing loans and maintained high levels of capital adequacy. The completion of this phase of our strategy has coincided with the strengthening of the economic growth momentum in India, which creates an environment with many opportunities for growth. Our objective going forward is to leverage our capital base for profitable growth, while sustaining the improvements in the ratio of current and savings account deposits, cost ratios and credit quality that we have already achieved. As we grow our businesses, meeting customer expectations on service quality will be a critical element of our strategy.
We believe that as a diversified financial services group we are well positioned to capitalize on these opportunities. However, the success of our strategy depends on several factors, including our ability to grow our low cost deposit base; our ability to contain non-performing loans; our ability to maintain regulatory compliance in an evolving regulatory environment and address regulators' assessments of and observations on our operations; and our ability to compete effectively in the Indian corporate and retail financial services market. The success of our strategy is also subject to the overall regulatory and policy environment in which we operate including the direction of monetary policy. In fiscal 2011, between April and September 2010 (up to September 17, 2010), the Reserve Bank of India announced a 25 basis poi nt increase in the cash reserve ratio to 6.00%, a 100 basis point increase in the repo rate to 6.00% and a 150 basis point increase in the reverse repo rate to 5.00%. Profit on the sale of investments in fixed income securities, including government of India securities, is an important element of our profitability and is impacted by movement in market yields. With the increase in loan growth and an increase in the cash reserve ratio and repo and reverse repo rates, liquidity is expected to remain tight, and deposit and lending rates are expected to increase during fiscal 2011. Our insurance business may also be affected by changes in insurance regulations in India. Recently the Insurance Regulatory and Development Authority introduced revisions to the regulations governing unit linked insurance products such as an increase in the lock-in period from three years to five years, increase in minimum mortality cover, cap on surrender and other charges and minimum guaranteed return of 4.5% on pension annuity produ cts. The minimum guaranteed return of 4.5% on pension products is applicable up to year-end fiscal 2011. From fiscal 2012 the guaranteed return will be 50 basis points above the average reverse repo rate subject to a maximum of 6% and a minimum of 3%. These changes may impact the growth and profitability of our life insurance business.
For a detailed discussion of risks that we face in our business please refer to “Risk Factors”.
Other Key Factors
Under Indian GAAP, we have not consolidated certain entities (primarily 3i Infotech Limited) in which control is intended to be temporary. However under US GAAP, these entities have been accounted for in accordance with
FASB ASC Topic 323 — “Investments — Equity Method and Joint Venture”. See also “Business — Subsidiaries and Joint Ventures”.
Effect of Other Acquisitions
During fiscal 2007, ICICI Bank entered into an all-stock merger with Sangli Bank at a share exchange ratio of 100 shares of ICICI Bank for 925 shares of Sangli Bank. Our financial statements for fiscal 2008 include the results of the operations of Sangli Bank from April 19, 2007. The value of this transaction was not material to our overall operations.
Amalgamation of the Bank of Rajasthan Limited
On May 23, 2010, the Board of Directors of ICICI Bank and the Board of Directors of the Bank of Rajasthan, a private sector Indian bank, at their respective meetings approved an all-stock amalgamation of the Bank of Rajasthan with ICICI Bank at a share exchange ratio of 25 shares of ICICI Bank for 118 shares of the Bank of Rajasthan. The Reserve Bank of India has approved the scheme of amalgamation effective from the close of business at August 12, 2010. At year-end fiscal 2010, the Bank of Rajasthan had total assets of Rs. 173.0 billion, deposits of Rs. 150.6 billion, loans of Rs. 83.3 billion, investments of Rs. 67.2 billion and capital adequacy of 7.5%. During fiscal 2010, it incurred a loss of Rs. 1.0 billion. We have issued 31.3 million shares representing 2.8% of our shares to shareholders of the Bank of Rajastha n in August 2010. The total assets of the Bank of Rajasthan represented 4.7% of the total assets of ICICI Bank at year-end fiscal 2010.
The amalgamation substantially enhances ICICI Bank’s branch network and especially strengthens its presence in northern and western India. It combines the Bank of Rajasthan’s branch franchise with ICICI Bank’s strong capital base, to enhance the ability of the combined entity to capitalize on the growth opportunities in the Indian economy.
Introduction of the Base Rate System
Historically, interest rates on loans were set subject to restrictions established by the Reserve Bank of India and linked to a prime lending rate. With effect from July 1, 2010, the Reserve Bank of India implemented a new base rate system requiring banks in India to set and publicly disclose their minimum rate or base rate for all new loans and existing loans which come up for renewal, subject to certain limited exceptions. While existing loans based on the benchmark prime lending rate system will continue to be linked to the benchmark prime lending rate until their maturity, existing borrowers have an option to migrate to the base rate system before the expiry of existing contracts on mutually agreed terms. Except for certain categories of loans as specified by the Reserve Bank of India, banks are not allowed to lend below the base rate. Banks are required to review and, if necessary, revise their base rates at least once every quarter.
The Asset Liability Management Committee of the Bank at its meeting on June 30, 2010, set the base rate of ICICI Bank, called “I-Base”, at 7.50% with effect from July 1, 2010.
Change in Methodology for Computing Interest Payable on Savings Deposits
The Reserve Bank of India has prescribed an interest rate of 3.5% on savings deposits. Until March 31, 2010, banks were required to pay this interest on the minimum outstanding balance in a savings deposit account between the tenth day and last day of the month. Effective April 1, 2010, the Reserve Bank of India has changed the methodology of computation of the interest payable on savings deposits. Banks are now required to pay interest on the daily average balance maintained in a savings deposit account. This change in methodology has resulted in an increased effective interest rate on savings account deposits for Indian banks.
Average Balance Sheet
For fiscal 2008, the average balances are the averages of quarterly balances outstanding at the end of March of the previous fiscal year and June, September, December and March of that year. For fiscal 2009 and 2010, the average balances are the sum of the daily average balances outstanding for ICICI Bank and the average of quarterly balances outstanding at the end of March of the previous fiscal year and June, September, December and March of
that year for subsidiaries. The yield on average interest-earning assets is the ratio of interest income to average interest-earning assets. The cost of average interest-bearing liabilities is the ratio of interest expense to average interest-bearing liabilities. The average balances of advances include non-performing advances and are net of allowance for loan losses. For fiscal 2009 and 2010, we have recalculated tax-exempt income on a tax-equivalent basis. Other interest income has been bifurcated into rupee and foreign currency amounts in order to facilitate the explanation of movements of rupee and foreign currency spreads and margins. The rupee portion is primarily comprised of interest on income tax refunds and income from interest rate swaps. The foreign currency portion is primarily comprised of income from interest rate swaps in foreign currencies. The swaps considered in other interest income are part of the non-trading portfolio and are undertaken by the Bank to manage the market risk arising from our assets and liabilities. Prior period figures have been regrouped accordingly.
The following table sets forth, for the periods indicated, the average balances of the assets and liabilities outstanding, which contribute to the major components of interest income, interest expense and net interest income.
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | Rs. | 1,721,656 | | | Rs. | 202,245 | | | | 11.75 | % | | Rs. | 1,712,680 | | | Rs. | 205,657 | | | | 12.01 | % | | Rs. | 1,496,991 | | | Rs. | 167,553 | | | | 11.19 | % |
| Foreign currency | | | 562,993 | | | | 38,439 | | | | 6.83 | | | | 865,873 | | | | 46,250 | | | | 5.34 | | | | 898,309 | | | | 36,073 | | | | 4.02 | |
Total advances | | | 2,284,649 | | | | 240,684 | | | | 10.53 | | | | 2,578,553 | | | | 251,907 | | | | 9.77 | | | | 2,395,300 | | | | 203,626 | | | | 8.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 820,752 | | | | 77,657 | | | | 9.46 | | | | 1,021,223 | | | | 85,286 | | | | 8.35 | | | | 1,120,887 | | | | 76,140 | | | | 6.79 | |
| Foreign currency | | | 203,710 | | | | 11,388 | | | | 5.59 | | | | 259,140 | | | | 12,256 | | | | 4.73 | | | | 198,279 | | | | 6,131 | | | | 3.09 | |
| Total investments | | | 1,024,462 | | | | 89,045 | | | | 8.69 | | | | 1,280,363 | | | | 97,542 | | | | 7.62 | | | | 1,319,166 | | | | 82,271 | | | | 6.24 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 190,357 | | | | 693 | | | | 0.36 | | | | 232,334 | | | | 3,948 | | | | 1.70 | | | | 251,677 | | | | 5,798 | | | | 2.30 | |
| Foreign currency | | | 128,107 | | | | 8,055 | | | | 6.29 | | | | 91,612 | | | | 3,737 | | | | 4.08 | | | | 94,740 | | | | 1,314 | | | | 1.39 | |
| Total other interest-earning assets | | | 318,464 | | | | 8,748 | | | | 2.75 | | | | 323,946 | | | | 7,685 | | | | 2.37 | | | | 346,417 | | | | 7,112 | | | | 2.05 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other interest Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | | | | | 1,570 | | | | | | | | | | | | 3,314 | | | | | | | | | | | | 2,350 | | | | | |
| Foreign currency | | | | | | | 903 | | | | | | | | | | | | 5,910 | | | | | | | | | | | | 10,285 | | | | | |
| Total other interest income | | | | | | | 2,473 | | | | | | | | | | | | 9,224 | | | | | | | | | | | | 12,635 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 2,732,765 | | | | 282,165 | | | | 10.33 | | | | 2,966,237 | | | | 298,205 | | | | 10.05 | | | | 2,869,555 | | | | 251,840 | | | | 8.78 | |
| Foreign currency | | | 894,810 | | | | 58,785 | | | | 6.57 | | | | 1,216,624 | | | | 68,153 | | | | 5.60 | | | | 1,191,328 | | | | 53,804 | | | | 4.52 | |
| Total interest-earning assets | | | 3,627,575 | | | | 340,950 | | | | 9.40 | | | | 4,182,862 | | | | 366,358 | | | | 8.76 | | | | 4,060,883 | | | | 305,644 | | | | 7.53 | |
Fixed assets | | | 44,727 | | | | | | | | | | | | 46,351 | | | | | | | | | | | | 42,485 | | | | | | | | | |
Other assets | | | 688,866 | | | | | | | | | | | | 669,451 | | | | | | | | | | | | 827,354 | | | | | | | | | |
| Total non-earning assets | | | 733,593 | | | | | | | | | | | | 715,802 | | | | | | | | | | | | 869,839 | | | | | | | | | |
Total assets | | Rs. | 4,361,168 | | | Rs. | 340,950 | | | | | | | Rs. | 4,898,664 | | | Rs. | 366,358 | | | | | | | Rs. | 4,930,722 | | | Rs. | 305,644 | | | | | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings account deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | Rs. | 346,323 | | | Rs. | 8,803 | | | | 2.54 | % | | Rs. | 390,811 | | | Rs. | 10,624 | | | | 2.72 | % | | Rs. | 450,901 | | | Rs. | 12,576 | | | | 2.79 | % |
| Foreign currency | | | 116,333 | | | | 6,897 | | | | 5.93 | | | | 141,891 | | | | 9,731 | | | | 6.86 | | | | 102,426 | | | | 2,015 | | | | 1.97 | |
| Total savings account deposits | | | 462,656 | | | | 15,700 | | | | 3.39 | | | | 532,701 | | | | 20,355 | | | | 3.82 | | | | 553,327 | | | | 14,591 | | | | 2.64 | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 1,627,756 | | | | 158,760 | | | | 9.75 | | | | 1,509,234 | | | | 145,202 | | | | 9.62 | | | | 1,210,185 | | | | 101,328 | | | | 8.37 | |
| Foreign currency | | | 218,567 | | | | 12,760 | | | | 5.84 | | | | 345,237 | | | | 16,950 | | | | 4.91 | | | | 446,396 | | | | 19,174 | | | | 4.30 | |
| Total time deposits | | | 1,846,323 | | | | 171,520 | | | | 9.29 | | | | 1,854,471 | | | | 162,152 | | | | 8.74 | | | | 1,656,581 | | | | 120,502 | | | | 7.27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other demand deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 216,479 | | | | | | | | | | | | 176,312 | | | | | | | | | | | | 178,012 | | | | | | | | | |
| Foreign currency | | | 12,741 | | | | | | | | | | | | 14,194 | | | | | | | | | | | | 16,600 | | | | | | | | | |
| Total other demand deposits | | | 229,220 | | | | | | | | | | | | 190,506 | | | | | | | | | | | | 194,612 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 2,190,558 | | | | 167,563 | | | | 7.65 | | | | 2,076,356 | | | | 155,826 | | | | 7.50 | | | | 1,839,098 | | | | 113,904 | | | | 6.19 | |
| Foreign currency | | | 347,641 | | | | 19,657 | | | | 5.65 | | | | 501,322 | | | | 26,681 | | | | 5.32 | | | | 565,422 | | | | 21,189 | | | | 3.75 | |
Total deposits | | | 2,538,199 | | | | 187,220 | | | | 7.38 | | | | 2,577,678 | | | | 182,507 | | | | 7.08 | | | | 2,404,520 | | | | 135,093 | | | | 5.62 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrowings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 374,124 | | | | 37,698 | | | | 10.08 | | | | 515,340 | | | | 47,804 | | | | 9.28 | | | | 626,428 | | | | 44,769 | | | | 7.15 | |
| Foreign currency | | | 590,734 | | | | 32,752 | | | | 5.54 | | | | 785,853 | | | | 34,562 | | | | 4.40 | | | | 682,395 | | | | 27,430 | | | | 4.02 | |
| Total borrowings | | | 964,858 | | | | 70,450 | | | | 7.30 | | | | 1,301,193 | | | | 82,366 | | | | 6.33 | | | | 1,308,823 | | | | 72,199 | | | | 5.52 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 2,564,682 | | | | 205,261 | | | | 8.00 | | | | 2,591,696 | | | | 203,630 | | | | 7.86 | | | | 2,465,526 | | | | 158,673 | | | | 6.44 | |
| Foreign currency | | | 938,375 | | | | 52,409 | | | | 5.59 | | | | 1,287,175 | | | | 61,243 | | | | 4.76 | | | | 1,247,817 | | | | 48,619 | | | | 3.90 | |
| Total interest-bearing liabilities | | | 3,503,057 | | | | 257,670 | | | | 7.36 | | | | 3,878,871 | | | | 264,873 | | | | 6.83 | | | | 3,713,343 | | | | 207,292 | | | | 5.58 | |
| Preference share capital | | | 3,500 | | | | | | | | | | | | 3,500 | | | | | | | | | | | | 3,500 | | | | | | | | | |
Other liabilities | | | 487,809 | | | | | | | | | | | | 533,613 | | | | | | | | | | | | 701,288 | | | | | | | | | |
Total liabilities | | | 3,994,366 | | | | 257,670 | | | | | | | | 4,415,984 | | | | 264,873 | | | | | | | | 4,418,131 | | | | 207,292 | | | | | |
| Stockholders’ equity | | | 366,802 | | | | | | | | | | | | 482,680 | | | | | | | | | | | | 512,591 | | | | | | | | | |
| Total liabilities and stockholders’ equity | | Rs. | 4,361,168 | | | Rs. | 257,670 | | | | | | | Rs. | 4,898,664 | | | Rs. | 264,873 | | | | | | | Rs. | 4,930,722 | | | Rs. | 207,292 | | | | | |
Analysis of Changes in Interest Income and Interest Expense: Volume and Rate Analysis
The following table sets forth, for the periods indicated, the changes in the components of net interest income. The changes in net interest income between periods have been reflected as attributed either to volume or rate changes. For the purpose of this table, changes which are due to both volume and rate, have been allocated solely to volume.
| | | Fiscal 2009 vs. Fiscal 2008 | | | Fiscal 2010 vs. Fiscal 2009 | |
| | | Increase (decrease) due to | | | Increase (decrease) due to | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions) | |
| Interest income: | | | | | | | | | | | | | | | | | | |
| Advances: | | | | | | | | | | | | | | | | | | |
Rupee | | Rs. | 3,412 | | | Rs. | (1,078 | ) | | Rs. | 4,490 | | | Rs. | (38,104 | ) | | Rs. | (24,141 | ) | | Rs. | (13,963 | ) |
| Foreign currency | | | 7,811 | | | | 16,178 | | | | (8,367 | ) | | | (10,177 | ) | | | 1,303 | | | | (11,480 | ) |
Total advances | | | 11,223 | | | | 15,100 | | | | (3,877 | ) | | | (48,281 | ) | | | (22,838 | ) | | | (25,443 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 7,629 | | | | 16,741 | | | | (9,113 | ) | | | (9,146 | ) | | | 6,770 | | | | (15,916 | ) |
Foreign currency | | | 868 | | | | 2,622 | | | | (1,754 | ) | | | (6,125 | ) | | | (1,882 | ) | | | (4,243 | ) |
Total investments | | | 8,497 | | | | 19,363 | | | | (10,867 | ) | | | (15,271 | ) | | | 4,888 | | | | (20,159 | ) |
| Other interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 3,255 | | | | 713 | | | | 2,542 | | | | 1,850 | | | | 446 | | | | 1,404 | |
| | | Fiscal 2009 vs. Fiscal 2008 | | | Fiscal 2010 vs. Fiscal 2009 | |
| | | Increase (decrease) due to | | | Increase (decrease) due to | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions) | |
| Foreign currency | | | (4,318 | ) | | | (1,489 | ) | | | (2,829 | ) | | | (2,423 | ) | | | 43 | | | | (2,466 | ) |
| Total other interest earning asset | | | (1,063 | ) | | | (775 | ) | | | (287 | ) | | | (573 | ) | | | 489 | | | | (1,062 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other interest income | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 1,744 | | | | – | | | | 1,744 | | | | (964 | ) | | | – | | | | (964 | ) |
| Foreign currency | | | 5,007 | | | | – | | | | 5,007 | | | | 4,375 | | | | – | | | | 4,375 | |
| Other interest income | | | 6,751 | | | | – | | | | 6,751 | | | | 3,411 | | | | – | | | | 3,411 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 16,040 | | | | 16,377 | | | | (338 | ) | | | (46,364 | ) | | | (16,925 | ) | | | (29,439 | ) |
| Foreign currency | | | 9,368 | | | | 17,311 | | | | (7,943 | ) | | | (14,350 | ) | | | (536 | ) | | | (13,814 | ) |
| Total interest income | | | 25,409 | | | | 33,688 | | | | (8,281 | ) | | | (60,714 | ) | | | (17,461 | ) | | | (43,253 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings account deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 1,821 | | | | 1,209 | | | | 612 | | | | 1,952 | | | | 1,676 | | | | 276 | |
| Foreign currency | | | 2,834 | | | | 1,753 | | | | 1,081 | | | | (7,716 | ) | | | (776 | ) | | | (6,940 | ) |
| Total savings account deposits | | | 4,655 | | | | 2,962 | | | | 1,693 | | | | (5,764 | ) | | | 900 | | | | (6,664 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Time deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | (13,558 | ) | | | (11,403 | ) | | | (2,156 | ) | | | (43,874 | ) | | | (25,039 | ) | | | (18,835 | ) |
| Foreign currency | | | 4,190 | | | | 6,219 | | | | (2,029 | ) | | | 2,224 | | | | 4,345 | | | | (2,121 | ) |
| Total time deposits | | | (9,368 | ) | | | (5,184 | ) | | | (4,185 | ) | | | (41,650 | ) | | | (20,694 | ) | | | (20,956 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | (11,737 | ) | | | (10,194 | ) | | | (1,544 | ) | | | (41,922 | ) | | | (23,363 | ) | | | (18,559 | ) |
| Foreign currency | | | 7,024 | | | | 7,972 | | | | (948 | ) | | | (5,492 | ) | | | 3,569 | | | | (9,061 | ) |
| Total total deposits | | | (4,713 | ) | | | (2,222 | ) | | | (2,492 | ) | | | (47,414 | ) | | | (19,794 | ) | | | (27,619 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrowings: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 10,106 | | | | 13,099 | | | | (2,993 | ) | | | (3,035 | ) | | | 7,939 | | | | (10,974 | ) |
| Foreign currency | | | 1,810 | | | | 8,581 | | | | (6,771 | ) | | | (7,132 | ) | | | (4,159 | ) | | | (2,973 | ) |
Total borrowings | | | 11,917 | | | | 21,681 | | | | (9,764 | ) | | | (10,167 | ) | | | 3,780 | | | | (13,947 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | (1,631 | ) | | | 2,906 | | | | (4,537 | ) | | | (44,957 | ) | | | (15,424 | ) | | | (29,533 | ) |
| Foreign currency | | | 8,834 | | | | 16,553 | | | | (7,719 | ) | | | (12,624 | ) | | | (590 | ) | | | (12,034 | ) |
| Total interest expense | | | 7,203 | | | | 19,459 | | | | (12,256 | ) | | | (57,581 | ) | | | (16,014 | ) | | | (41,567 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Rupee | | | 17,671 | | | | 13,471 | | | | 4,199 | | | | (1,407 | ) | | | (1,501 | ) | | | 94 | |
| Foreign currency | | | 534 | | | | 758 | | | | (224 | ) | | | (1,726 | ) | | | 54 | | | | (1,780 | ) |
| Total net interest income | | Rs. | 18,205 | | | Rs. | 14,229 | | | Rs. | 3,975 | | | Rs. | (3,133 | ) | | Rs. | (1,447 | ) | | Rs. | (1,686 | ) |
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields, spreads and net interest margins on interest-earning assets.
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Interest income | | Rs. | 143,335 | | | Rs. | 240,026 | | | Rs. | 340,950 | | | Rs. | 366,358 | (1) | | Rs. | 305,644 | (1) |
| | | | |
| | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Average interest-earning assets | | | 1,806,601 | | | | 2,728,531 | | | | 3,627,575 | | | | 4,182,862 | | | | 4,060,883 | |
Interest expense | | | 101,015 | | | | 176,757 | | | | 257,670 | | | | 264,873 | | | | 207,292 | |
| Average interest-bearing liabilities | | | 1,795,244 | | | | 2,707,456 | | | | 3,503,057 | | | | 3,878,871 | | | | 3,713,342 | |
Average total assets | | | 2,166,897 | | | | 3,250,679 | | | | 4,361,168 | | | | 4,898,664 | | | | 4,930,722 | |
| Average interest-earning assets as a percentage of average total assets | | | 83.37 | % | | | 83.94 | % | | | 83.18 | % | | | 85.39 | % | | | 82.36 | % |
| Average interest-bearing liabilities as a percentage of average total assets | | | 82.85 | | | | 83.29 | | | | 80.32 | | | | 79.18 | | | | 75.31 | |
| Average interest-earning assets as a percentage of average interest-bearing liabilities | | | 100.63 | | | | 100.78 | | | | 103.55 | | | | 107.84 | | | | 109.36 | |
| | | | | | | | | | | | | | | | | | | | | |
Yield | | | 7.93 | | | | 8.80 | | | | 9.40 | | | | 8.76 | | | | 7.53 | |
| Rupee | | | 8.37 | | | | 9.35 | | | | 10.33 | | | | 10.05 | | | | 8.78 | |
| Foreign currency | | | 5.53 | | | | 6.47 | | | | 6.57 | | | | 5.60 | | | | 4.52 | |
| | | | | | | | | | | | | | | | | | | | | |
Cost of funds | | | 5.63 | | | | 6.53 | | | | 7.36 | | | | 6.83 | | | | 5.58 | |
| Rupee | | | 5.91 | | | | 6.86 | | | | 8.00 | | | | 7.86 | | | | 6.44 | |
| Foreign currency | | | 4.24 | | | | 5.31 | | | | 5.59 | | | | 4.76 | | | | 3.90 | |
| | | | | | | | | | | | | | | | | | | | | |
Spread(2) | | | 2.30 | | | | 2.27 | | | | 2.04 | | | | 1.93 | | | | 1.95 | |
| Rupee | | | 2.46 | | | | 2.49 | | | | 2.33 | | | | 2.19 | | | | 2.34 | |
| Foreign currency | | | 1.29 | | | | 1.16 | | | | 0.98 | | | | 0.84 | | | | 0.62 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net interest margin(3) | | | 2.34 | | | | 2.32 | | | | 2.30 | | | | 2.43 | | | | 2.42 | |
| Rupee | | | 2.61 | | | | 2.74 | | | | 2.81 | | | | 3.19 | | | | 3.25 | |
| Foreign currency | | | 0.87 | | | | 0.54 | | | | 0.71 | | | | 0.57 | | | | 0.44 | |
_____________
| (1) | For fiscal 2009 and 2010, we have recalculated tax-exempt income on a tax-equivalent basis. |
| (2) | Spread is the difference between yield on average interest-earning assets and cost of average interest-bearing liabilities. Yield on average interest-earning assets is the ratio of interest income to average interest-earning assets. Cost of average interest-bearing liabilities is the ratio of interest expense to average interest-bearing liabilities. |
| (3) | Net interest margin is the ratio of net interest income to average interest-earning assets. The difference in net interest margin and spread arises due to the difference in amount of average interest-earning assets and average interest-bearing liabilities. If average interest-earning assets exceed average interest-bearing liabilities, net interest margin is greater than the spread and if average interest-bearing liabilities exceed average interest-earning assets, net interest margin is less than the spread. |
Net Interest Income
The following table sets forth, for the periods indicated, the principal components of net interest income.
| | | Year ended March 31, | |
| | | 2009 | | | 2010 | | | 2010 | | | 2010/2009 % change | |
| | | (in millions, except percentages) | |
Interest income | | Rs. | 362,507 | | | Rs. | 301,537 | | | US$ | 6,708 | | | | (16.8 | )% |
Interest expense | | | (264,873 | ) | | | (207,292 | ) | | | (4,611 | ) | | | (21.7 | ) |
Net interest income(1) | | Rs. | 97,634 | | | Rs. | 94,245 | | | US$ | 2,097 | | | | (3.5 | )% |
| (1) | Tax exempt income has not been recalculated on a tax-equivalent basis. |
Net interest income decreased by 3.5% from Rs. 97.6 billion in fiscal 2009 to Rs. 94.2 billion in fiscal 2010 reflecting a decrease of 2.9% in the average volume of interest-earning assets. Net interest margin decreased by one basis point from 2.43% in fiscal 2009 to 2.42% in fiscal 2010.
Net interest margin
Net interest margin decreased by one basis point from 2.43% in fiscal 2009 to 2.42% in fiscal 2010. There was an increase of six basis points in the net interest margin on the rupee portfolio, which was offset by a decrease of 13 basis points in the net interest margin on the foreign currency portfolio.
The yield on the rupee portfolio decreased by 127 basis points from 10.1% in fiscal 2009 to 8.8% in fiscal 2010 due to the following factors:
| | · | Liquidity in the Indian banking system remained comfortable throughout fiscal 2010, with average liquidity adjustment facility balances (short-term lending by banks to the Reserve Bank of India) in excess of Rs. 1.00 trillion for a large part of the year. In response to abundant systemic liquidity and a low interest rate environment, banks reduced their deposit rates for various maturities by 25-250 basis points during March-December 2009. The impact of the lower cost of funds for banks was also transmitted to interest rates on loans, with the benchmark prime lending rates of banks declining by 25-100 basis points during the same period. Lower loan growth and high liquidity led to increased price competition in the banking sector and introduction of products such as home loans with lower rates in the initial years of such loans. We reduced our prime lending rate by 100 basis points from 16.75% to 15.75%, effective June 5, 2009. Further, we reduced the floating reference rate applicable for our floating rate home loans by 100 basis points from 13.75% to 12.75%, effective June 5, 2009. As a result, the yield on rupee loans decreased from 12.0% in fiscal 2009 to 11.2% in fiscal 2010. |
| | · | The proportion of high yielding unsecured retail loans in our loan portfolio declined as a result of our conscious strategy of reducing our exposure to this asset class. |
| | · | The yield on our government securities portfolio also declined, reflecting the systemic decline in yields on government securities since October 2008 and the realization of mark-to-market gains through the sale of higher yielding government securities in our portfolio in the second half of fiscal 2009 and the first quarter of fiscal 2010. We also deployed excess liquidity available with us in mutual funds and other liquid investments. The higher level of such investments and the decrease in yield on the government securities portfolio resulted in a decrease in yield on rupee investments by 156 basis points from 8.4% in fiscal 2009 to 6.8% in fiscal 2010. |
| | · | The Reserve Bank of India increased the cash reserve ratio by 75 basis points to 5.75% at year-end fiscal 2010. As cash reserve ratio balances do not earn any interest income, the increase in requirement resulted in a negative impact on yield on interest-earning assets. The full impact of recent increases in the cash reserve ratio requirement will be reflected in the net interest margin from the first quarter of fiscal 2011. |
| | · | We earned lower interest of Rs. 1.2 billion, on income tax refunds, in fiscal 2010 compared to Rs. 3.4 billion in fiscal 2009. The receipt, amount and timing of such income depends on the nature and timing of determinations by tax authorities and is not consistent or predictable. |
| | · | We deduct losses from the securitization of assets (including credit losses on existing securitized pools) from our interest income. The amount of such losses was Rs. 5.1 billion in fiscal 2010 compared to Rs. 3.2 billion in fiscal 2009. See also “Critical Accounting Policies – Transfer and Servicing of Assets”. |
The cost of funds for the rupee portfolio decreased by 142 basis points from 7.9% in fiscal 2009 to 6.4% in fiscal 2010. The decrease in the cost of funds for the rupee portfolio was due to a decline in interest rates in the economy, a higher proportion of low cost current and savings deposits in our deposit base and a reduction in our wholesale term deposits. The proportion of current and savings accounts deposits to the total deposits of ICICI Bank increased from 28.7% at year-end fiscal 2009 to 41.7% at year-end fiscal 2010. As a result, the cost of rupee deposits decreased from 7.5% in fiscal 2009 to 6.2% in fiscal 2010. The cost of rupee borrowings decreased due to a decrease in the cost of call borrowings and repurchase transaction borrowings.
The six month LIBOR, which is generally the benchmark for our foreign currency loans and borrowings, decreased from 1.8% in March 2009 to 0.4% in March 2010, which led to a decrease in both the yield on and cost of
funds of the foreign currency portfolio. The yield on the foreign currency portfolio decreased by 108 basis points from 5.6% in fiscal 2009 to 4.5% in fiscal 2010, whereas the cost of foreign currency funds decreased by 86 basis points from 4.8% in fiscal 2009 to 3.9% in fiscal 2010.
The Reserve Bank of India prescribes a rate of 3.5% on savings deposits and the methodology of computing the interest. Until March 31, 2010, banks were required to pay interest on the minimum outstanding balance in a savings account between the tenth and last day of the month. Accordingly, the effective cost of savings deposits for banks was much less than the prescribed rate of 3.5%. Effective April 1, 2010, the interest is paid on the average balance in a savings account which will adversely impact the net interest margin of Indian banks including us. ICICI Bank’s cost of savings account deposits for fiscal 2010 was 2.8% which has increased to 3.5% from April 1, 2010. Based on average balances for fiscal 2010, this change would adversely impact our net interest margin by approximately eight basis points.
Interest-earning assets
The average volume of interest-earning assets decreased by 2.9% from Rs. 4,182.9 billion in fiscal 2009 to Rs. 4,060.9 billion in fiscal 2010. The decrease in interest-earning assets was primarily on account of a decrease in average loans by Rs. 183.3 billion. Average interest-earning investments increased by Rs. 38.8 billion in fiscal 2010.
Average loans decreased by 7.1% from Rs. 2,578.6 billion in fiscal 2009 to Rs. 2,395.3 billion in fiscal 2010 mainly due to a decrease in average rupee loans by 12.6% from Rs. 1,712.7 billion in fiscal 2009 to Rs. 1,497.0 billion in fiscal 2010, partly offset by a 3.7% increase in average foreign currency loans from Rs. 865.9 billion at year-end fiscal 2009 to Rs. 898.3 billion at year-end fiscal 2010. Rupee loans decreased mainly due to a decrease in the retail loan portfolio of ICICI Bank by 25.6% from Rs. 1,062.0 billion at year-end fiscal 2009 to Rs. 790.5 billion at year-end fiscal 2010. This was due to the strategy of reducing the unsecured retail loan portfolio, a moderation in new secured retail loan disbursements and contractual repayments and prepayments on the existing portfolio. In rupee terms, the loan por tfolio of overseas branches and subsidiaries decreased by 13.1% from Rs. 945.4 billion at year-end fiscal 2009 to Rs. 821.1 billion at year-end fiscal 2010 mainly due to the impact of appreciation of the rupee vis-a-vis the US dollar. In US dollar terms, the loan portfolio of overseas branches and subsidiaries decreased marginally from US$ 18.3 billion at year-end fiscal 2009 to US$ 17.8 billion at year-end fiscal 2010.
Average interest-earning investments increased by 3.0% from Rs. 1,280.4 billion in fiscal 2009 to Rs. 1,319.2 billion in fiscal 2010, primarily due to an increase in average interest-earning investments other than the investment in government and other approved securities by 9.4% from Rs. 535.9 billion at year-end fiscal 2009 to Rs. 586.3 billion at year-end fiscal 2010. Average interest-earning investments, other than government and other approved securities primarily include the investments in credit substitutes and investments in liquid mutual funds to deploy excess liquidity. Average investments in government and other approved securities decreased due to reduction in domestic net demand and time liabilities partly offset by an increase of 100 basis points in the statutory liquidity ratio requirement from 24.0% to 25.0% during fiscal 2010.
See also “Risk Factors — Risks Relating to Our Business — Our banking and trading activities are particularly vulnerable to interest rate risk and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our income from treasury operations, the quality of our loan portfolio and our financial performance”.
Non-Interest Income
The following table sets forth, for the periods indicated, the principal components of non-interest income.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Commission, exchange and brokerage | | Rs. | 65,748 | | | Rs. | 60,039 | | | US$ | 1,336 | | | | (8.7 | )% |
| Profit/(loss) on treasury-related activities (net)(1) | | | 21,851 | | | | 26,194 | | | | 583 | | | | 19.9 | |
| Profit/(loss) on sale of land, buildings and other assets (net) | | | 15 | | | | 822 | | | | 18 | | | | – | |
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Income pertaining to insurance business | | | 183,582 | | | | 204,758 | | | | 4,555 | | | | 11.5 | |
| Miscellaneous income (including lease income) | | | 7,828 | | | | 2,648 | | | | 59 | | | | (66.2 | ) |
Total non-interest income | | Rs. | 279,024 | | | Rs. | 294,461 | | | US$ | 6,551 | | | | 5.5 | % |
_____________
| (1) | Includes profit/(loss) on the sale/revaluation of investments and foreign exchange transactions. |
Non-interest income primarily includes income pertaining to our insurance business, fee and commission income, income from treasury-related activities and other miscellaneous income (including lease income). This analysis of non-interest income should be read against the backdrop of global and Indian economic developments, financial market activities, the competitive environment, client activity levels and our strategy, as detailed in earlier sections.
Non-interest income increased by 5.5% from Rs. 279.0 billion in fiscal 2009 to Rs. 294.5 billion in fiscal 2010. The increase in non-interest income was primarily due to an increase in income related to our insurance business and our treasury-related activities. During fiscal 2010, there was a decrease in commission, exchange and brokerage income and a decrease in miscellaneous income (including lease income).
Commission, exchange and brokerage
Commission, exchange and brokerage income primarily includes fees from our banking business, and the fee and brokerage income of our securities broking and asset management subsidiaries. The fee income of our banking business is mainly comprised of loan processing and transaction banking fees from corporate and retail clients, credit card fees, appraisal, syndication and advisory fees from corporate clients and fees from the distribution of third-party retail products. Commission, exchange and brokerage income decreased by 8.7% from Rs. 65.8 billion in fiscal 2009 to Rs. 60.0 billion in fiscal 2010, primarily due to subdued credit demand from the corporate sector in fiscal 2010, resulting in lower appraisal and advisory fees, and lower retail loan origination and credit card business volumes resulting in lower fees fro m these products. This was partly offset by an increase in fee and brokerage income of our securities broking and asset management subsidiaries.
Fee income including appraisal, advisory, loan processing and other fees from the corporate sector decreased due to subdued credit demand from the corporate sector and slower domestic corporate activity during fiscal 2010. The fee income of our overseas branches and banking subsidiaries also decreased due to reduced international activity by Indian corporates. Moderation in retail disbursements resulted in lower retail loan related fees in fiscal 2010 compared to fiscal 2009. Following the reduction in our credit card portfolio, specifically products like equated monthly installments/personal loan on credit cards and lower issuance of new credit cards, the fees related to credit card business declined substantially in fiscal 2010 compared to fiscal 2009. Fee income from our credit card business was Rs. 6.9 billion in f iscal 2010, a decline of 31.0% from Rs. 10.0 billion in fiscal 2009.
Commission, exchange and brokerage of our securities broking subsidiary increased by 51.1% from Rs. 4.7 billion in fiscal 2009 to Rs. 7.1 billion in fiscal 2010, primarily due to improved capital market conditions resulting in a higher level of market trade volumes. The management fees of our asset management subsidiary increased by 43.8% from Rs. 3.2 billion in fiscal 2009 to Rs. 4.6 billion in fiscal 2010, primarily due to higher assets under management. The average assets under management increased from Rs. 498.1 billion in fiscal 2009 to Rs. 769.9 billion in fiscal 2010, primarily due to an increase in market price of securities.
Profit/(loss) on treasury-related activities (net)
Income from treasury-related activities includes income from sale of investments and the revaluation of investments on account of changes in unrealized profit/(loss) in the fixed income, equity and preference share portfolio, units of venture capital and private equity funds, and security receipts issued by asset reconstruction
companies. It also includes income from foreign exchange transactions, consisting of various foreign exchange and derivatives transactions with clients, including options and swaps, and on credit derivatives instruments including credit default swaps, credit-linked notes and collateralized debt obligations. Profit from treasury-related activities increased from Rs. 21.9 billion in fiscal 2009 to Rs. 26.2 billion in fiscal 2010. The increase in treasury-related income in fiscal 2010 was primarily due to higher profits from our equity portfolio, realized gain and mark-to-market loss reversal on our credit derivatives portfolio, write-back of provisions related to derivatives contracts with clients and lower provisions on our investment in security receipts issued by asset reconstruction companies. This was offset by lower profits from investments in government securities and other domestic fixed income positions and lower income from foreign exchange and derivatives transactions with our clients.
The benchmark equity index, the BSE SENSEX, increased by 80.5% from 9,709 at year-end fiscal 2009 to 17,528 at year-end fiscal 2010, compared to a decline of 37.9% during fiscal 2009. We made a profit of Rs. 6.9 billion from our equity portfolio in fiscal 2010, against a loss of Rs. 4.6 billion in fiscal 2009.
We deal in credit derivatives instruments including credit default swaps, credit-linked notes and collateralized debt obligations. These include both funded and non-funded instruments. The notional principal amount of funded instruments at year-end fiscal 2010 was Rs. 28.0 billion compared to Rs. 33.7 billion at year-end fiscal 2009. The notional principal amount of non-funded instruments at year-end fiscal 2010 was Rs. 32.9 billion compared to Rs. 38.7 billion at year-end fiscal 2009. During fiscal 2010, the contraction in credit spreads due to improved global market conditions resulted in reversal of mark-to-market provisions and realized gains of Rs. 5.1 billion compared to a loss of Rs. 3.6 billion in fiscal 2009.
We offer various derivatives products, including options and swaps, to our clients primarily for their risk management purposes. We generally do not carry market risk on client derivatives positions as we cover ourselves in the inter-bank market. Profits or losses on account of currency movements on these transactions are borne by the clients. During fiscal 2009, due to high exchange rate volatility as a result of the financial crisis, a number of clients experienced significant mark-to-market losses in derivatives transactions. On maturity or premature termination of the derivatives contracts, these mark-to-market losses became receivables owed to us. Some clients did not pay their derivatives contract obligations to us in a timely manner and, in some instances, clients filed lawsuits to avoid payment of derivatives c ontract obligations entirely. In other instances, at the request of clients, we converted overdue amounts owed to us into loans and advances. In October 2008, the Reserve Bank of India issued guidelines requiring banks to classify derivatives contract receivables overdue for 90 days or more as non-performing assets. Pursuant to these guidelines, we reverse derivatives contract receivables in our income statement when they are overdue for 90 days or more. After reversal, any recovery is accounted for only on actual receipt of payment. We pursue a variety of recovery strategies to collect receivables owed in connection with derivatives contracts. These strategies include, among other approaches, set-offs against any other payables to the same client, negotiated settlements, rescheduling of obligations, the exercise of rights against collateral (if available) and legal redress. We select collection strategies and make assessments of collectability based on all available financial information about a client acco unt as well as economic and legal factors that may affect our recovery efforts. In fiscal 2009, we reversed an amount equal to Rs. 4.4 billion under Indian GAAP relating to receivables under derivatives contracts that were overdue for more than 90 days, in accordance with the Reserve Bank of India guidelines. In fiscal 2010, there was a net write back of Rs. 0.4 billion.
The treatment of receivables owed in connection with derivatives contracts differs under US GAAP from that under Indian GAAP. Under US GAAP, these receivables are analyzed to identify the required provisions in the same manner as provisions for loan losses. Accordingly, under US GAAP, the amount receivable by us when a derivatives contract obligation arises is charged to the client’s account and treated like a loan. We periodically conduct a comprehensive analysis of our corporate loan portfolio, including overdue derivatives receivables, to determine appropriate allowances for loan losses. This analysis takes into account both qualitative and quantitative criteria, including among other considerations, the account conduct, future prospects, repayment history and financial performance. This comprehensive analysis includes an account-by-account review of a substantial portion of our corporate loan portfolio, and an allowance is made for probable loss, if any, on each account. In addition to the detailed review of large balance loans, we also classify our portfolio based on the overdue status of each account and classify loans as impaired if principal or interest has remained overdue for more than 90 days.
At year-end fiscal 2010, we had an outstanding net investment of Rs. 33.9 billion in security receipts issued by asset reconstruction companies in relation to the sale of non-performing assets. In accordance with the Reserve Bank of India guidelines on “Prudential norms for classification, valuation and operation of investment portfolio by banks”, all instruments received by banks, whether as consideration for transferred non-performing assets or otherwise, are securities. The Reserve Bank of India guidelines on the valuation and classification of securities apply to these security receipts as well. At the end of each reporting period, security receipts issued by asset reconstruction companies are valued in accordance with the guidelines applicable to such instruments, as prescribed by the Reserve Bank of I ndia from time to time. Accordingly, in cases where the cash flows from security receipts issued by asset reconstruction companies are limited to the actual realization of the financial assets assigned to the instruments in the concerned scheme, we consider the net asset value obtained from the asset reconstruction company from time to time, for the valuation of such investments at each reporting period end and record the mark-to-market adjustment on this basis as part of our income from treasury activities. During fiscal 2010, the mark-to-market loss on this account was Rs. 1.9 billion compared to Rs. 3.3 billion in fiscal 2009.
During fiscal 2010, we capitalized on market opportunities to realize gains from our government securities portfolio and other fixed income positions. However, the opportunities were limited compared to fiscal 2009. We earned a profit of Rs. 8.2 billion on our government securities portfolio and other fixed income positions in fiscal 2010 compared to Rs. 26.5 billion in fiscal 2009. Our fixed income portfolio generally benefits from declining interest rates. During fiscal 2009, subsequent to the bankruptcy filing by Lehman Brothers and the developments with respect to other financial institutions in the United States and United Kingdom, central banks across the world including the Reserve Bank of India announced various monetary easing measures along with infusion of liquidity in the banking system. This led to a sharp reduction in domestic interest rates. The yield on ten-year government of India securities after increasing from 7.94% at year-end fiscal 2008 to a peak of about 9.47% declined sharply to a low of 5.09% at January 5, 2009. We positioned ourselves to take advantage of the change in the interest rate scenario by increasing the duration of the government securities as well as taking trading positions to benefit from the drop in yields. This resulted in significant gains from the fixed income securities during fiscal 2009. During fiscal 2010, concerns over the fiscal deficit together with the Reserve Bank of India’s gradual exit from expansionary monetary policy and inflationary pressures led to expectations of hardening of interest rates. The yield on ten-year government of India securities, after declining in the initial months increased by 81 basis points from 7.01% at year-end fiscal 2009 to 7.82% at year-end fiscal 2010.
Our income from foreign exchange transactions with clients and from margins on derivatives transactions with clients declined from Rs. 10.6 billion in fiscal 2009 to Rs. 7.3 billion in fiscal 2010. This was primarily due to lower client transaction volumes and market activity during this period.
Our subsidiary, ICICI Bank UK had an investment portfolio comprised of bonds, credit-linked notes, asset backed securities and equity of Rs. 148.5 billion at year-end fiscal 2009 and Rs. 89.8 billion at year-end fiscal 2010. The investment portfolio of ICICI Bank UK includes investments of Rs. 140.6 billion at year-end fiscal 2009 and Rs. 81.3 billion at year-end fiscal 2010 classified as “available-for-sale” investments. In the “available-for-sale” investments category, the mark-to-market post-tax loss reflected in the shareholders’ equity decreased from Rs. 12.4 billion at year-end fiscal 2009 to Rs. 4.3 billion at year-end fiscal 2010, due to the impact of tightening credit spreads on the bond portfolio. During fiscal 2009, the mark-to-market post-tax loss reflected in the shareholders& #8217; equity had increased from Rs. 4.1 billion at year-end fiscal 2008 to Rs. 12.4 billion at year-end fiscal 2009.
In October 2008, the UK Accounting Standards Board amended FRS 26 on ‘Financial Instruments: Recognition and Measurement’ and permitted reclassification of financial assets in certain circumstances from the “held for trading” category to the “available-for-sale” category, “held for trading” category to the “loans and receivables” category and from the “available-for-sale” category to the “loans and receivables” category. Pursuant to these amendments ICICI Bank UK in fiscal 2009 had reclassified certain corporate bonds and asset backed securities with fair value of Rs. 34.0 billion from the held for trading category to the available-for-sale category, certain asset backed securities with a fair value of Rs. 0.1 billion from the “he ld for trading” category of investments to the “loans and receivables” category and certain corporate bonds and asset backed securities with a fair value of Rs. 20.4 billion from the “available-for-sale” category of investments to the “loans and receivables” category. If these reclassifications had not been made, our pre-tax profit for fiscal 2009 would have been reduced by Rs. 2.5 billion and our pre-tax profit for fiscal 2010 would have increased by Rs. 2.3 billion.
Income relating to our insurance business
Income from our insurance business increased by 11.5% from Rs. 183.6 billion in fiscal 2009 to Rs. 204.8 billion in fiscal 2010. Income from our insurance business includes net premium income, fee income and commission income of our life insurance subsidiary amounting to Rs. 182.0 billion and general insurance subsidiary amounting to Rs. 22.8 billion in fiscal 2010 compared to income of Rs. 161.9 billion from our life insurance subsidiary and Rs. 21.7 billion from our general insurance subsidiary in fiscal 2009. The increase in income from our insurance business was from the life insurance business primarily due to an increase our in life insurance business volume (including renewal premiums) and an increase in fees, including fund management fees and policy discontinuation charges.
Income from our life insurance business includes net premium income of Rs. 164.7 billion and fee and other income of Rs. 17.3 billion in fiscal 2010 compared to net premium income of Rs. 153.1 billion and fee and other income of Rs. 8.8 billion from our life insurance business in fiscal 2009.
The net premium income (net of premium on reinsurance ceded) of ICICI Prudential Life Insurance Company increased by 7.6% from Rs. 153.1 billion in fiscal 2009 to Rs. 164.7 billion in fiscal 2010, primarily due to growth in renewal premiums (gross of premium on reinsurance ceded) by 19.4% from Rs. 85.4 billion in fiscal 2009 to Rs. 102.0 billion in fiscal 2010. The renewal premium contributed to 61.7% of total premiums in fiscal 2010. The new business premiums (gross of premium on reinsurance ceded) of ICICI Prudential Life Insurance Company decreased by 7.0% from Rs. 68.1 billion in fiscal 2009 to Rs. 63.3 billion in fiscal 2010 due to declining new business growth in the first half of fiscal 2010, relative to the first half of fiscal 2009. New business premium growth moderated sharply in the second half of fiscal 200 9 primarily due to the financial crisis its impact on the equity markets. ICICI Prudential Life Insurance Company’s other income increased from Rs. 8.8 billion in fiscal 2009 to Rs. 17.3 billion in fiscal 2010 primarily due to an increase in fund management fees and policy discontinuation charges. These relate primarily to the unit-linked insurance business. The unit-linked insurance business is comprised of life insurance, pension or health insurance contracts under which the benefits due to the policy holder are determined wholly or partly by reference to the value of underlying asset or index chosen by the policy holder. Therefore, the risks and rewards of the investments made out of premiums paid on linked policies largely lie with policy holders and accordingly the liability on the linked policies moves more or less in line with the movement in the underlying asset or index.
Income from our general insurance business includes net premium income amounting to Rs. 20.7 billion and commission income amounting to Rs. 2.1 billion in fiscal 2010, compared to net premium income of Rs. 18.4 billion and commission income of Rs. 3.3 billion from our general insurance subsidiary in fiscal 2009.
Gross written premiums of ICICI Lombard General Insurance Company decreased marginally by 1.3% from Rs. 37.5 billion in fiscal 2009 to Rs. 37.0 billion in fiscal 2010. The net premium income of ICICI Lombard General Insurance Company increased by 12.5% from Rs. 18.4 billion in fiscal 2009 to Rs. 20.7 billion in fiscal 2010. Until January 1, 2007, almost 70.0% of the general insurance market was subject to price controls under a tariff regime. The general insurance industry was de-tariffed with effect from January 1, 2007 resulting in a reduction in premium rates and in the rate of growth of the industry. Commission income of ICICI Lombard General Insurance Company decreased by 36.4% from Rs. 3.3 billion in fiscal 2009 to Rs. 2.1 billion in fiscal 2010 due to changes in reinsurance arrangements resulting in lower commis sion income.
Miscellaneous income (including lease income)
Miscellaneous income decreased from Rs. 7.8 billion in fiscal 2009 to Rs. 2.6 billion in fiscal 2010, primarily due to lower profit on buyback of bonds. During fiscal 2009, the spread on foreign currency bonds issued by ICICI Bank and ICICI Bank UK widened significantly. We therefore initiated a buyback of our bonds in the secondary market. During fiscal 2009, our UK subsidiary realized a gain of Rs. 4.0 billion on the buyback of bonds as against Rs. 0.3 billion in fiscal 2010. During fiscal 2009, ICICI Bank realized a gain of Rs. 3.4 billion on buyback of bonds whereas ICICI Bank did not buy back any bonds in fiscal 2010.
During the third quarter of fiscal 2010, ICICI Bank and First Data, a global company engaged in electronic commerce and payment services, formed a merchant acquiring alliance and a new entity, ICICI Merchant Services
Private Limited, which is 81.0% owned by First Data and 19.0% owned by ICICI Bank. ICICI Merchant Services Private Limited acquired ICICI Bank’s merchant acquiring operations through a transfer of assets, primarily comprising fixed assets, receivables and payables, and assumption of liabilities for a total consideration of Rs. 3.7 billion. The Bank realized a profit of Rs. 2.0 billion from this transaction in fiscal 2010, which is included in miscellaneous income.
Lease income of the Bank, net of lease depreciation, decreased by 34.8% from Rs. 0.23 billion in fiscal 2009 to Rs. 0.15 billion in fiscal 2010, primarily due to a reduction in leased assets from Rs. 4.6 billion at year-end fiscal 2009 to Rs. 3.5 billion at year-end fiscal 2010.
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal components of non-interest expense.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Payments to and provisions for employees | | Rs. | 39,043 | | | Rs. | 36,784 | | | US$ | 818 | | | | (5.8 | )% |
Depreciation on own property | | | 5,966 | | | | 6,212 | | | | 138 | | | | 4.1 | |
Auditor’s fees and expenses | | | 137 | | | | 148 | | | | 3 | | | | 8.0 | |
Other administrative expenses | | | 62,990 | | | | 51,199 | | | | 1,139 | | | | (18.7 | ) |
Operating expenses | | | 108,136 | | | | 94,343 | | | | 2,098 | | | | (12.8 | ) |
| Direct marketing agency expenses | | | 6,122 | | | | 2,413 | | | | 54 | | | | (60.6 | ) |
Depreciation on leased assets | | | 2,101 | | | | 1,416 | | | | 32 | | | | (32.6 | ) |
| Expenses pertaining to insurance business | | | 165,499 | | | | 179,160 | | | | 3,986 | | | | 8.3 | |
Total non-interest expenses | | Rs. | 281,858 | | | Rs. | 277,332 | | | US$ | 6,170 | | | | (1.6 | )% |
Non-interest expense primarily includes expenses relating to our insurance business, payment to and provision for employees, direct marketing agency expenses and other administrative expenses. The operating expenses were contained at Rs. 277.3 billion in fiscal 2010 compared to Rs. 281.9 billion in fiscal 2009. There was a decrease in direct marketing agency expenses employee expenses and other administrative expenses. There was an increase in expenses related to our insurance business.
Payments to and provisions for employees
Employee expenses decreased by 5.8% from Rs. 39.0 billion in fiscal 2009 to Rs. 36.8 billion in fiscal 2010, primarily due to a decrease in the employee base, including sales executives, employees on fixed term contracts and interns, from 91,777 at year-end fiscal 2009 to 74,056 at year-end fiscal 2010. This decrease in the employee base was partly offset by the annual increase in salaries and a higher performance bonus payout.
The employee expenses for ICICI Bank decreased by 2.0% from Rs. 19.7 billion in fiscal 2009 to Rs. 19.3 billion in fiscal 2010, despite provision of performance bonuses and performance-linked retention pay for fiscal 2010 while there was no performance bonus or performance-linked retention pay in fiscal 2009. The decrease in employee expenses for ICICI Bank was primarily due to a decrease in the employee base. The employee base, including sales executives, employees on fixed term contracts and interns, at year-end fiscal 2010 was 41,068 compared to 51,835 at year-end fiscal 2009. The employee expenses for ICICI Prudential Life insurance Company decreased by 12.5% from Rs. 10.4 billion in fiscal 2009 to Rs. 9.1 billion in fiscal 2010, due to a decrease in the employee base from 24,518 at year-end fiscal 2009 to 20,295 a t year-end fiscal 2010. The employee expenses for ICICI Lombard General Insurance Company decreased by 23.7% from Rs. 3.8 billion in fiscal 2009 to Rs. 2.9 billion in fiscal 2010, due to a decrease in the employee base from 5,697 at year-end fiscal 2009 to 4,650 at year-end fiscal 2010. The reduction in the employee base is due to a decrease in the number of fixed term contract employees, reduced staffing requirements in certain product lines and functions and our overall cost reduction and productivity improvement initiatives.
Depreciation
Depreciation on owned property increased from Rs. 6.0 billion in fiscal 2009 to Rs. 6.2 billion in fiscal 2010, reflecting the addition of new branches. Depreciation on leased assets decreased from Rs. 2.1 billion in fiscal 2009 to Rs. 1.4 billion in fiscal 2010 due to a reduction in assets given on lease.
Other administrative expenses
Other administrative expenses decreased from Rs. 63.0 billion in fiscal 2009 to Rs. 51.2 billion in fiscal 2010, primarily due to a reduction in expenses relating to the retail assets business such as collection expenses and our overall cost reduction initiatives although there was an increase in expenses related to additional branches opened and ATMs installed by ICICI Bank. The reduction in retail collection expenses was due to de-emphasizing on the retail unsecured portfolio. There was a reduction in expenses on account of a decline in printing and stationery, advertisement and publicity and postage and communication expenses in fiscal 2010 compared to fiscal 2009. The number of branches (excluding foreign branches and offshore banking units) and extension counters of ICICI Bank increased from 1,419 at year-end fiscal 2009 to 1,707 at year-end fiscal 2010. The number of ATMs increased from 4,713 at year-end fiscal 2009 to 5,219 at year-end fiscal 2010. The number of branches and offices of our insurance subsidiaries decreased from 2,513 at year-end fiscal 2009 to 2,277 at year-end fiscal 2010.
In fiscal 2009, other administrative expenses included scheme support expenses of Rs. 920 million incurred by ICICI Prudential Asset Management Company Limited. During fiscal 2010, no such scheme support expenses were incurred by ICICI Prudential Asset Management Company Limited. The scheme support expenses were incurred to address market valuation shortfalls in fixed maturity plans and money market schemes due to liquidity constraints and volatility in the fixed income markets; and for compensation against a diminution in the value of shares held in an equity scheme. These measures were taken to protect the interests of investors and to preserve the franchise, although there was no contractual obligation to do so.
Direct marketing agency expenses
Direct marketing agency expenses decreased from Rs. 6.1 billion in fiscal 2009 to Rs. 2.4 billion in fiscal 2010, primarily due to lower retail loan disbursements, lower issuance of new credit cards and rationalization of our payout structure. We use marketing agents, called direct marketing agents or associates, for sourcing our retail assets. We include commissions paid to these direct marketing agents in non-interest expense. In line with the Reserve Bank of India guidelines, these commissions are expensed upfront and not amortized over the life of the loan.
Expenses related to our insurance business
Expenses related to our insurance business includes claims and benefit payouts, commission expenses and reserves for actuarial liability (including the investible portion of the premium on unit-linked policies of our life insurance business). The expenses relating to our insurance business increased by 8.3% from Rs. 165.5 billion in fiscal 2009 to Rs. 179.2 billion in fiscal 2010, primarily due to an increase in life insurance business volume (including renewal premiums) and claims and benefit payouts. The impact of such increases in expenses was reduced to a certain extent by a decline in the commission expenses. The expenses related to our insurance business includes expenses of our life insurance subsidiary amounting to Rs. 158.3 billion and of our general insurance subsidiary amounting to Rs. 20.9 billion in fiscal 2010, compared to expenses of Rs. 146.7 billion for our life insurance subsidiary and Rs. 18.8 billion for our general insurance subsidiary in fiscal 2009.
The expenses of our life insurance business includes reserves for actuarial liabilty of Rs. 150.9 billion, claims and benefit payouts of Rs. 2.9 billion and commission expenses of Rs. 4.5 billion in fiscal 2010 compared to Rs. 139.1 billion of reserves for actuarial liability, Rs. 2.2 billion of claims and benefit payouts and Rs. 5.4 billion of commission expenses in fiscal 2009.
During fiscal 2010, the reserves for the actuarial liability of the life insurance business (including the investible portion of the premium on unit-linked policies) increased from Rs. 139.1 billion in fiscal 2009 to Rs. 150.9 billion in fiscal 2010 primarily due to an increase in the volume of unit-linked insurance business (including renewal
premiums). The investible portion of the premium on linked policies of life insurance business represents the amount of premium including renewal premium received on linked policies of life insurance business invested, after deducting charges and the premium for risk coverage, in the underlying asset or index chosen by the policy holder. The claims and benefit payouts increased from Rs. 2.2 billion in fiscal 2009 to Rs. 2.9 billion in fiscal 2010, due to an increase in death and health claims together with the increase in payment of survival benefits. Commission expenses decreased by 16.7% from Rs. 5.4 billion in fiscal 2009 to Rs. 4.5 billion in fiscal 2010 despite the increase in total premium, primarily due to an increase in the proportion of renewal premium of our life insurance business to total premium of the business and an increase in the proportion of pension business in our life insurance new business premium. Commission rates for pension products are lower compared to the other products. In line with Indian accounting norms for insurance companies, we do not amortize the customer acquisition cost, but account for the expenses upfront.
The expenses of general insurance business includes claims and benefit payouts of Rs. 18.9 billion and Rs. 2.0 billion of commission expenses in fiscal 2010 compared to Rs. 16.9 billion of claims and benefit payouts and Rs. 1.9 billion of commission expenses in fiscal 2009. The claims and benefit payouts of ICICI Lombard General Insurance Company increased from Rs. 16.9 billion in fiscal 2009 to Rs. 18.9 billion in fiscal 2010, primarily due to an increase in motor and health claims.
Provisions for Restructured Loans and Non-performing Assets
We classify our loans and credit substitutes in accordance with the Reserve Bank of India guidelines into performing and non-performing assets. Further, non-performing assets are classified into substandard, doubtful and loss assets based on the criteria stipulated by the Reserve Bank of India. The Reserve Bank of India has separate guidelines for restructured loans. A fully secured standard loan can be restructured by rescheduling principal repayments and/or the interest element, but must be separately disclosed as a restructured loan in the year of restructuring. Similar guidelines apply to restructuring of substandard and doubtful loans. See also “Business—Classification of Loans”.
The following table sets forth, at the dates indicated, certain information regarding restructured loans.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Gross restructured loans | | Rs. | 61,368 | | | Rs. | 62,662 | | | US$ | 1,394 | | | | 2.1 | % |
Provisions for restructured loans | | | (1,736 | ) | | | (2,758 | ) | | | (61 | ) | | | 58.9 | |
Net restructured loans | | Rs. | 59,632 | | | Rs. | 59,904 | | | US$ | 1,333 | | | | 0.5 | |
Gross customer assets | | Rs. | 2,892,808 | | | Rs. | 2,601,135 | | | US$ | 57,867 | | | | (10.1 | ) |
Net customer assets | | | 2,836,439 | | | | 2,536,941 | | | | 56,439 | | | | (10.6 | ) |
| Gross restructured loans as a percentage of gross customer assets | | | 2.12 | % | | | 2.41 | % | | | | | | | | |
| Net restructured loans as a percentage of net customer assets | | | 2.10 | % | | | 2.36 | % | | | | | | | | |
Gross restructured loans increased by 2.1% from Rs. 61.4 billion at year-end fiscal 2009 to Rs. 62.7 billion at year-end fiscal 2010 primarily due to stress experienced by certain borrowers in the services and textiles sectors. After restructuring, based on the satisfactory performance of the borrower over a period of time, the restructured account is upgraded, and removed from this category. During fiscal 2010, the Bank upgraded corporate borrower accounts aggregating Rs. 33.5 billion primarily in the oil and petrochemical sector based on payment performance. During fiscal 2009, there were no such upgrades. As a percentage of net customer assets, net restructured loans were 2.36% at year-end fiscal 2010 compared to 2.10% at year-end fiscal 2009. During fiscal 2010, the diminution in fair value of restructured loans, i ncluding funded interest reversal charged to the profit and loss account amounted to Rs. 2.6 billion, compared to Rs. 0.1 billion in fiscal 2009.
All standard restructured loans must be fully secured by tangible assets. In December 2008, the Reserve Bank of India permitted banks to undertake one-time restructuring of loans classified as real estate exposures and to undertake a second restructuring for accounts that were previously restructured, without downgrading such accounts
to the non-performing category, up to June 30, 2009. The Reserve Bank of India also permitted banks to classify all eligible accounts that met the basic criteria for restructuring and which were classified as standard at September 1, 2008, as standard accounts irrespective of their subsequent asset classification. This treatment was subject to banks receiving an application from the borrower for restructuring the loan at or before year-end fiscal 2009 and to the implementation of the restructuring package within 120 days from the date of receipt of the application. During fiscal 2010, the Bank restructured loans aggregating Rs. 53.1 billion, including eight borrower accounts restructured for a second time up to June 30, 2009 aggregating Rs. 24.3 billion.
The following table sets forth, at the dates indicated, certain information regarding non-performing assets.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Gross non-performing assets(1) | | Rs. | 99,921 | | | Rs. | 105,821 | | | US$ | 2,354 | | | | 5.9 | |
| Provisions for non-performing assets(1) | | | (52,580 | ) | | | (59,083 | ) | | | (1,314 | ) | | | 12.4 | |
Net non-performing assets(1) | | Rs. | 47,341 | | | Rs. | 46,738 | | | US$ | 1,040 | | | | (1.3 | ) |
| | | | | | | | | | | | | | | | | |
Gross customer assets | | | 2,892,808 | | | | 2,601,135 | | | | 57,867 | | | | (10.1 | ) |
Net customer assets | | | 2,836,439 | | | | 2,536,941 | | | | 56,439 | | | | (10.6 | ) |
| Gross non-performing assets as a percentage of gross customer assets | | | 3.45 | % | | | 4.07 | % | | | | | | | | |
| Net non-performing assets as a percentage of net customer assets | | | 1.67 | % | | | 1.84 | % | | | | | | | | |
| (1) | Includes loans identified as impaired in line with the guidelines issued by regulators of the respective subsidiaries. |
Gross non-performing assets increased by 5.9% from Rs. 99.9 billion at year-end fiscal 2009 to Rs. 105.8 billion at year-end fiscal 2010, net of write-off of unsecured and small value secured retail loans aggregating Rs. 27.5 billion during fiscal 2010. These loans were fully provided for at the date of write-off. During fiscal 2009, we wrote-off corporate and retail loans aggregating Rs. 24.2 billion (consisting of corporate loans of Rs. 5.9 billion and retail loans of Rs. 18.3 billion). The additions (gross of write-off) to our retail gross non-performing loans during fiscal 2010 amounted to Rs. 34.2 billion compared to Rs. 42.1 billion during fiscal 2009. We experienced an increase in non-performing loans in our retail portfolio in fiscal 2009 and fiscal 2010, due to the seasoning of the portfolio and higher level o f defaults in unsecured personal loans and credit card receivables due to challenges in collections and the impact of the adverse macroeconomic environment in fiscal 2009. Retail gross non-performing loans constituted 63.3% of total gross non-performing assets at year-end fiscal 2010 compared to 72.4% at year-end fiscal 2009. In fiscal 2010, our non-performing assets in foreign currency increased mainly due to certain borrowers from the food and beverages, auto and services - finance sectors experiencing financial difficulties or being extended concessionary modifications in the repayment of loans by our overseas banking subsidiaries.
We sold Rs. 7.6 billion of net non performing assets, including Rs. 7.5 billion of mortgage loans, to asset reconstruction companies in fiscal 2010. In fiscal 2009 we sold Rs. 6.8 billion of our net non-performing assets to asset reconstruction companies, including mortgage loans of Rs. 5.6 billion. We also sold net non-performing assets of Rs. 479 million to companies, other than asset reconstruction companies in fiscal 2010. See also “Business — Classification of Loans — Non-Performing Asset Strategy”.
As a percentage of net customer assets, net non-performing assets were 1.8% at year-end fiscal 2010, compared to 1.7% at year-end fiscal 2009. The net non-performing loans in the retail portfolio increased from 2.6% of net retail loans at year-end fiscal 2009 to 2.8% of net retail loans at year-end fiscal 2010, primarily due to a decline in net retail loans.
The following table sets forth, for the periods indicated, the composition of provisions and contingencies, excluding provisions for tax.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Provision for investments (including credit substitutes) (net) | | Rs. | 6,305 | | | Rs. | 328 | | | US$ | 7 | | | | (94.8 | )% |
| Provision for non-performing assets | | | 37,707 | | | | 44,898 | | | | 999 | | | | 19.1 | |
Provision for standard assets | | | 1,409 | | | | (153 | ) | | | (3 | ) | | | – | |
Others | | | (304 | ) | | | 514 | | | | 11 | | | | – | |
| Total provisions and contingencies (excluding tax) | | Rs. | 45,117 | | | Rs. | 45,587 | | | US$ | 1,014 | | | | 1.0 | % |
Provisions are made by ICICI Bank on standard, substandard and doubtful assets at rates prescribed by the Reserve Bank of India. Loss assets and unsecured portions of doubtful assets are provided/written off to the extent required by Reserve Bank of India guidelines. Subject to the minimum provisioning levels prescribed by the Reserve Bank of India, provisions on retail non-performing loans are made at the borrower level in accordance with the provisioning policy of ICICI Bank. The specific provisions on retail loans held by ICICI Bank are higher than the minimum regulatory requirement. See also “Business — Classification of Loans”.
Provisions and contingencies (excluding provisions for tax) increased by 1.0% from Rs. 45.1 billion in fiscal 2009 to Rs. 45.6 billion in fiscal 2010, primarily due to a higher level of specific provisioning for retail non-performing loans and an increase in provisions for restructured corporate assets, offset, in part, by a reduction in provision for investments and a net write-back of provision for standard assets. The increase in specific provisioning for retail non-performing loans primarily reflects the seasoning of the secured loan portfolio and relatively higher losses on the unsecured portfolio, challenges in collections and the impact of adverse macro-economic environment in fiscal 2009.
In the second quarter review of monetary policy for fiscal 2010, the Reserve Bank of India directed banks to ensure that their total provisioning coverage ratio against non-performing loans is not less than 70.0% by end-September 2010. On December 1, 2009, the Reserve Bank of India issued detailed guidelines on provisioning coverage for advances by banks. In March 2010, the Reserve Bank of India permitted ICICI Bank to reach the stipulated provisioning coverage ratio of 70.0% in a phased manner by March 31, 2011. ICICI Bank’s provisioning coverage ratio at year-end fiscal 2010 computed as per the Reserve Bank of India guidelines was 59.5%. At June 30, 2010, the Bank’s provisioning coverage ratio was 64.8%.
Provision for investments decreased from Rs. 6.3 billion in fiscal 2009 to Rs. 0.3 billion in fiscal 2010. In fiscal 2009, provision for investments was higher primarily due to the impairment provision for investments held by our consolidating venture capital funds and other provisions of Rs. 4.2 billion made by ICICI Bank UK, primarily on its investments in securities issued by Lehman Brothers after the failure of Lehman Brothers.
During fiscal 2010, the Bank did not make additional general provisions on standard assets. In November 2009, the Reserve Bank of India issued guidelines reducing the general provision requirement. However, these guidelines did not permit a write-back of excess provisions already made and we therefore held a cumulative general provision of Rs. 14.4 billion at year-end fiscal 2010 compared to the general provision requirement as per the revised guidelines of Rs. 7.3 billion. There was a reversal of general provision on standard assets in our subsidiaries amounting to Rs. 153 million.
Provisions, including general provisions on performing assets, as a percentage of gross customer assets were 3.0% at year-end fiscal 2010 compared to 2.5% at year-end fiscal 2009.
Tax Expense
Income tax expense increased by 9.4% from Rs. 15.9 billion in fiscal 2009 to Rs. 17.4 billion in fiscal 2010. The effective tax rate of 26.4% in fiscal 2010 was lower compared to the effective tax rate of 32.0% in fiscal 2009, primarily due to a change in the mix of taxable profits having a higher component of exempt income, and the abolition of fringe benefit tax. In fiscal 2009, fringe benefit tax expense was Rs. 659 million. These positive effects
were moderated by a negative impact arising from the revaluation of deferred tax assets on account of a reduction in surcharge on tax from 10.0% to 7.5% by the Finance Act, 2010.
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal components of assets.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Cash and cash equivalents | | Rs. | 350,614 | | | Rs. | 471,441 | | | US$ | 10,488 | | | | 34.5 | % |
Investments | | | 1,481,070 | | | | 1,863,198 | | | | 41,451 | | | | 25.8 | |
Advances (net of provisions) | | | 2,661,305 | | | | 2,257,781 | | | | 50,229 | | | | (15.2 | ) |
Fixed assets | | | 44,975 | | | | 38,623 | | | | 859 | | | | (14.1 | ) |
Other assets | | | 288,946 | | | | 262,430 | | | | 5,838 | | | | (9.2 | ) |
Total assets | | Rs. | 4,826,910 | | | Rs. | 4,893,473 | | | US$ | 108,865 | | | | 1.4 | % |
Our total assets increased marginally from Rs. 4,826.9 billion at year-end fiscal 2009 to Rs. 4,893.5 billion at year-end fiscal 2010, primarily due to an increase in cash and cash equivalents and investments. Net advances decreased by 15.2% from Rs. 2,661.3 billion at year-end fiscal 2009 to Rs. 2,257.8 billion at year-end fiscal 2010.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, and balances with the Reserve Bank of India and other banks, including money at call and on short notice. Cash and cash equivalents increased from Rs. 350.6 billion at year-end fiscal 2009 to Rs. 471.4 billion at year-end fiscal 2010. The increase was primarily due to an increase in balances held with the Reserve Bank of India. Balances with the Reserve Bank of India increased from Rs. 146.8 billion at year-end fiscal 2009 to Rs. 241.7 billion at year-end fiscal 2010, due to a higher level of liquidity on that date and on account of the 75 basis point increase in the cash reserve ratio from 5.00% to 5.75%.
Investments
Total investments increased by 25.8% from Rs. 1,481.1 billion at year-end fiscal 2009 to Rs. 1,863.2 billion at year-end fiscal 2010, primarily due to an increase in investments held to cover linked liabilities of ICICI Prudential Life Insurance Company and an increase in investment in government and other approved securities. Investments held to cover the liabilities on unit-linked insurance policies of ICICI Prudential Life Insurance Company increased by 79.9% from Rs. 286.1 billion at year-end fiscal 2009 to Rs. 514.7 billion at year-end fiscal 2010, due to the mark-to-market impact of improvement in the capital markets and the increase in our insurance business. Investments in government and other approved securities increased due to a 100 basis point increase in the statutory liquidity ratio requirement applicable to ICICI Bank from 24.0% to 25.0% during fiscal 2010, although the reduction in domestic net demand and time liabilities had a moderating effect. At year-end fiscal 2010, we had an outstanding net investment of Rs. 33.9 billion in security receipts issued by asset reconstruction companies in relation to sales of non-performing assets compared to Rs. 32.2 billion at year-end fiscal 2009.
Advances
Net advances decreased by 15.2% from Rs. 2,661.3 billion at year-end fiscal 2009 to Rs. 2,257.8 billion at year-end fiscal 2010, primarily due to a decrease in retail advances, advances of our overseas branches and advances of our overseas banking subsidiaries. Net retail advances of ICICI Bank (including dealer financing and developer financing) decreased by 25.6% from Rs. 1,062.0 billion at year-end fiscal 2009 to Rs. 790.5 billion at year-end fiscal 2010. Advances of our overseas branches and subsidiaries decreased primarily due to the impact of rupee appreciation on foreign currency denominated advances. Net advances of our overseas branches (including our offshore banking unit) decreased in US dollar terms by 6.5% from US$ 10.7 billion at year-end fiscal 2009 to US$
10.0 billion at year-end fiscal 2010, and in rupee terms by 16.9% from Rs. 542.9 billion at year-end fiscal 2009 to Rs. 451.4 billion at year-end fiscal 2010. Net advances of overseas subsidiaries increased marginally in US dollar terms by 2.6% from US$ 7.6 billion at year-end fiscal 2009 to US$ 7.8 billion at year-end fiscal 2010, while in rupee terms, net advances of overseas subsidiaries decreased by 10.1% from Rs. 387.1 billion at year-end fiscal 2009 to Rs. 347.9 billion at year-end fiscal 2010.
Fixed and other assets
Fixed assets include premises, furniture and fixtures, assets given on lease and other fixed assets. Fixed assets decreased by 14.1% from Rs. 45.0 billion at year-end fiscal 2009 to Rs. 38.6 billion at year-end fiscal 2010 due to sale or surrender of certain properties, sale of fixed assets of merchant acquiring business and annual depreciation charge. Other assets decreased by 9.2% from Rs. 288.9 billion at year-end fiscal 2009 to Rs. 262.4 billion at year-end fiscal 2010.
Liabilities and Stockholders’ Equity
The following table sets forth, at the dates indicated, the principal components of liabilities and stockholders’ equity.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Deposits | | Rs. | 2,618,558 | | | Rs. | 2,415,723 | | | US$ | 53,742 | | | | (7.7 | )% |
Borrowings(1) | | | 1,160,664 | | | | 1,156,983 | | | | 25,739 | | | | (0.3 | ) |
| Proposed dividend (including corporate dividend tax) | | | 13,872 | | | | 15,136 | | | | 337 | | | | 9.1 | |
Other liabilities | | | 556,936 | | | | 779,962 | | | | 17,352 | | | | 40.0 | |
Minority interest | | | 9,105 | | | | 12,704 | | | | 283 | | | | 39.5 | |
Total liabilities | | | 4,359,135 | | | | 4,380,508 | | | | 97,453 | | | | 0.5 | |
Equity share capital | | | 11,133 | | | | 11,149 | | | | 248 | | | | 0.1 | |
Reserves and surplus | | | 456,642 | | | | 501,816 | | | | 11,164 | | | | 9.9 | |
| Total liabilities (including capital and reserves) | | Rs. | 4,826,910 | | | Rs. | 4,893,473 | | | US$ | 108,865 | | | | 1.4 | % |
| (1) | Includes subordinated debt and redeemable non-cumulative preference shares. |
Our total liabilities (including capital and reserves) increased marginally from Rs. 4,826.9 billion at year-end fiscal 2009 to Rs. 4,893.5 billion at year-end fiscal 2010, primarily due to an increase in borrowings and other liabilities (including liabilities on insurance policies in force) and retained earnings. During fiscal 2010, deposits decreased by 7.7% from Rs. 2,618.6 billion at year-end fiscal 2009 to Rs. 2,415.7 billion at year-end fiscal 2010.
Deposits
Deposits decreased by 7.7% from Rs. 2,618.6 billion at year-end fiscal 2009 to Rs. 2,415.7 billion at year-end fiscal 2010, primarily due to our conscious strategy of reducing wholesale term deposits. During fiscal 2010, ICICI Bank focused on rebalancing its funding mix by increasing the share of current and savings account deposits in total deposits. The Bank’s current and savings account deposits increased from Rs. 626.7 billion at year-end fiscal 2009 to Rs. 842.2 billion at year-end fiscal 2010 and the ratio of current and savings account deposits to the Bank’s total deposits increased from 28.7% to 41.7%. ICICI Bank’s savings account deposits increased from Rs. 410.4 billion at year-end fiscal 2009 to Rs. 532.2 billion at year-end fiscal 2010.
Since fiscal 2009, ICICI Bank UK has focused on re-balancing its deposit base towards term deposits in order to increase the proportion of its deposits that may be deployed in medium-term loan assets. Accordingly, ICICI Bank UK’s savings deposits declined from Rs. 84.8 billion at year-end fiscal 2009 to Rs. 58.8 billion at year-end fiscal 2010.
Our total term deposits decreased from Rs. 1,880.8 billion at year-end fiscal 2009 to Rs. 1,478.0 billion at year-end fiscal 2010, while savings deposits increased from Rs. 515.1 billion at year-end fiscal 2009 to Rs. 622.2 billion
at year-end fiscal 2010. Total deposits at year-end fiscal 2010 formed 67.6% of our funding (i.e., deposits, borrowings and subordinated debt).
Borrowings
Borrowings (including redeemable non-cumulative preference shares and subordinated debt) decreased marginally by 0.3% from Rs. 1,160.7 billion at year-end fiscal 2009 to Rs. 1,157.0 billion at year-end fiscal 2010. Although capital-eligible rupee borrowings in the nature of subordinated debt increased, the impact of rupee appreciation on foreign currency denominated borrowings led to an overall decrease in the level of borrowings.
The Reserve Bank of India has issued guidelines effective April 1, 2010, which require repurchase transactions (currently accounted for as sale and repurchase) to be accounted for as borrowing and lending. This will be reflected in our financial statements for fiscal 2011. At year-end fiscal 2010, outstanding amount of securities sold through repurchase transactions with other banks and financial institutions was Rs. 48.6 billion compared to Rs. 48.1 billion at year-end fiscal 2009.
Proposed dividend
In India, dividends declared for a fiscal year are normally paid out in the following year. We declared a dividend of Rs. 11.00 per equity share for fiscal 2009, which was paid out in fiscal 2010. We declared a dividend of Rs. 12.00 per equity share for fiscal 2010, which was paid out in fiscal 2011.
Other liabilities
Other liabilities primarily consist of liabilities on insurance policies in force, pertaining to our insurance subsidiaries. Other liabilities increased by 40.0% from Rs. 556.9 billion at year-end fiscal 2009 to Rs. 780.0 billion at year-end fiscal 2010 primarily due to an increase in liabilities on policies in force of our life insurance business from Rs. 310.5 billion at year-end fiscal 2009 to Rs. 539.7 billion at year-end fiscal 2010. This was in line with the mark-to-market impact of improvement in the capital markets on the assets and liabilities of unit-linked insurance plans.
Equity share capital and reserves
Stockholders’ equity increased from Rs. 467.8 billion at year-end fiscal 2009 to Rs. 513.0 billion at year-end fiscal 2010 primarily due to retained earnings for fiscal 2010 and mark-to-market gains on investments classified as available for sale securities by ICICI Bank UK. Minority interest increased by 39.5% from Rs. 9.1 billion at year-end fiscal 2009 to Rs. 12.7 billion at year-end fiscal 2010, primarily due to an increase of Rs. 13.1 billion in reserves of our insurance subsidiaries, in which the minority shareholding is approximately 26.0%.
Fiscal 2009 to Fiscal 2008
Summary
Net profit increased by 5.3% from Rs. 34.0 billion in fiscal 2008 to Rs. 35.8 billion in fiscal 2009, primarily due to a 17.2% increase in net interest income and a 7.5% increase in non-interest income, offset, in part, by a 49.5% increase in provisions (excluding provision for tax) and a 4.2% increase in non-interest expenses. The increase in provisions (excluding provision for tax) was primarily due to a higher level of specific provisioning on non-performing loans, though the lower general provisioning on standard loans lessened this impact.
Net interest income increased by 17.2% from Rs. 83.3 billion in fiscal 2008 to Rs. 97.6 billion in fiscal 2009, reflecting an increase in net interest margin by 13 basis points from 2.30% in fiscal 2008 to 2.43% for fiscal 2009 and an increase of 15.3% in the average volume of interest earning assets, in rupee terms.
Non-interest income increased by 7.5% from Rs. 259.6 billion in fiscal 2008 to Rs. 279.0 billion in fiscal 2009, primarily due to an increase in income from our insurance business from Rs. 159.9 billion in fiscal 2008 to Rs. 183.6 billion in fiscal 2009 and an increase in miscellaneous income (including lease income) from Rs. 0.8 billion in fiscal 2008 to Rs. 7.8 billion in fiscal 2009.
Non-interest expense increased by 4.2% from Rs. 270.4 billion in fiscal 2008 to Rs. 281.9 billion in fiscal 2009, primarily due to an increase of 15.9% in expenses pertaining to insurance business and an increase of 19.9% in rent, taxes and lighting expenses, offset, in part by a 61.1% decrease in direct marketing agency expenses from Rs. 15.7 billion in fiscal 2008 to Rs. 6.1 billion in fiscal 2009.
Provisions and contingencies (excluding provisions for tax) increased by 49.5% from Rs. 30.2 billion in fiscal 2008 to Rs. 45.1 billion in fiscal 2009, primarily due to a higher level of specific provisioning on non-performing retail loans, though the lower general provisioning on standard loans reduced this impact. The increase in retail non-performing loans was due to the seasoning of the secured loan portfolio, relatively higher losses in the unsecured portion of the portfolio and the adverse macro-economic environment.
Gross restructured loans increased by 26.8% from Rs. 48.4 billion at year-end fiscal 2008 to Rs. 61.4 billion at year-end fiscal 2009. Gross non-performing assets increased by 28.2% from Rs. 78.0 billion at year-end fiscal 2008 to Rs. 99.9 billion at year-end fiscal 2009, primarily due to an increase in retail non-performing loans due to higher delinquencies in the unsecured retail loan portfolio and the seasoning of the overall retail loan portfolio.
Total assets decreased by 0.6% from Rs. 4,856.2 billion at year-end fiscal 2008 to Rs. 4,826.9 billion at year-end fiscal 2009 primarily due to a decrease in investments by Rs. 119.4 billion, reflecting the lower statutory liquidity ratio requirement and the decline in demand and time liabilities requiring the maintenance of this ratio, and the decrease in cash and balances held with the Reserve Bank of India by Rs. 118.5 billion, reflecting a reduction in the cash reserve ratio requirement.
Net Interest Income
The following table sets forth, for the periods indicated, the principal components of net interest income.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Interest income(1) | | Rs. | 340,950 | | | Rs. | 362,507 | | | US$ | 8,065 | | | | 6.3 | % |
Interest expense | | | (257,670 | ) | | | (264,873 | ) | | | (5,893 | ) | | | 2.8 | |
Net interest income | | Rs. | 83,280 | | | Rs. | 97,634 | | | US$ | 2,172 | | | | 17.2 | % |
| (1) | Tax exempt income has not been recalculated on a tax-equivalent basis. |
Net interest income (net of amortization of premium on government securities) increased by 17.2% from Rs. 83.3 billion in fiscal 2008 to Rs. 97.6 billion in fiscal 2009 reflecting mainly the following:
| | · | an increase of Rs. 555.3 billion or 15.3% in the average volume of interest-earning assets (after taking into account the impact of depreciation of the rupee on the rupee equivalent of foreign currency denominated assets); and |
| | · | an increase in net interest margin by 13 basis points from 2.30% in fiscal 2008 to 2.43% in fiscal 2009. |
The average volume of interest-earning assets increased by 15.3% or Rs. 555.3 billion from Rs. 3,627.6 billion in fiscal 2008 to Rs. 4,182.9 billion in fiscal 2009, primarily due to an increase in average advances by Rs. 293.9 billion and an increase in average investments by Rs. 255.9 billion. Average advances increased by 12.9% from Rs. 2,284.6 billion in fiscal 2008 to Rs. 2,578.6 billion in fiscal 2009, primarily due to an increase in non-retail advances, offset, in part, by a decrease in retail advances. While the net advances of our overseas branches (including our offshore banking unit) decreased by US$ 1.2 billion or 10.1% from US$ 11.9 billion at year-end fiscal 2008 to US$ 10.7 billion at year-end fiscal 2009, the net advances of our overseas branches, in rupee terms, increased by 13.7% from Rs. 477.5 billion at year-end fiscal 2008 to Rs. 542.9 billion at year-end fiscal 2009 due to the impact of rupee depreciation in fiscal 2009. Advances of our overseas subsidiaries increased, in rupee terms, from Rs. 195.2 billion at year-end fiscal 2008 to Rs. 387.1 billion at year-end fiscal 2009. Average interest-earning investments increased by 25.0% from Rs. 1,024.5 billion in fiscal 2008 to Rs. 1,280.4 billion in fiscal 2009, primarily due to the increase in average interest-earning non-statutory liquidity ratio investments, offset, in part, by
the decrease in average statutory liquidity ratio investments. Average statutory liquidity ratio investments decreased due to reduction in domestic net demand and time liabilities and a reduction of 100 basis points in the statutory liquidity ratio requirement from 25.0% to 24.0% during fiscal 2009.
Interest income increased by 6.3% from Rs. 341.0 billion in fiscal 2008 to Rs. 362.5 billion in fiscal 2009, primarily due to an increase of 15.3% in the average volume of interest-earning assets from Rs. 3,627.6 billion in fiscal 2008 to Rs. 4,182.9 billion in fiscal 2009. The overall yield on average interest-earning assets decreased by 64 basis points from 9.4% for fiscal 2008 to 8.8% for fiscal 2009, primarily due to a decrease in yield on investments by 111 basis points from 9.5% for fiscal 2008 to 8.4% for fiscal 2009, offset, in part, by a reduction in the cash reserve ratio requirement from 7.5% at the beginning of fiscal 2009 to 5.0% at the end of fiscal 2009. As cash reserve ratio balances do not earn any interest income, the reduction in the required level of cash reserve ratio resulted in a positive impact on yield on interest-earning assets. Yield on average interest-earning investments decreased primarily due to a decrease of 86 basis points in the yield of foreign currency investments from 5.6% for fiscal 2008 to 4.7% for fiscal 2009.
Interest income was positively impacted by the receipt of interest of Rs. 3.4 billion on our income tax refund in fiscal 2009 compared to Rs. 0.9 billion in fiscal 2008 and negatively impacted by a loss on securitization (including credit losses on existing pools) of Rs. 3.2 billion in fiscal 2009.
Total interest expense increased by 2.8% from Rs. 257.7 billion in fiscal 2008 to Rs. 264.9 billion in fiscal 2009, primarily due to an increase of 34.9% in average interest-bearing liabilities from Rs. 964.9 billion in fiscal 2008 to Rs. 1,301.2 billion in fiscal 2009, offset by a 53 basis points decrease in the cost of funds from 7.4% in fiscal 2008 to 6.8% in fiscal 2009. Average deposits, with a cost of 7.1% in fiscal 2009, constituted 66.5% of total average interest-bearing liabilities compared to 72.5% of the total average interest-bearing liabilities with a cost of 7.4% in fiscal 2008. The decrease in average deposits as a percentage of total funding was primarily on account of our conscious strategy of reducing our wholesale term deposit base. Our cost of funds decreased from 7.4% in fiscal 2008 to 6.8% in fisc al 2009. The cost of deposits decreased by 30 basis points from 7.4% in fiscal 2008 to 7.1% in fiscal 2009, as a consequence of an increase in the ratio of low-cost current account and savings account deposits in total deposits, offset, in part, by high interest-bearing wholesale deposits raised during the quarter ended December 31, 2008. The average cost of total borrowings including subordinated debt decreased by 97 basis points from 7.3% in fiscal 2008 to 6.3% in fiscal 2009, primarily due to a decrease in the cost of foreign currency borrowings as the benchmark rate (LIBOR) decreased.
Our net interest margin is expected to continue to be lower than other banks in India until we increase the proportion of low-cost deposits and retail deposits in our total funding. Our net interest margin is also impacted by the relatively lower net interest margin earned by our overseas branches and subsidiaries. See also “Risk Factors — Risks Relating to Our Business — Our banking and trading activities are particularly vulnerable to interest rate risk and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our income from treasury operations, the quality of our loan portfolio and our financial performance”.
Non-Interest Income
The following table sets forth, for the periods indicated, the principal components of non-interest income.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Commission, exchange and brokerage | | Rs. | 67,673 | | | Rs. | 65,748 | | | US$ | 1,463 | | | | (2.8 | )% |
| Profit/(loss) on sale of investments (net) | | | 34,042 | | | | 24,318 | | | | 541 | | | | (28.6 | )% |
| Profit/(loss) on revaluation of investments (net) | | | (4,788 | ) | | | (4,432 | ) | | | (99 | ) | | | (7.4 | )% |
| Profit/(loss) on sale of land, buildings and other assets (net) | | | 613 | | | | 15 | | | | – | | | | (97.6 | )% |
| Profit/(loss) on foreign exchange transactions (net) | | | 1,280 | | | | 1,965 | | | | 44 | | | | 53.5 | % |
| Income pertaining to insurance business | | | 159,920 | | | | 183,582 | | | | 4,084 | | | | 14.8 | % |
| Miscellaneous income (including lease income) | | | 841 | | | | 7,828 | | | | 174 | | | | 831.6 | % |
Total non-interest income | | Rs. | 259,581 | | | Rs. | 279,024 | | | US$ | 6,207 | | | | 7.5 | % |
Non-interest income increased by 7.5% from Rs. 259.6 billion in fiscal 2008 to Rs. 279.0 billion in fiscal 2009, primarily due to a 14.8% increase in income pertaining to our insurance business from Rs. 159.9 billion in fiscal 2008 to Rs. 183.6 billion in fiscal 2009, a 53.5% increase in net profit on foreign exchange transactions from Rs. 1.3 billion in fiscal 2008 to Rs. 2.0 billion in fiscal 2009, a 7.4% decrease in net loss on revaluation of investments from Rs. 4.8 billion in fiscal 2008 to Rs. 4.4 billion in fiscal 2009 and an increase in miscellaneous income (including lease income) from Rs. 841 million in fiscal 2008 to Rs. 7.8 billion in fiscal 2009, offset, in part, by a 28.6% decrease in profit on sale of investments from Rs. 34.0 billion in fiscal 2008 to Rs. 24.3 billion in fiscal 2009.
Income pertaining to our insurance business representing premium income of our life and general insurance subsidiaries increased by 14.8% from Rs. 159.9 billion in fiscal 2008 to Rs. 183.6 billion in fiscal 2009. The income pertaining to our insurance business includes Rs. 161.9 billion from our life insurance business and Rs. 21.7 billion from our general insurance business. The total premium income of ICICI Prudential Life Insurance Company increased by 13.2% from Rs. 135.6 billion in fiscal 2008 to Rs. 153.6 billion in fiscal 2009. The new business premium (on a weighted received premium basis) of ICICI Prudential Life Insurance Company decreased by 22.9% from Rs. 66.8 billion in fiscal 2008 to Rs. 51.5 billion in fiscal 2009. However, our renewal premium increased by 60.4% from Rs. 55.3 billion in fiscal 2008 to Rs . 88.7 billion in fiscal 2009. The gross written premium (excluding share of motor third party insurance pool) of ICICI Lombard General Insurance Company increased by 3.3% from Rs. 33.5 billion in fiscal 2008 to Rs. 34.6 billion in fiscal 2009. There was a slowdown in the growth of the general insurance industry in India due to de-tariffing, wherein insurance premiums were freed from price controls resulting in a significant reduction in premium rates.
Commission, exchange and brokerage income decreased by 2.8% from Rs. 67.7 billion in fiscal 2008 to Rs. 65.7 billion in fiscal 2009, primarily due to lower fee income from corporate and retail customers. Fee income in the second half of fiscal 2009 was impacted by the slowdown in the domestic economy and continued turmoil in the international markets. The high interest rates prevalent for a large part of the year, combined with our strategy to moderate balance sheet growth impacted domestic lending activity, with retail disbursements slowing down considerably. This resulted in low retail asset related fees in fiscal 2009. Sales of third party products such as insurance and mutual funds slowed down considerably in the second half of fiscal 2009 resulting in lower third party distribution fees. Our commission, exchange a nd brokerage income was impacted by the level of corporate activity, the demand for retail financial products and the overall level of economic and trade activity. Volatile market conditions also had an adverse impact on mergers and acquisitions activity by Indian companies, affecting our fee and other income related to such activity. We have experienced a decline in these income streams since the second half of fiscal 2009 as a result of the general decline in business activity during the global financial crisis and economic turmoil. Commission, exchange and brokerage of our banking subsidiaries decreased by 24.9% from Rs. 5.0 billion in fiscal 2008 to Rs. 3.8 billion in fiscal 2009, primarily due to a decrease in advisory and structuring fees. Commission, exchange and brokerage of our security brokering and primary dealership subsidiaries decreased from Rs. 7.6 billion in fiscal 2008 to Rs. 5.0 billion in fiscal 2009, primarily due to adverse conditions in both equity and fixed income markets and lower equ ity trading volumes.
Income from foreign exchange transactions increased by 53.5% from Rs. 1.3 billion in fiscal 2008 to Rs. 2.0 billion in fiscal 2009, primarily due to an increase in income from the merchant foreign exchange and client-related derivatives business in our Canadian subsidiary, offset, in part, by a mark-to-market and realized loss of Rs. 3.6 billion on our credit derivatives portfolio. At year-end fiscal 2009, we had a credit derivatives portfolio of Rs. 72.4 billion, including funded investments of Rs. 33.7 billion in credit derivatives instruments such as credit default swaps, credit-linked notes and collateralized debt obligations. The entire exposure is to Indian corporates. During fiscal 2009, we sold our entire non-India linked credit derivatives portfolio on which we realized a loss of about Rs. 6.6 billion, which w as provided for in fiscal 2008.
We offer various derivatives products, including options and swaps, to our clients primarily for their risk management purposes. We generally do not carry market risk on client derivatives positions as we cover ourselves in the inter-bank market. Profits or losses on account of currency movements on these transactions are borne by the clients. During fiscal 2009, due to high exchange rate volatility as a result of the financial crisis, a number of clients experienced significant mark-to-market losses in derivatives transactions. On maturity or premature termination of the derivatives contracts, these mark-to-market losses became receivables owed to us. Some clients did not pay their
derivatives contract obligations to us in a timely manner and, in some instances, clients filed lawsuits to avoid payment of derivatives contract obligations entirely. In other instances, at the request of clients, we converted the overdue amounts owed to us into loans and advances. In October 2008, the Reserve Bank of India issued guidelines requiring banks to classify derivatives contract receivables overdue for 90 days or more as non-performing assets. Pursuant to these guidelines we reverse derivatives contracts receivables in our income statement when they are overdue for 90 days or more. After reversal, any recovery is accounted for only on actual receipt of payment. Accordingly, in fiscal 2009, we reversed an amount equal to Rs. 4.4 billion under Indian GAAP relating to receivables under derivatives contract s that were overdue for more than 90 days.
At year-end fiscal 2008, we had an investment of approximately €57 million in senior bonds of Lehman Brothers, through our UK subsidiary, which we fully provided for during fiscal 2009. We have an insignificant amount of unreceived premium due from Lehman Brothers for protection sold in certain credit derivatives transactions, which are in the process of being novated. The mark-to-market loss of Rs. 12.4 billion at year-end fiscal 2009 on investment classified as “available for sale securities” in our UK and Canadian subsidiaries is directly reflected in the shareholders’ equity.
In October 2008, the UK Accounting Standards Board amended FRS 26 on “Financial Instruments: Recognition and Measurement” and permitted the reclassification of financial assets in certain circumstances from the “held for trading” category to the “available for sale” category, from the “held for trading” category to the “loans and receivables” category and from the “available for sale” category to the “loans and receivables” category. Pursuant to these amendments, during fiscal 2009, ICICI Bank UK transferred certain assets with a fair value of Rs. 34.0 billion from the held for trading category to the “available for sale” category, certain assets with a fair value of Rs. 0.1 billion from the held for trading category of inve stments to “the loans and receivables” category and certain assets with a fair value of Rs. 20.4 billion from the “available for sale” category of investments to “the loans and receivables” category. If these reclassifications had not been made, our profit for fiscal 2009 would have been lower by Rs. 2.5 billion.
Our mark-to-market provisions against available for sale investments adjusted against shareholders’ equity increased by a post-tax amount of Rs. 8.3 billion during fiscal 2009 to a post-tax amount of Rs. 13.4 billion at year-end fiscal 2009. If the above reclassifications had not been made, these provisions would have increased by a further pre-tax amount of Rs. 0.5 billion.
Profit/(loss) on sale and revaluation of investments decreased by 32.0% from Rs. 29.3 billion in fiscal 2008 to Rs. 19.9 billion in fiscal 2009, primarily due to a decline in equity markets resulting in mark-to-market losses in the equity portfolio, a loss on proprietary equity trading and mutual fund portfolio, and mark-to-market provisioning on security receipts, offset, in part, by realized profit on the sale of fixed income investments. At year-end fiscal 2009, we had an outstanding net investment of Rs. 32.2 billion in security receipts issued by asset reconstruction companies in relation to sales of non-performing assets. In accordance with Reserve Bank of India guidelines on “Prudential norms for classification, valuation and operation of investment portfolio by banks”, all instruments received by ba nks, whether as consideration for transferred non-performing assets or otherwise, are securities. The Reserve Bank of India regulations on the valuation and classification of securities apply to these securities receipts as well. At the end of each reporting period, security receipts issued by asset reconstruction companies are valued in accordance with the guidelines applicable to such instruments, as prescribed by the Reserve Bank of India from time to time. Accordingly, in cases where the cash flows from security receipts issued by asset reconstruction companies are limited to the actual realization of the financial assets assigned to the instruments in the concerned scheme, the Bank calculates the net asset value obtained from the asset reconstruction company from time to time, for valuation of such investments at each reporting period end. During fiscal 2009, the mark-to-market impact on these security receipts was a loss of Rs. 3.3 billion.
During the year, the spread on foreign currency bonds issued by ICICI Bank and ICICI Bank UK widened significantly. We initiated buyback of our bonds in the secondary market resulting in a gain of Rs. 3.4 billion to ICICI Bank and Rs. 4.0 billion to our UK subsidiary. This led to an increase in miscellaneous income from Rs. 0.8 billion in fiscal 2008 to Rs. 7.8 billion in fiscal 2009.
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal components of non-interest expense.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Payments to and provisions for employees | | Rs. | 39,698 | | | Rs. | 39,043 | | | US$ | 869 | | | | (1.6 | )% |
Depreciation on own property | | | 4,973 | | | | 5,966 | | | | 133 | | | | 20.0 | % |
Auditor’s fees and expenses | | | 100 | | | | 137 | | | | 3 | | | | 37.0 | % |
Other administrative expenses | | | 65,299 | | | | 62,990 | | | | 1,401 | | | | (3.5 | )% |
Operating expenses | | | 110,070 | | | | 108,136 | | | | 2,406 | | | | (1.8 | )% |
Direct marketing agency expenses | | | 15,750 | | | | 6,122 | | | | 136 | | | | (61.1 | )% |
Depreciation on leased assets | | | 1,821 | | | | 2,101 | | | | 47 | | | | 15.4 | % |
| Expenses pertaining to insurance business | | | 142,793 | | | | 165,499 | | | | 3,681 | | | | 15.9 | % |
Total non-interest expenses | | Rs. | 270,434 | | | Rs. | 281,858 | | | US$ | 6,270 | | | | 4.2 | % |
Non-interest expense increased by 4.2% from Rs. 270.4 billion in fiscal 2008 to Rs. 281.9 billion in fiscal 2009, primarily due to a 15.9% increase in expenses pertaining to our insurance business and a 20.0% increase in depreciation expenses, offset, in part, by a reduction in direct marketing agency expenses.
Expenses pertaining to our insurance business, representing provisions for claims, commissions paid and reserving for actuarial liability increased by 15.9% from Rs. 142.8 billion in fiscal 2008 to Rs. 165.5 billion in fiscal 2009, primarily due to an increase in life insurance business volume and an increase in claims including certain high value claims in the general insurance business, offset, in part, by a decline in commission expenses. In the case of ICICI Prudential Life Insurance Company, higher renewal premiums and lower new business premiums resulted in a lower increase in upfront expenses and commission expenses. The provisions for claims are determined based on actuarial valuation. In line with Indian accounting norms for insurance companies we do not amortize the customer acquisition cost, but account for the expenses upfront.
Depreciation on our owned property increased by 20.0% from Rs. 5.0 billion in fiscal 2008 to Rs. 6.0 billion in fiscal 2009, reflecting the addition of new branches. Depreciation on leased assets was Rs. 2.1 billion in fiscal 2009 compared to Rs. 1.8 billion in fiscal 2008.
Employee expenses decreased by 1.6% from Rs. 39.7 billion in fiscal 2008 to Rs. 39.0 billion in fiscal 2009, primarily due to a decrease in the employee base, including sales executives, employees on fixed term contracts and interns, from 108,393 at year-end fiscal 2008 to 91,777 at year-end fiscal 2009, offset, in part, by an annual increase in salaries and other employee benefits. The employee expenses for ICICI Bank decreased by 5.1% from Rs. 20.8 billion in fiscal 2008 to Rs. 19.7 billion in fiscal 2009, primarily due to a 17.9% decrease in our employee base from 63,098 at year-end fiscal 2008 to 51,835 at year-end fiscal 2009, offset, in part, by an annual increase in salaries. ICICI Bank did not pay a performance bonus to employees for fiscal 2009 (other than bonuses payable under statute). The performance bonus included in ICICI Bank’s employee expenses in fiscal 2008 was Rs. 2.1 billion.
Other administrative expenses decreased by 3.5% from Rs. 65.3 billion in fiscal 2008 to Rs. 63.0 billion in fiscal 2009, primarily due to overall cost reduction initiatives undertaken by ICICI Bank, offsetting an increase in expenses related to retail business (primarily related to collections) and an increase in ICICI Bank’s branch and ATM network. The number of branches (excluding foreign branches and offshore banking units) and extension counters of ICICI Bank in India increased from 1,262 at year-end fiscal 2008 to 1,419 at year-end fiscal 2009. The number of ATMs increased from 3,881 at year-end fiscal 2008 to 4,713 at year-end fiscal 2009. The number of branches and offices of our insurance subsidiaries increased from 2,223 at year-end fiscal 2008 to 2,513 at year-end fiscal 2009.
Other administrative expenses include a scheme support expense of Rs. 920 million of ICICI Prudential Asset Management Company Limited in fiscal 2009. The scheme support expense consists of support of Rs. 27 million to fixed maturity plans towards yield shortfall, Rs. 55 million to money market schemes and Rs. 838 million to equity schemes. The scheme support expenses were incurred to address market valuation shortfalls in fixed maturity plans and money market schemes due to liquidity constraints and volatility in the fixed income markets;
and for compensation against a diminution in the value of shares held in an equity scheme. These measures were taken to protect the interests of investors and to preserve the franchise, although there was no contractual obligation to do so.
Direct marketing agency expenses of ICICI Bank decreased by 61.1% from Rs. 15.7 billion in fiscal 2008 to Rs. 6.1 billion in fiscal 2009, primarily due to lower retail loan origination, the lower issuance of new credit cards and the reduction in the rate of commission. We use marketing agents, called direct marketing agents or associates, for sourcing our retail assets. We include commissions paid to these direct marketing agents of our retail assets in non-interest expense. These commissions are expensed upfront and not amortized over the life of the loan.
Provisions for Restructured Loans and Non-performing Assets
We classify our loans in accordance with the Reserve Bank of India guidelines into performing and non-performing loans. Further, non-performing assets are classified into substandard, doubtful and loss assets based on the criteria stipulated by the Reserve Bank of India. The Reserve Bank of India has separate guidelines for restructured loans. A fully secured standard loan can be restructured by rescheduling principal repayments and/or the interest element, but such loan must be separately disclosed as a restructured loan in the year of restructuring. Similar guidelines apply to restructuring of substandard and doubtful loans. See also “Business — Loan portfolio — Classification of loans”.
The following table sets forth, at the dates indicated, certain information regarding restructured loans.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Gross restructured loans | | Rs. | 48,411 | | | Rs. | 61,368 | | | US$ | 1,365 | | | | 26.8 | % |
Provisions for restructured loans | | | (1,572 | ) | | | (1,736 | ) | | | (39 | ) | | | 10.4 | |
Net restructured loans | | | 46,839 | | | | 59,632 | | | | 1,326 | | | | 27.3 | |
Gross customer assets | | | 2,687,999 | | | | 2,892,808 | | | | 64,356 | | | | 7.6 | |
Net customer assets | | Rs. | 2,642,697 | | | Rs. | 2,836,439 | | | US$ | 63,102 | | | | 7.3 | |
| Gross restructured loans as a percentage of gross customer assets | | | 1.8 | % | | | 2.1 | % | | | | | | | | |
| Net restructured loans as a percentage of net customer assets | | | 1.8 | | | | 2.1 | | | | | | | | | |
The deterioration in the global economic environment during fiscal 2009, in particular following the bankruptcy of Lehman Brothers in September 2008, adversely impacted the operations of several Indian companies. Indian businesses were impacted by the lack of access to financing and refinancing capital from the global debt capital markets, losses on existing inventories due to the sharp decline in commodity prices, a reduction in demand for and prices of output and a reduction in cash accruals and profitability. This led to the additional restructuring of loans in the Indian banking system, including loans made by us. Our gross restructured loans increased by 26.8% from Rs. 48.4 billion at year-end fiscal 2008 to Rs. 61.4 billion at year-end fiscal 2009 primarily due to stress experienced by certain borrowers in real e state and developer financing, auto ancillaries, textiles and retail mortgage sectors. As a percentage of net customer assets, net restructured loans were 2.1% at year-end fiscal 2009 compared to 1.8% at year-end fiscal 2008.
The following table sets forth, at the dates indicated, certain information regarding non-performing assets.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Gross non-performing assets | | Rs. | 77,963 | | | Rs. | 99,921 | | | US$ | 2,223 | | | | 28.2 | |
| Provisions for non-performing assets | | | (42,031 | ) | | | (52,580 | ) | | | (1,170 | ) | | | 25.1 | |
Net non-performing assets | | Rs. | 35,932 | | | Rs. | 47,341 | | | US$ | 1,053 | | | | 31.8 | |
Gross customer assets | | | 2,687,999 | | | | 2,892,808 | | | | 64,356 | | | | 7.6 | |
Net customer assets | | Rs. | 2,642,697 | | | Rs. | 2,836,439 | | | US$ | 63,102 | | | | 7.3 | |
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Gross non-performing assets as a percentage of gross customer assets | | | 2.9 | | | | 3.5 | | | | | | | | | |
| Net non-performing assets as a percentage of net customer assets | | | 1.4 | | | | 1.7 | | | | | | | | | |
Gross non-performing assets increased by 28.2% from Rs. 78.0 billion at year-end fiscal 2008 to Rs. 99.9 billion at year-end fiscal 2009 primarily due to an increase in retail non-performing loans due to higher delinquencies in the unsecured retail portfolio and the seasoning of the overall retail loan portfolio. The net non-performing loans in the retail portfolio at year-end fiscal 2009 were 2.6% of net retail loans compared to 1.7% at year-end fiscal 2008. Retail gross non-performing loans constituted 72.4% of total gross non-performing assets at year-end fiscal 2009 compared to 71.6% at year-end fiscal 2008, due to an increase in retail non-performing loans, particularly in the non-collateralized portfolio. We sold Rs. 6.8 billion of our non-performing assets, including mortgage loans of Rs. 5.6 billion, during fis cal 2009 and Rs. 9.3 billion of our net non-performing assets including mortgage loans of Rs. 6.9 billion, during fiscal 2008 to asset reconstruction companies registered with the Reserve Bank of India. As a percentage of net customer assets, net non-performing assets were 1.7% at year-end fiscal 2009 compared to 1.4% at year-end fiscal 2008. Provisions including general provision on performing assets as required by the Reserve Bank of India as a percentage of gross customer assets were 2.5% at year-end fiscal 2009 compared to 2.2% at year-end fiscal 2008.
The following table sets forth, for the periods indicated, the composition of provision and contingencies, excluding provision for tax.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Provisions for investments (including credit substitutes)(net) | | Rs. | 730 | | | Rs. | 6,305 | | | US$ | 140 | | | | – | |
| Provision for non-performing assets | | | 25,552 | | | | 37,707 | | | | 839 | | | | 47.6 | % |
Provision for standard assets | | | 2,172 | | | | 1,409 | | | | 31 | | | | (35.1 | ) |
Others | | | 1,724 | | | | (304 | ) | | | (6 | ) | | | – | |
| Total provisions and contingencies (excluding tax) | | Rs. | 30,178 | | | Rs. | 45,117 | | | US$ | 1,004 | | | | 49.5 | % |
Provisions are made by ICICI Bank on standard, substandard and doubtful assets at rates prescribed by the Reserve Bank of India. Loss assets and the unsecured portion of doubtful assets are provided/written off as prescribed by the current Reserve Bank of India guidelines. Subject to the minimum provisioning levels prescribed by the Reserve Bank of India, provisions on homogeneous retail loans/receivables are assessed at a portfolio level, on the basis of days past due. See also “Business — Classification of Loans”.
Provisions and contingencies (excluding provisions for tax) increased by 49.5% from Rs. 30.2 billion in fiscal 2008 to Rs. 45.1 billion in fiscal 2009, primarily due to a higher level of specific provisioning on non-performing retail loans, impairment provisions for certain held-to-maturity investments and provisions made for investment in securities issued by Lehman Brothers and other investments held by ICICI Bank UK, offset, in part by the absence of general provision on standard assets.
Provisions for investments increased from Rs. 0.7 billion in fiscal 2008 to Rs. 6.3 billion in fiscal 2009 primarily due to the impairment provisions for certain held-to-maturity investments and provisions of Rs. 4.2 billion made for investment in securities issued by Lehman Brothers and other investments held by ICICI Bank UK.
Specific provisioning on non-performing assets increased primarily due to an increase in retail credit losses. The increase in retail credit losses primarily reflects the seasoning of the secured loan portfolio and relatively higher losses on unsecured portfolio.
The government of India issued guidelines for the implementation of the agriculture debt waiver and the relief scheme for farmers on May 23, 2008, which we have adopted. Pursuant to the scheme, an aggregate amount of Rs. 2.7 billion has been waived which is recoverable from government of India. Of the above, an amount of Rs. 773 million was received by year-end fiscal 2009. Correspondingly, amounts of Rs. 145 million and Rs. 57 million have been written back from the excess non-performing assets provision and the interest suspense account, respectively.
We did not make additional general provisions on standard assets pursuant to guidelines issued by the Reserve Bank of India which reduced the general provisioning requirement. However, these guidelines do not permit the write-back of excess provisions already made and we therefore held a cumulative general provision of Rs. 14.4 billion at year-end fiscal 2009 compared to the general provisioning requirement under the revised guidelines, of Rs. 8.4 billion.
Tax Expense
Total tax expense was Rs. 15.9 billion in fiscal 2009 compared to Rs. 11.1 billion in fiscal 2008. Income tax expense was Rs. 15.2 billion in fiscal 2009 compared to Rs. 10.3 billion in fiscal 2008. The effective tax rate of 30.6% in fiscal 2009 was higher compared to the effective tax rate of 24.3% in fiscal 2008, primarily due to change in mix of taxable profits, which had a lower component of income from dividend and capital gains. The effective income tax rate of 30.6% for fiscal 2009 was lower compared to the statutory tax rate of 33.99%, primarily due to the exempt dividend income, deduction towards special reserve and deduction of income of offshore banking unit.
As per the clarification relating to the creation of deferred tax asset by an insurance company, issued by the Insurance Regulatory and Development Authority, ICICI Prudential Life Insurance Company created deferred tax assets of Rs. 1.0 billion for fiscal 2009.
In accordance with the provisions of the Income Tax Act, 1961, companies are obligated to pay additional income tax referred to as fringe benefit tax on the value of fringe benefits provided or deemed to be provided to their employees, computed as per the prescribed methodology. The fringe benefit tax expense decreased from Rs. 780 million in fiscal 2008 to Rs. 659 million in fiscal 2009. The fringe benefit tax on employee stock options is not reflected above as it is recovered from employees. The Finance Act, 2009, abolished the levy of fringe benefit tax, effective fiscal 2010.
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal components of assets.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Cash and cash equivalents | | Rs. | 453,287 | | | Rs. | 350,614 | | | US$ | 7,800 | | | | (22.7 | )% |
Investments | | | 1,600,468 | | | | 1,481,070 | | | | 32,949 | | | | (7.5 | ) |
Advances (net of provisions) | | | 2,514,017 | | | | 2,661,305 | | | | 59,206 | | | | 5.9 | |
Fixed assets | | | 46,783 | | | | 44,975 | | | | 1,001 | | | | (3.9 | ) |
Other assets | | | 241,611 | | | | 288,946 | | | | 6,428 | | | | 19.6 | |
Total assets | | Rs. | 4,856,166 | | | Rs. | 4,826,910 | | | US$ | 107,384 | | | | (0.6 | )% |
Our total assets decreased marginally by 0.6% from Rs. 4,856.2 billion at year-end fiscal 2008 to Rs. 4,826.9 billion at year-end fiscal 2009, primarily due to a decrease in cash and cash equivalents by 22.7%. Net advances increased by 5.9% from Rs. 2,514.0 billion at year-end fiscal 2008 to Rs. 2,661.3 billion at year-end fiscal 2009, primarily due to an increase in advances of overseas branches and banking subsidiaries. Advances of our overseas
branches and subsidiaries increased due to the impact of rupee depreciation on foreign currency denominated advances. Net advances of our overseas branches (including our offshore banking unit) decreased in US dollar terms by 10.1% from US$ 11.9 billion at year-end fiscal 2008 to US$ 10.7 billion at year-end fiscal 2009. Net advances of overseas subsidiaries increased in US dollar terms by 55.1% from US$ 4.9 billion at year-end fiscal 2008 to US$ 7.6 billion at year-end fiscal 2009. Total investments at year-end fiscal 2009 decreased by 7.5% from Rs. 1,600.5 billion at year-end fiscal 2008 to Rs. 1,481.1 billion, primarily due to a 13.2% decrease in statutory liquidity ratio investments from Rs. 786.6 billion at year-end fiscal 2008 to Rs. 683.0 billion at year-end fiscal 2009. Investments held to cover the linked liabilities of ICICI Prudential Life Insurance Company increased by 15.1% from Rs. 248.5 billion at year-end fiscal 2008 to Rs. 286.1 billion at year-end fiscal 2009, primarily due to the growth of our insurance business.
Other assets increased by 19.6% from Rs. 241.6 billion at year-end fiscal 2008 to Rs. 288.9 billion at year-end fiscal 2009, primarily due to an increase in receivables on derivatives transactions with customers, other income receivables and deferred tax assets. Deferred tax assets increased by 45.7% from Rs. 17.3 billion at year-end fiscal 2008 to Rs. 25.2 billion at year-end fiscal 2009, primarily due to an increase in deferred tax assets created to provide for loan losses.
Liabilities and Stockholders’ Equity
The following table sets forth, at the dates indicated, the principal components of liabilities and stockholders’ equity.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Deposits | | Rs. | 2,769,832 | | | Rs. | 2,618,558 | | | US$ | 58,255 | | | | (5.5 | )% |
Borrowings | | | 1,073,238 | | | | 1,160,664 | | | | 25,821 | | | | 8.1 | |
Other liabilities(1) | | | 544,681 | | | | 556,936 | | | | 12,390 | | | | 2.2 | |
| Proposed dividend (including corporate dividend tax) | | | 13,881 | | | | 13,872 | | | | 309 | | | | (0.1 | ) |
Minority interest | | | 7,312 | | | | 9,105 | | | | 203 | | | | 24.5 | |
Total liabilities | | | 4,408,944 | | | | 4,359,135 | | | | 96,977 | | | | (1.1 | ) |
Equity share capital | | | 11,127 | | | | 11,133 | | | | 248 | | | | 0.1 | |
Reserves and surplus | | | 436,095 | | | | 456,642 | | | | 10,159 | | | | 4.7 | |
| Total liabilities (including capital and reserves) | | Rs. | 4,856,166 | | | Rs. | 4,826,910 | | | US$ | 107,384 | | | | (0.6 | )% |
| (1) | Includes liabilities on policies in force but does not include subordinated debt reclassified to borrowings and proposed dividend. |
Deposits decreased by 5.5% from Rs. 2,769.8 billion at year-end fiscal 2008 to Rs. 2,618.6 billion at year-end fiscal 2009, primarily due to our conscious strategy of reducing wholesale term deposits. Term deposits decreased from Rs. 1,982.5 billion at year-end fiscal 2008 to Rs. 1,880.8 billion at year-end fiscal 2009 and savings deposits decreased from Rs. 537.6 billion at year-end fiscal 2008 to Rs. 515.1 billion at year-end fiscal 2009. Total deposits at year-end fiscal 2009 constituted 69.4% of our funding (i.e., deposit and borrowings excluding preference shares). Borrowings increased by 8.1% from Rs. 1,073.2 billion at year-end fiscal 2008 to Rs. 1,160.7 billion at year-end fiscal 2009, primarily due to capital-eligible borrowings, in the nature of subordinated debt and the impact of rupee depreciation on foreig n currency denominated borrowings. Minority interest increased by 24.5% from Rs. 7.3 billion at year-end fiscal 2008 to Rs. 9.1 billion at year-end fiscal 2009, primarily due to an increase of Rs. 7.2 billion in the share capital and reserves of our insurance subsidiaries. Stockholders’ equity increased from Rs. 447.2 billion at year-end fiscal 2008 to Rs. 467.8 billion at year-end fiscal 2009, primarily due to the profit for fiscal 2009, offset in part, by dividend payments on equity shares.
Off Balance Sheet Items, Commitments and Contingencies
Foreign Exchange and Derivatives Contracts
We enter into foreign exchange forwards, options, swaps and other derivatives products to enable customers to transfer, modify or reduce their foreign exchange and interest rate risks and to manage our own interest rate and foreign exchange positions. These instruments are used to manage foreign exchange and interest rate risk relating to specific groups of on-balance sheet assets and liabilities. The following table sets forth, at the dates indicated, the notional amount of foreign exchange and interest rate derivatives contracts.
| | | Notional principal amounts | | | Balance sheet credit exposure(1) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (in millions) | |
| Interest rate products: | | | | | | | | | | | | | | | | | | | | | | | | |
| Swap agreements | | Rs. | 7,440,119 | | | Rs. | 3,277,582 | | | Rs. | 3,960,258 | | | US$ | 88,104 | | | Rs. | 30,346 | | | Rs. | 10,134 | | | Rs. | 20,120 | | | US$ | 447 | |
Others | | | 115,266 | | | | 236,732 | | | | 253,973 | | | | 5,650 | | | | 72 | | | | 1,201 | | | | 222 | | | | 5 | |
| Total interest rate products | | Rs. | 7,555,385 | | | Rs. | 3,514,314 | | | Rs. | 4,214,231 | | | US$ | 93,754 | | | Rs. | 30,418 | | | Rs. | 11,335 | | | Rs. | 20,342 | | | US$ | 452 | |
| Foreign exchange products: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | | Rs. | 2,086,254 | | | Rs. | 2,429,365 | | | Rs. | 1,644,474 | | | US$ | 36,585 | | | Rs. | (2,402 | ) | | Rs. | 1,173 | | | Rs. | – | | | US$ | – | |
| Swap agreements | | | 1,158,421 | | | | 662,172 | | | | 582,155 | | | | 12,951 | | | | (1,046 | ) | | | 15,855 | | | | 12,656 | | | | 282 | |
Others | | | 1,681,353 | | | | 643,024 | | | | 634,665 | | | | 14,119 | | | | 426 | | | | 9,249 | | | | (873 | ) | | | (19 | ) |
| Total foreign exchange products | | Rs. | 4,926,028 | | | Rs. | 3,734,561 | | | Rs. | 2,861,294 | | | US$ | 63,655 | | | Rs. | (3,022 | ) | | Rs. | 26,277 | | | Rs. | 11,783 | | | US$ | 263 | |
| (1) | Denotes the net mark-to-market impact of the derivatives and foreign exchange products on the reporting date. |
The notional principal amount of interest rate products increased to Rs. 4,214.2 billion at year-end fiscal 2010 compared to Rs. 3,514.3 billion at year-end fiscal 2009. The notional principal amount of foreign exchange products decreased to Rs. 2,861.3 billion at year-end fiscal 2010 compared to Rs. 3,734.6 billion at year-end fiscal 2009, primarily due to the termination and maturities of derivatives contracts with clients and the impact of rupee appreciation during fiscal 2010. There was also a significant decline in trading volumes of currency options during fiscal 2010, on account of generally subdued corporate business activities.
An interest rate swap does not entail the exchange of notional principal and the cash flow arises because of the difference between the interest rate pay and receive portions of the swap, which is generally much lower than the notional principal of the swap. A large proportion of interest rate swaps, currency swaps and forward exchange contracts are on account of market making, which involves providing regular two-way prices to customers or inter-bank counter-parties. This results in the generation of a higher number of outstanding transactions, and hence a large value of gross notional principal of the portfolio. For example, if a transaction entered into with a customer is covered by an exactly opposite transaction entered into with another counterparty, the net market risk of the two transactions will be zero wherea s the notional principal amount of the portfolio will be the sum of both transactions. We also deal in credit derivatives instruments including credit default swaps, credit-linked notes, collateralized debt obligations and principal protected structures. The notional principal amount of these credit derivatives outstanding at year-end fiscal 2010 was Rs. 28.0 billion in funded instruments and Rs. 32.9 billion in non-funded instruments which includes Rs. 225 million of protection we have bought. The notional principal amount of these credit derivatives outstanding at year-end fiscal 2009 was Rs. 33.7 billion in funded instruments and Rs. 38.7 billion in non-funded instruments which included Rs. 254 million of protection we have bought.
Securitization
We primarily securitize commercial loans through “pass-through” securitization transactions involving special purpose entities, usually constituted as trusts. After securitization, we generally continue to maintain customer account relationships and service loans transferred to the securitization trusts. Our securitization transactions are
made either on a limited or no-recourse basis. In certain cases, we may enter into derivatives transactions such as interest rate swaps with the contributors to the securitization trusts. Effective February 1, 2006, the Reserve Bank of India issued guidelines on the securitization of standard assets. In accordance with these guidelines, we account for any loss arising out of a securitization transaction immediately at the time of sale and amortize the profit or premium over the life of the asset. Prior to February 1, 2006, any profit arising out of a securitization transaction was recorded at the time of sale.
In certain cases prior to the issuance of guidelines, we have written put options which require us to purchase upon request of the holders securities issued in certain securitization transactions. The put options seek to provide liquidity to holders of such instruments. If exercised we are obligated to purchase the securities at the pre-determined exercise price. The value of put options outstanding at year-end fiscal 2010 was Rs. 652 million.
The Bank acts in different capacities and under different contracts for consideration including as originator, liquidity or credit enhancement provider, underwriter and senior contributor.
Excess interest spreads from the underlying assets in securitization transactions are subordinated to provide credit enhancement. Upon the origination of transactions, the Bank values the subordinated excess interest spreads on the basis of the future cash flows estimated after payment of dues to the senior contributors. These subordinate contributions represent the beneficial interest in the monthly cash flows received as per the payment waterfall defined at the time of sale.
In addition to the subordination of excess interest spreads, the Bank provides further credit enhancement facilities to mitigate cash flow shortfalls that may arise from the underlying asset delinquencies. These facilities include first loss credit enhancement representing the first or primary level of protection provided to bring the ratings accorded to the beneficial interests of senior contributors to investment grade. The Bank also provides second loss credit enhancement representing a subsequent level of protection provided to protect the beneficiaries against further cash flow shortfalls. The first loss and second loss credit enhancements are provided either in the form of undertakings or cash maintained separately for the benefit of the special purpose vehicles constituted as trusts. The total outstanding first loss credit enhancements at year-end fiscal 2010 were Rs. 17.2 billion and second loss credit enhancements were Rs. 12.7 billion. Of the above, the outstanding credit enhancements in the form of guarantees amounted to Rs. 19.9 billion.
The Bank also provides liquidity facilities to help smoothen the timing differences faced by the special purpose vehicles between the receipt of cash flows from the underlying assets and the payments to be made to the investors. The liquidity facility enjoys a priority of claim over the future cash flows from the underlying assets, which is senior to the claims of the senior contributors.
Loan Commitments
We have outstanding undrawn commitments to provide loans and financing to customers. These loan commitments (including fund-based commitments fungible with non fund-based facilities) aggregated Rs. 849.2 billion at year-end fiscal 2010 compared to Rs. 868.3 billion at year-end fiscal 2009. The interest rate on a significant portion of these commitments is dependent on the lending rates prevailing on the date of the loan disbursement. Further, the commitments have fixed expiration dates and are contingent upon the borrower’s ability to maintain specific credit standards.
Capital Commitments
We are obligated under a number of capital contracts which have been committed. The estimated amounts of contracts remaining to be executed on capital projects increased from Rs. 4.6 billion at year-end fiscal 2009 to Rs. 5.5 billion at year-end fiscal 2010.
The following table sets forth contractual obligations on long-term debt, operating lease and guarantees at year-end fiscal 2010.
| | | | |
| | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Long-term debt obligations | | Rs. | 970,245 | | | Rs. | 181,471 | | | Rs. | 332,365 | | | Rs. | 93,018 | | | Rs. | 363,391 | |
| Operating lease obligations | | | 7,364 | | | | 1,652 | | | | 2,575 | | | | 1,636 | | | | 1,501 | |
| Guarantees | | | | | | | | | | | | | | | | | | | | |
Financial guarantees | | | 168,487 | | | | 100,994 | | | | 46,183 | | | | 20,982 | | | | 328 | |
Performance guarantees | | | 468,598 | | | | 177,407 | | | | 203,206 | | | | 59,182 | | | | 28,803 | |
Total | | Rs. | 1,614,694 | | | Rs. | 461,524 | | | Rs. | 584,329 | | | Rs. | 174,818 | | | Rs. | 394,023 | |
Long-term debt obligations
Long-term debt represents debt with an original contractual maturity greater than one year. Maturity distribution is based on contractual maturity or the date, at which the debt is callable at the option of the holder, whichever is earlier. For a detailed discussion on long-term debt, see note no. 4 in our consolidated financial statements included herein.
Operating Lease Commitments
We have commitments under long-term operating leases principally for premises. The following table sets forth a summary of future minimum lease rental commitments at year-end fiscal 2010.
Lease rental commitments for fiscal | | | |
2011 | | Rs. | 1,652 | |
2012 | | | 1,419 | |
2013 | | | 1,156 | |
2014 | | | 912 | |
2015 | | | 724 | |
Thereafter | | | 1,501 | |
Total minimum lease commitments | | Rs. | 7,364 | |
Guarantees
As a part of our project financing and commercial banking activities, we have issued guarantees to support the regular business activities of our clients. These generally represent irrevocable assurances that we will make payments in the event that the customer fails to fulfill its financial or performance obligations. Financial guarantees are obligations to pay a third party beneficiary, where a customer fails to make payment towards a specified financial obligation. Performance guarantees are obligations to pay a third party beneficiary, where a customer fails to perform a non-financial contractual obligation. The guarantees are generally for a period not exceeding ten years. The credit risks associated with these products, as well as the operating risks, are similar to those relating to other types of unfunded facil ities. We enter into guarantee arrangements after conducting appropriate due diligence on our clients. We generally review these facilities on an annual basis. If a client’s risk profile deteriorates to an unacceptable level, we may decline to renew the guarantee at expiration or may require additional security sufficient to protect our exposure. Guarantees increased by 7.2% from Rs. 594.4 billion at year-end fiscal 2009 to Rs. 637.1 billion at year-end fiscal 2010.
The following table sets forth, at the dates indicated, guarantees outstanding.
| | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
| Financial guarantees | | Rs. | 163,746 | | | Rs. | 175,455 | | | | 7.2 | % | | Rs. | 168,487 | | | US$ | 3,748 | | | | (4.0 | )% |
| Performance guarantees | | | 302,988 | | | | 418,903 | | | | 38.3 | % | | | 468,598 | | | | 10,425 | | | | 11.9 | % |
Total guarantees | | Rs. | 466,734 | | | Rs. | 594,358 | | | | 27.3 | % | | Rs. | 637,085 | | | US$ | 14,173 | | | | 7.2 | % |
Financial guarantees constituted approximately 26% of our guarantee exposure at year-end fiscal 2010. Of these financial guarantees, approximately 30% were issued in favor of other lenders as beneficiaries to allow our clients to receive credit assistance or credit enhancement from such lender-beneficiaries. The balance of financial guarantees was issued to support other business activities of our clients, such as guarantees for the procurement of goods or guarantees in lieu of security/cash deposits. Performance guarantees constituted 74% of our guarantee exposure at year-end fiscal 2010.
Illustrative examples of client business activities requiring guarantees include: contracts to procure goods from suppliers, where guarantees are obtained by clients to provide suppliers with assurance of payment in case the clients fail to pay upon receipt of goods; submission of bids for projects, where the guarantees are obtained by clients to provide assurance of performance of contract obligations, in case the bid is awarded to them; advances against goods or services to be supplied by clients to their own customers, where the guarantees are obtained by clients to assure their customers of a refund of advance in case the clients are unable to supply goods or services; guarantees provided in lieu of security deposits or cash deposits, that clients would otherwise be required to maintain with stock exchanges, commod ity exchanges, regulatory authorities or other bodies, or for participating in tenders or in other business contracts; and guarantees obtained by the clients in favor of lenders that enable the clients to receive credit assistance or credit enhancement from lenders by providing such lenders with assurance of payment.
If our clients default under the terms of the guarantees, the beneficiaries may exercise their rights under the guarantees and we are obligated to make certain payments to the beneficiaries. Other banks and financial institutions are the beneficiaries of some of our financial guarantees, which clients request so that they may receive loans from these banks and financial institutions. If our clients default on these loans, the banks and financial institutions exercise their rights under the guarantees and we are obligated to make certain payments to them. Amounts that we pay to the other banks and financial institutions and do not recover from clients are subject to the Reserve Bank of India’s prudential norms on income recognition, asset classification and provisioning pertaining to advances.
We also issue guarantees for clients to whom we have provided other funded facilities in the form of loans. The outstanding amount of such guarantees related to non-performing or restructured loans was Rs. 6,867 million at year-end fiscal 2010. The guarantees we issue are not unilaterally changed or revised when a related loan is restructured. Guarantees are valid for a specified amount and a specified period. Any change in expiry date or amount requires the consent of both the beneficiary and the guarantor. We generally provide guarantee facilities to our customers for a validity period of 12-18 months, and we review the guarantees at least annually during their validity period. If a client’s risk profile deteriorates to an unacceptable level, we may decline to renew the guarantee at expiration or may require ad ditional security sufficient to protect the Bank’s exposure.
Our related party guarantees amounted to Rs. 0.1 million at year-end fiscal 2010.
The following table sets forth the roll-forward of activity for guarantees at year-end fiscal 2010.
| | | | | | |
| | | (in millions) | |
Opening balance at April 1, 2009 | | Rs. | 418,902.9 | | | Rs. | 175,454.8 | |
Additions: Issued during the year | | | 166,040.3 | | | | 125,032.2 | |
| Deletions: Closed due to expiry/termination during the year | | | (115,521.0 | ) | | | (131,120.1 | ) |
| Invoked and paid during the year | | | (824.5 | ) | | | (880.0 | ) |
Closing balance at March 31, 2010 | | Rs. | 468,597.7 | | | Rs. | 168,486.9 | |
Capital Resources
The Bank actively manages its capital to meet regulatory norms and current and future business needs considering the risks in its businesses, expectations of rating agencies, shareholders and investors, and the available options of raising capital. The capital management framework of the Bank is administered by the Finance Group and
the Global Risk Management Group under the supervision of the Board and the Risk Committee. The capital adequacy position and assessment is periodically reported to the Board and the Risk Committee.
Regulatory capital
ICICI Bank is subject to the capital adequacy norms stipulated by the Reserve Bank of India guidelines on Basel II, effective from year-end fiscal 2008. Prior to year-end fiscal 2008, ICICI Bank was subject to the capital adequacy norms as stipulated by the Reserve Bank of India guidelines on Basel I. The Reserve Bank of India guidelines on Basel II require ICICI Bank to maintain a minimum ratio of total capital to risk weighted assets of 9.0%, with a minimum tier I capital adequacy ratio of 6.0%. The total capital adequacy ratio of ICICI Bank at the standalone level at year-end fiscal 2010 as per the Reserve Bank of India guidelines on Basel II was 19.4% with a tier I capital adequacy ratio of 14.0%. Our total capital adequacy ratio at the consolidated level at year-end fiscal 2010 as per the Reserve Bank of India gui delines on Basel II was 19.1% with a tier I capital adequacy ratio of 12.9%.
Under Pillar 1 of the Reserve Bank of India guidelines on Basel II, ICICI Bank follows the standardized approach for measurement of credit and market risks and basic indicator approach for measurement of operational risk.
At year-end fiscal 2010, ICICI Bank was required to maintain capital adequacy based on the higher of the minimum capital required under Basel II or at 80.0% of the minimum capital required under Basel I. The computation under Basel II guidelines results in a higher minimum capital requirement compared to Basel I, and hence the capital adequacy at year-end fiscal 2010 has been maintained and reported as per Basel II guidelines.
Standalone capital adequacy position
The following table sets forth, at the dates indicated, risk-based capital, risk-weighted assets and risk-based capital adequacy ratios computed in accordance with the Reserve Bank of India guidelines on Basel I and Basel II and based on ICICI Bank’s unconsolidated financial statements prepared in accordance with Indian GAAP.
| | | As per the Reserve Bank of India guidelines on Basel I | | | As per the Reserve Bank of India guidelines on Basel II | |
| | | | |
| | | | | | | | | | | | | | | | | | | |
| | | (in millions) | |
Tier I capital | | Rs. | 420,098 | | | Rs. | 432,614 | | | US$ | 9,624 | | | Rs. | 421,968 | | | Rs. | 410,615 | | | US$ | 9,135 | |
Tier II capital | | | 129,716 | | | | 181,569 | | | | 4,039 | | | | 131,585 | | | | 160,410 | | | | 3,569 | |
Total capital | | Rs. | 549,814 | | | Rs. | 614,183 | | | US$ | 13,663 | | | Rs. | 553,553 | | | Rs. | 571,025 | | | US$ | 12,704 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit risk- risk weighted assets. | | Rs. | 3,171,942 | | | Rs. | 2,899,149 | | | US$ | 64,497 | | | Rs. | 3,151,951 | | | Rs. | 2,485,581 | | | US$ | 55,297 | |
| Market risk- risk weighted assets | | | 281,437 | | | | 309,276 | | | | 6,880 | | | | 206,977 | | | | 221,065 | | | | 4,918 | |
| Operational risk- risk weighted assets | | | – | | | | – | | | | | | | | 205,702 | | | | 235,160 | | | | 5,232 | |
| Total risk weighted assets | | Rs. | 3,453,379 | | | Rs. | 3,208,425 | | | US$ | 71,377 | | | Rs. | 3,564,630 | | | Rs. | 2,941,806 | | | US$ | 65,447 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I capital adequacy ratio | | | 12.2 | % | | | 13.5 | % | | | | | | | 11.8 | % | | | 14.0 | % | | | | |
| Tier II capital adequacy ratio | | | 3.7 | % | | | 5.6 | % | | | | | | | 3.7 | % | | | 5.4 | % | | | | |
| Total capital adequacy ratio | | | 15.9 | % | | | 19.1 | % | | | | | | | 15.5 | % | | | 19.4 | % | | | | |
The following key changes were introduced by the Reserve Bank of India under Pillar 1 of the Basel II guidelines during fiscal 2010:
| | · | The Reserve Bank of India issued a clarification on July 1, 2009 that the special reserve (created by banks under Section 36(1) (viii) of the Income Tax Act, 1961) should be included, net of tax payable, in the tier I capital. |
| | · | The Reserve Bank of India in its revised Basel II guidelines issued on February 8, 2010 stipulated that banks are not permitted to use any external credit assessment for risk weighting securitization exposures where the assessment is at least partly based on unfunded support provided by the bank. |
| | · | The Reserve Bank of India in its revised Basel II guidelines issued on February 8, 2010, also issued guidance on the assessment of valuation adjustments on account of illiquidity for less liquid/illiquid that is subject to market risk capital requirements. The Reserve Bank of India also stipulated that these valuation adjustments are to be deducted from tier I capital. ICICI Bank applied this guidance in its computation of its capital adequacy position at year-end fiscal 2010. In May 2010, Reserve Bank of India issued a clarification deferring of the application of this guidance to a future date, pending the finalization of a standardized methodology for computing the valuation adjustments for less liquid/illiquid positions, to be formulated by a working group of the Reserve Bank of India. |
Movement in ICICI Bank’s capital funds and risk weighted assets from year-end fiscal 2009 to year-end fiscal 2010 (as per the Reserve Bank of India guidelines on Basel II)
During fiscal 2010, capital funds increased by Rs. 17.5 billion primarily due to the issuance of tier II debt capital instruments and retained earnings, moderated by certain incremental deductions from capital. Tier II debt capital of Rs. 62.0 billion was raised during the year. The incremental impact of items entirely deducted from tier I capital comprised the tax adjustment of Rs. 9.0 billion on account of the revised treatment of special reserves, valuation adjustments of Rs. 0.9 billion for less liquid positions and an increase of Rs. 2.8 billion for deferred tax asset. The incremental impact of items deducted at 50% each from tier I and tier II capital comprised increase of Rs. 41.6 billion in securitization exposures (including due to revisions in the Reserve Bank of India guidelines on Basel II) that are deducte d from capital, and a capital infusion of Rs. 1.0 billion by the Bank in its securities broking subsidiary during fiscal 2010.
During fiscal 2010, risk weighted assets on account of credit risk decreased by Rs. 666.4 billion primarily due to a decrease in the loan portfolio and the increased coverage of external credit ratings on the portfolio. Risk weighted assets in respect of loans and advances decreased by Rs. 432.9 billion and risk weighted assets in respect of held-to-maturity investments decreased by Rs. 38.8 billion. Further, in the case of off-balance sheet items, risk weighted assets on derivatives contracts (interest rate, exchange rate and gold) decreased by Rs. 77.9 billion and risk weighted assets for other contingent liabilities and undrawn commitments decreased by Rs. 49.5 billion. Risk weighted assets on account of market risk increased by Rs. 14.1 billion primarily due to the increase in market value of equities. Risk weighte d assets on account of operational risk increased by Rs. 29.5 billion due to the increase in the average of previous three years’ gross income which is the basis for computation as per the basic indicator approach.
Consolidated capital adequacy position
Consolidation for capital adequacy calculation is based on the consolidated financial statements of ICICI Bank and its subsidiaries in line with the norms on consolidated prudential reporting issued by the Reserve Bank of India. The entities considered for consolidation for capital adequacy calculation include subsidiaries, associates and joint ventures of the Bank, which carry on activities of banking or of a financial nature as stated in the reporting guidelines prescribed by Reserve Bank of India. Entities engaged in the insurance business and businesses not pertaining to financial services are excluded from consolidation for capital adequacy calculation. Investment above 30% in the paid-up equity capital of financial entities which are not consolidated for capital adequacy (including insurance entities) and investm ents in other instruments eligible for regulatory capital status in those entities are deducted to the extent of 50% from tier I and 50% from tier II capital of the Bank.
Movement in our capital funds and risk weighted assets at the consolidated level from year-end fiscal 2009 to year-end fiscal 2010:
Capital funds increased by Rs. 34.2 billion primarily due to the issuance of tier II debt capital instruments and retained earnings, moderated by certain changes in the Reserve Bank of India guidelines which resulted in an increase in deductions on account of securitization exposures and in special reserve being considered net of tax. The incremental deduction (at 50% each from tier I and tier II capital) on account of securitization deduction was Rs. 41.1 billion. The revised treatment of special reserves to be calculated at net of tax payable resulted in a reduction of Rs. 9.5 billion from tier I capital.
Total risk weighted assets decreased by Rs. 836.9 billion primarily due to a decrease in the loan portfolio and increased coverage of external credit ratings on the portfolio. Risk weighted in respect of loans and advances (on-balance sheet) decreased by Rs. 454.5 billion and risk weighted assets on held-to-maturity investments decreased by Rs. 50.5 billion. Further, under credit risk for off-balance sheet items, risk weighted assets on derivatives contracts (interest rate, exchange rate and gold) decreased by Rs. 75.7 billion and risk weighted assets for other contingent liabilities and undrawn commitments decreased by Rs. 98.9 billion. Risk weighted assets on account of market risk decreased by Rs. 149.2 billion and risk weighted assets on account of operational risk increased by Rs. 38.2 billion.
Internal assessment of capital
ICICI Bank’s capital management framework includes a comprehensive internal capital adequacy assessment process conducted annually, which determines the adequate level of capitalization necessary to meet regulatory norms and current and future business needs, including under stress scenarios. The internal capital adequacy assessment process is formulated at both the standalone bank level and the consolidated group level. The process encompasses capital planning for a certain time horizon, identification and measurement of material risks and the relationship between risk and capital.
The capital management framework is complemented by its risk management framework, which includes a comprehensive assessment of all material risks. Stress testing, which is a key aspect of the capital assessment process and the risk management framework, provides an insight into the impact of extreme but plausible scenarios on the risk profile and capital position. Based on our Board-approved stress testing framework, we conduct stress tests on our various portfolios and assess the impact on our capital ratios and the adequacy of our capital buffers for current and future periods. We periodically assess and refine our stress tests in an effort to ensure that the stress scenarios capture material risks as well as reflect possible extreme market moves that could arise as a result of market conditions. Internal capital ad equacy assessment process at the consolidated level integrates the business and capital plans, and the stress testing results of the group entities.
Based on the internal capital adequacy assessment process, we determine our capital needs and the optimum level of capital by considering the following in an integrated manner:
| | · | strategic focus, business plan and growth objectives; |
| | · | regulatory capital requirements as per Reserve Bank of India guidelines; |
| | · | assessment of material risks and impact of stress testing; |
| | · | perception of credit rating agencies, shareholders and investors; |
| | · | future strategy with regard to investments or divestments in subsidiaries; and |
| | · | evaluation of options to raise capital from domestic and overseas markets, as permitted by Reserve Bank of India from time to time. |
We formulate our internal capital level targets based on the internal capital adequacy assessment process and endeavor to maintain the capital adequacy level in accordance with the targeted levels at all times. See also “Basel II —Pillar 3 disclosures (consolidated)” filed as exhibit to this report.
Impending regulatory developments associated with capital adequacy
Basel III proposals
In order to strengthen the resilience of the banking sector to potential future shocks, together with ensuring adequate liquidity in the banking system, the Basel Committee on Banking Supervision issued consultative documents on capital and liquidity (popularly known as “Basel III” proposals) on December 17, 2009. Subsequent amendments to and guidance regarding these proposals were issued in July 2010, August 2010 and September 2010. The Basel III proposals seek to increase capital requirements for the banking system and introduce internationally harmonized global liquidity standards. Some aspects of the proposals continue to be at the stage of consultation. The complete form of the Basel III framework is expected to be finalized by end of calendar year 2010. Implementation is expected to begin at the start of calendar year 2013 with substantial transition arrangements to be put in place.
The Basel III proposals on capital consist of proposals on improving the quality, consistency and transparency of capital, enhancing risk coverage, introducing a supplementary leverage ratio, reducing procyclicality and promoting counter-cyclical buffers, and addressing systemic risk and interconnectedness. In September 2010, the Basel Committee announced the strengthening of capital requirements, which comprised an increase in minimum common equity from 2.0% to 4.5% with an additional capital conservation buffer requirement of 2.5%, thereby bringing the total common equity requirement to 7.0%. The capital conservation buffer is a buffer established above the regulatory minimum capital requirement and capital distribution constraints will be imposed on the bank when capital levels fall below the buffer limit. Further, the minimum tier I capital requirement has been increased from 4.0% to 6.0% and with the above-mentioned capital conservation buffer; the total tier I capital requirement would be 8.5%. The total capital adequacy requirement (tier I and tier II) remains at the existing 8.0% level and with the above-mentioned capital conservation buffer, the total capital adequacy requirement would be 10.5%. The Basel III proposals on liquidity consist of a proposal on short-term liquidity coverage ratio aimed at building liquidity buffers to meet stress situations, and a proposal on long-term net stable funding ratio aimed at promoting longer term structural funding. These proposals are scheduled to be implemented in a phased manner over the next several years.
Some of the proposed measures of Basel III such as the predominance of equity in tier I capital, an increased tier I capital requirement, capital conservation, a counter-cyclical buffer and deduction of deferred tax asset over a certain threshold, already exist in some form in the Reserve Bank of India’s current prudential regulatory regime on capital adequacy for the Indian banking system. Further, the Reserve Bank of India currently stipulates a capital adequacy requirement of 9.0% compared to 8.0% stipulated by the Basel Committee. The Reserve Bank of India’s current stipulation for banks in India on maintaining a minimum statutory liquid ratio through mandatory holdings of government of India securities already reflects the emphasis of Basel III on building adequate liquidity buffers through the holding of high quality liquid assets.
We continue to monitor developments regarding these proposals. While the Basel III proposals may increase capital requirements and impose additional costs on the Bank in the future, we believe that our current robust capital adequacy position, adequate headroom currently available to raise hybrid/debt capital, demonstrated track record of access to domestic and overseas markets for capital raising and adequate flexibility in its balance sheet structure and business model will enable us to adapt to the Basel III framework along with any amendments by the Reserve Bank of India, as and when they are implemented.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment activities and in the management of trading positions. It includes both the risk of unexpected increases in the cost of funding an asset portfolio at appropriate maturities and the risk of being unable to liquidate a position in a timely manner at a reasonable price. The goal of liquidity management is to be able, even under adverse conditions, to meet all liability repayments on time and fund all investment opportunities.
Most of our incremental funding requirements are met through short-term funding sources, primarily in the form of deposits including inter-bank deposits. However, a large portion of our assets, primarily our corporate and project finance and home loan portfolio, have medium or long-term maturities, creating a potential for funding
mismatches. We actively monitor our liquidity position and attempt to maintain adequate liquidity at all times to meet all the requirements of our depositors and bondholders, while also meeting the credit demand of our customers.
We seek to establish a continuous information flow and an active dialogue between the funding and borrowing divisions of the organization to enable optimal liquidity management. A separate group is responsible for liquidity management. We are required to submit gap analysis on a monthly basis to the Reserve Bank of India. Pursuant to the Reserve Bank of India guidelines, the liquidity gap (if negative) must not exceed 20.0% of outflows in the 1 to 14 day and the 15 to 28 day time category. We prepare a fortnightly maturity gap analysis to review our liquidity position. Our static gap analysis is also supplemented by a short-term dynamic analysis, in order to provide the liability raising units with a fair estimate of our short-term funding requirements. In addition, we also monitor certain liquidity ratios on a fortnig htly basis. We have in place a liquidity contingency plan through which we monitor key indicators that could signal potential liquidity challenges, to enable us to take necessary measures to ensure sufficient liquidity.
We maintain diverse sources of liquidity to facilitate flexibility in meeting funding requirements. Incremental operations are principally funded by accepting deposits from retail and corporate depositors. The deposits are augmented by borrowings in the short-term inter-bank market and through the issuance of bonds. We also have recourse to the liquidity adjustment facility and the refinance window, which are short-term funding arrangements provided by the Reserve Bank of India. We generally maintain a substantial portfolio of liquid high quality securities that may be sold on an immediate basis to meet our liquidity needs. We also have the option of managing liquidity by borrowing in the inter-bank market on a short-term basis. The overnight market, which is a significant part of the inter-bank market, is susceptible to volatile interest rates. These interest rates on certain occasions have touched highs of 100.0% and above. To curtail reliance on such volatile funding, our liquidity management policy has stipulated daily limits for borrowing and lending in this market. Our limit on daily borrowing is more conservative than the limit set by the Reserve Bank of India. ICICI Securities Primary Dealership like us relies for a certain proportion of its funding on the inter-bank market for overnight money and is therefore also exposed to similar risk of volatile interest rates.
Our liquid assets consist of nostro balances, overnight and other money market placements maturing within 90 days, government bonds and treasury bills that are held in excess of regulatory requirements, other money market investments such as commercial paper, certificate of deposits, banker’s acceptance and bearer depository notes, bills rediscounting, inter-bank participations, mutual fund investments and unutilized repurchase/refinance lines. We deduct our short-term borrowings (borrowings with maturity up to one month) from the aggregate of these assets to determine our net liquid assets.
Our domestic operations in India and our overseas banking subsidiaries are funded primarily by deposits. Our international branches are funded primarily by bond issuances, syndicated loans, inter-bank funding and commercial paper, in addition to deposit taking subject to local regulations and have longer maturity assets relative to liabilities. While conditions in the international markets have improved, prolonged uncertainty regarding growth partly due to sovereign downgrades, together with new liquidity regimes being imposed by regulators, have resulted in continued challenges in the funding market. We have, therefore, limited new loan disbursements from our international branches and increased the focus on the deposit rollover, prepayments and inter-bank borrowings for managing liquidity, while accessing institution al markets through bond issuances and bilateral loans at appropriate times.
Additionally, we have continued to successfully raise funds through banker’s acceptance and access refinance from export credit agencies. We have the ability to use our rupee liquidity in India to meet refinancing needs at our overseas branches, though this may be at a relatively high cost based on swap and exchange rates prevailing at the time of such refinancing. ICICI Bank has raised US$ 1.3 billion through bonds denominated in US dollars through two issuances in November 2009 and July 2010. These bonds have an original maturity exceeding five years.
The terms of our bond issuances and loans from other financial institutions and export credit agencies contain cross-default clauses, restrictions on our ability to merge or amalgamate with another entity and restrictions on our ability to prematurely redeem or repay such bonds or loans. The terms of our subordinated debt issuances eligible for inclusion in tier I or tier II capital include the suspension of interest payments in the event of losses or capital deficiencies, and a prohibition on redemption, even at maturity or on specified call option dates, without the prior
approval of the Reserve Bank of India. We are currently not, and do not expect to be, in breach of any material covenants of our borrowings that would be construed as events of default under the terms of such borrowings.
There are restrictions on the use of liquidity maintained by our UK and Canada subsidiaries to meet our overall liquidity needs. The Office of the Superintendent of Financial Institutions has prescribed a limit of 100% on tier I and tier II capital, on the exposure to any single entity. ICICI Bank Canada, our Canadian subsidiary has internally capped this exposure at 50% of the limit specified by the Office of the Superintendent of Financial Institutions. The Financial Services Authority of the United Kingdom has prescribed a limit of 25% of the large exposure capital base, on the exposure to an individual counterparty (or a group of connected counterparties). The large exposure capital base is calculated as the sum of allowable tier I and tier II capital less any deductions required by the Financial Services Authority . ICICI Bank UK has a capital base of US$ 1.0 billion at year-end fiscal 2010, resulting in a limit of US$ 254 million.
The successful management of credit, market and operational risk is an important consideration in managing our liquidity because it affects the evaluation of our credit ratings by rating agencies. Rating agencies may reduce or indicate their intention to reduce the ratings at any time.
Capital Expenditure
The following tables set forth, for the periods indicated, certain information related to capital expenditure by category of fixed assets.
| | | | |
| | | Cost at year-end fiscal 2007 | | | | | | | | | | | | Net assets at year-end fiscal 2008 | |
| | | (in millions) | |
Premises | | Rs. | 23,574 | | | Rs. | 3,986 | | | Rs. | (325 | ) | | Rs. | (4,181 | ) | | Rs. | 23,054 | | | US$ | 513 | |
| Other fixed assets (including furniture and fixes) | | | 27,621 | | | | 6,917 | | | | (687 | ) | | | (18,093 | ) | | | 15,759 | | | | 351 | |
| Assets given on lease | | | 18,347 | | | | – | | | | (57 | ) | | | (10,318 | ) | | | 7,971 | | | | 177 | |
Total | | Rs. | 69,542 | | | Rs. | 10,903 | | | Rs. | (1,069 | ) | | Rs. | (32,592 | ) | | Rs. | 46,784 | | | US$ | 1,041 | |
| | | | |
| | | Cost at year-end fiscal 2008 | | | | | | | | | | | | Net assets at year-end fiscal 2009 | |
| | | (in millions) | |
Premises | | Rs. | 27,235 | | | Rs. | 2,875 | | | Rs. | (547 | ) | | Rs. | (5,485 | ) | | Rs. | 24,078 | | | US$ | 536 | |
| Other fixed assets (including furniture and fixes) | | | 33,852 | | | | 5,496 | | | | (1,209 | ) | | | (21,865 | ) | | | 16,274 | | | | 362 | |
| Assets given on lease | | | 18,289 | | | | – | | | | (328 | ) | | | (13,338 | ) | | | 4,623 | | | | 103 | |
Total | | Rs. | 79,376 | | | Rs. | 8,371 | | | Rs. | (2,084 | ) | | Rs. | (40,688 | ) | | Rs. | 44,975 | | | US$ | 1,001 | |
| | | | |
| | | Cost at year-end fiscal 2009 | | | | | | | | | | | | Net assets at year-end fiscal 2010 | |
| | | (in millions) | |
Premises | | Rs. | 29,563 | | | Rs. | 1,369 | | | Rs. | (2,251 | ) | | Rs. | (6,472 | ) | | Rs. | 22,209 | | | US$ | 494 | |
| Other fixed assets (including furniture and fixes) | | | 38,139 | | | | 2,298 | | | | (4,205 | ) | | | (23,352 | ) | | | 12,880 | | | | 286 | |
| Assets given on lease | | | 17,961 | | | | - | | | | (201 | ) | | | (14,226 | ) | | | 3,534 | | | | 79 | |
Total | | Rs. | 85,663 | | | Rs. | 3,667 | | | Rs. | (6,657 | ) | | Rs. | (44,050 | ) | | Rs. | 38,623 | | | US$ | 859 | |
Our capital expenditure on premises and other assets was Rs. 3.7 billion in fiscal 2010 compared to Rs. 8.4 billion in fiscal 2009. Capital expenditure of Rs. 2.3 billion on other fixed assets in fiscal 2010 included Rs. 1.4 billion on software. Our capital expenditure on premises and other assets decreased by 23.2% from Rs. 10.9 billion for fiscal 2008 to Rs. 8.4 billion for fiscal 2009. Deletion of fixed assets during fiscal 2010 is primarily due to sale or surrender of certain properties and sale of fixed assets of merchant acquiring business.
Collateral Management
Overview
The Bank defines collateral as the assets or rights provided to the Bank by a borrower or a third party in order to secure a credit facility. The Bank would have the rights of secured creditor in respect of the assets/contracts offered as security for the obligations of the borrower/obligor. The Bank ensures that the underlying documentation for the collateral provides the Bank with appropriate rights over the collateral or other forms of credit enhancement including the right to liquidate retain or take legal possession of such collateral in a timely manner in the event of default by the counterparty. The Bank also endeavors to keep the assets provided as security to the Bank under adequate insurance during the tenor of the Bank’s exposure. The collateral is monitored periodically.
Collateral valuation
As stipulated by the Reserve Bank of India guidelines, the Bank uses the comprehensive approach for collateral valuation. The Bank adjusts the value of any collateral received to adjust for possible future fluctuations in the value of the collateral in line with the requirements specified by the Reserve Bank of India guidelines. These adjustments, also referred to as ‘haircuts’, to produce volatility-adjusted amounts for collateral, are reduced from the exposure to compute the capital charge.
Types of collateral taken by the Bank
ICICI Bank determines the appropriate collateral for each facility based on the type of product and risk profile of the counterparty. In the case of corporate and small and medium enterprise financing, fixed assets are generally taken as security for long tenor loans and current assets for working capital finance. For project finance, the assets of the borrower and assignment of the underlying project contracts is generally taken as security. In some cases, additional security such as a pledge of shares, cash collateral, a charge on receivables with an escrow arrangement and guarantees is also taken. For retail products, the security to be taken is defined in the product policy for the respective products. Housing loans and automobile loans are secured by the security of the property or automobile being financed. The v aluation of the properties is carried out by an approved valuation agency at the time the loan is approved. The Bank also offers products that are primarily based on collateral including shares, specified securities, warehoused commodities and gold jewelry. These products are offered in line with the approved product policies, which include types of collateral, valuation and margining.
The Bank also extends unsecured facilities to its clients (corporate and retail) based on the merits of the case and credit strength of the borrower and within the limits with respect to unsecured facilities approved by our board of directors. The decision on the type and quantum of collateral for each transaction is taken by the credit approving authority as per the credit approval authorization approved by the board of directors. The Bank typically stipulates security creation as a condition precedent to disbursement of the facilities. In certain cases, time is allowed for security creation. For facilities provided as per approved product policies including retail products, and loan against shares, collateral is taken in line with the policy.
Significant Changes
Except as otherwise stated in this annual report, we have experienced no significant changes since the date of the fiscal 2010 consolidated financial statements contained in this annual report.
Segment Revenues and Assets
The Reserve Bank of India in its guidelines on “segmental reporting” has stipulated specified business segments and their definitions, for the purposes of public disclosures on business information for banks in India.
The consolidated segmental report for fiscal 2010, based on the segments identified and defined by the Reserve Bank of India, has been presented as follows:
| | · | Retail Banking includes exposures of the Bank, which satisfy the four qualifying criteria of ‘regulatory retail portfolio’ as stipulated by the Reserve Bank of India guidelines on the Basel II framework. These criteria are as follows: |
(i) Orientation criterion: Exposures is to an individual person or persons (not to be restricted to an individual, Hindu Undivided Family, trust, partnership firm, private limited companies, public limited companies, co-operative societies, etc.) or to a small business are classified as retail. A small business is defined as one where the three year average annual turnover is less than Rs. 500 million.
(ii) Product criterion: All exposure should take the form of any of the following:
| | · | revolving credits and lines of credit (including overdrafts); |
| | · | term loans and leases (e.g. installment loans and leases, student and educational loans); and |
| | · | small business facilities and commitments. |
(iii) Low value of individual exposures: The maximum aggregate retail exposure to one counterparty should not exceed the absolute threshold limit of Rs. 50 million.
(iv) Granularity criterion: The Regulatory retail portfolio should be sufficiently diversified to a degree that reduces the risks in the portfolio. The aggregate exposure to one counterparty should not exceed 0.2% of overall retail portfolio.
| | · | Wholesale Banking includes all advances to trusts, partnership firms, companies and statutory bodies, by the Bank which are not included in the Retail Banking segment, as per the Reserve Bank of India guidelines for the Bank. |
| | · | Treasury includes the entire investment portfolio of the Bank, ICICI Eco-net Internet and Technology Fund, ICICI Equity Fund, ICICI Emerging Sectors Fund, ICICI Strategic Investments Fund and ICICI Venture Value Fund (with effect from April 1, 2009). |
| | · | Other Banking includes the Bank’s banking subsidiaries that is, ICICI Bank UK PLC, ICICI Bank Canada and its subsidiary ICICI Wealth Management Inc. (up to December 31, 2009) and ICICI Bank Eurasia LLC. Further, it includes hire purchase and leasing operations and other items not attributable to any particular business segment of the Bank. |
| | · | Life Insurance represents results of ICICI Prudential Life Insurance Company Limited. |
| | · | General Insurance represents results of ICICI Lombard General Insurance Company Limited. |
| | · | Venture Fund Management represents results of ICICI Venture Funds Management Company Limited. |
| | · | Others includes ICICI Home Finance Company Limited, ICICI International Limited, ICICI Securities Primary Dealership Limited, ICICI Securities Limited, ICICI Securities Holdings Inc., ICICI Securities Inc., ICICI Prudential Asset Management Company Limited, ICICI Prudential Trust Limited, ICICI Investment Management Company Limited, ICICI Trusteeship Services Limited, TCW/ICICI Investment |
Partners LLC., ICICI Kinfra Limited, ICICI West Bengal Infrastructure Development Corporation Limited, Loyalty Solutions & Research Limited, I-Ven Biotech Limited and ICICI Prudential Pension Funds Management Company Limited (with effect from April 22, 2009).
Framework for transfer pricing
All liabilities are transfer priced to a central treasury unit, which pools all funds and lends to the business units at appropriate rates based on the relevant maturity of assets being funded after adjusting for regulatory reserve requirements and specific charge on account of directed lending to certain sectors categorized as priority sector. Current and savings account deposits are transfer priced at a fixed rate. For term deposits and borrowings the transfer pricing is based on the categories specified in the Transfer Pricing Policy. Transfer pricing to our asset creation units is based on the incremental cost of deposits (blended for current and savings account deposits) and borrowings adjusted for the maturity of the asset (term premium), regulatory reserve requirements, liquidity maintenance costs and speci fic charges due to priority sector lending. The allocated capital is also considered as a source of funding for this purpose.
Fiscal 2010 Compared with Fiscal 2009
The following table sets forth, for the periods indicated, profit before tax of various segments.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Retail Banking | | Rs. | 580 | | | Rs. | (13,335 | ) | | US$ | (297 | ) | | | – | |
Wholesale Banking | | | 34,133 | | | | 36,451 | | | | 811 | | | | 6.8 | % |
Treasury | | | 13,069 | | | | 27,444 | | | | 611 | | | | 110.0 | |
Other Banking | | | 6,079 | | | | 7,734 | | | | 172 | | | | 27.2 | |
Life Insurance | | | (8,596 | ) | | | 2,777 | | | | 62 | | | | 132.3 | |
General Insurance | | | 3 | | | | 1,583 | | | | 35 | | | | – | |
Venture fund management | | | 2,021 | | | | 744 | | | | 17 | | | | (63.2 | ) |
Others | | | 5,894 | | | | 6,814 | | | | 152 | | | | 15.6 | |
Profit before tax | | Rs. | 53,183 | | | Rs. | 70,212 | | | US$ | 1,563 | | | | 32.0 | % |
Retail Banking
The following table sets forth, for the periods indicated, the principal components of profit before tax.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Net interest income | | Rs. | 48,473 | | | Rs. | 37,594 | | | US$ | 836 | | | | (22.4 | )% |
Non-interest income | | | 29,415 | | | | 26,192 | | | | 583 | | | | (11.0 | ) |
Total income | | | 77,888 | | | | 63,786 | | | | 1,419 | | | | (18.1 | ) |
Non-interest expenses | | | 47,933 | | | | 43,565 | | | | 969 | | | | (9.1 | ) |
Profit before provisions | | | 29,955 | | | | 20,221 | | | | 450 | | | | (32.5 | ) |
Provisions | | | 29,375 | | | | 33,556 | | | | 747 | | | | 14.2 | |
Profit before tax | | Rs. | 580 | | | Rs. | (13,335 | ) | | US$ | (297 | ) | | | – | |
The following table sets forth, for the periods indicated, the outstanding balances of key assets and liabilities.
| | | Outstanding balance at March 31, | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Advances | | Rs. | 875,251 | | | Rs. | 665,364 | | | US$ | 14,802 | | | | (24.0 | )% |
Deposits | | | 1,057,499 | | | | 1,129,894 | | | | 25,137 | | | | 6.8 | |
Loans in the retail banking segment declined by 24.0% from Rs. 875.3 billion at year-end fiscal 2009 to Rs. 665.4 billion at year-end fiscal 2010, due to moderation in retail loan growth in the system, our strategy of reducing our unsecured retail portfolio and repayments and prepayments from our existing retail portfolio. The retail banking segment focused on increasing current and savings account deposits. Retail savings account deposits increased by 29.5% from Rs. 409.8 billion at year-end fiscal 2009 to Rs. 530.8 billion at year-end fiscal 2010. Retail current account deposits increased by 28.5% from Rs. 97.9 billion at year-end fiscal 2009 to Rs. 125.8 billion at year-end fiscal 2010.
The profit before tax of the retail banking segment decreased from a profit of Rs. 0.6 billion in fiscal 2009 to a loss of Rs. 13.3 billion in fiscal 2010, primarily due to a lower level of net interest income and loan-related fees, and higher provision for loan losses. These negative trends were partly offset by rigorous control over operating expenses.
Net interest income decreased by 22.4% from Rs. 48.5 billion in fiscal 2009 to Rs. 37.6 billion in fiscal 2010 primarily due to a reduction in the loan portfolio. During fiscal 2010, we moderated the growth in our retail credit portfolio. Further, our strategy of reducing unsecured retail loans resulted in a shift in the portfolio mix towards a higher proportion of lower yielding secured assets. We also reduced the floating reference rate applicable to our floating rate home loan portfolio. Although there was a declining interest rate trend in the banking system in fiscal 2010 resulting in lower incremental funding cost, the retail lending business did not fully reflect this benefit as a sizeable part of the loan portfolio, such as vehicle loans and unsecured loans are fixed rate retail loans, and the cost of funding t hese loans continued to be the cost at the time of the origination of the loan.
Non-interest income decreased by 11.0% from Rs. 29.4 billion in fiscal 2009 to Rs. 26.2 billion in fiscal 2010, primarily due to lower level of incremental lending, which resulted in a lower level of loan related fees. Following the reduction in our credit card portfolio, and specifically in products such as equated monthly installments, personal loans via credit cards and the lower issuance of new credit cards, the fee income from the credit card portfolio decreased from Rs. 10.0 billion in fiscal 2009 to Rs. 6.9 billion in fiscal 2010. In fiscal 2010, ICICI Bank and First Data, a global company engaged in electronic commerce and payment services, formed a merchant acquiring alliance. A new entity, 81.0% owned by First Data, was formed, which has acquired ICICI Bank’s merchant acquiring operations through a tran sfer of assets, primarily constituting fixed assets, receivables and payables, and the assumption of liabilities for a total consideration of Rs. 3.7 billion. The retail banking segment realized a profit of Rs. 2.0 billion in fiscal 2010 from this transaction.
Non-interest expenses decreased by 9.1% from Rs. 47.9 billion in fiscal 2009 to Rs. 43.6 billion in fiscal 2010, primarily due to lower business volumes and the Bank’s strategy of controlling operating expenses.
Provisions and contingencies increased by 14.2% from Rs. 29.4 billion in fiscal 2009 to Rs. 33.6 billion in fiscal 2010, primarily due to the seasoning of the secured loan portfolio, higher level of credit losses in the unsecured retail asset portfolio and challenges in collections and the adverse macro-economic environment in fiscal 2009. We made various efforts to contain losses in the unsecured retail segment by improving the loan collection architecture and minimizing incremental lending to this segment. We also tightened credit standards for incremental credit card issuance and unsecured lending, as a result of which there was reduction in incremental addition to retail non-performing loans on a quarter-on-quarter basis. Going forward this is expected to be reflected in a lower provisioning requirement.
Wholesale Banking
The following table sets forth, for the periods indicated, the principal components of profit before tax.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Net interest income | | Rs. | 26,503 | | | Rs. | 31,072 | | | US$ | 691 | | | | 17.2 | % |
Non-interest income | | | 34,697 | | | | 28,075 | | | | 625 | | | | (19.1 | ) |
Total income | | | 61,200 | | | | 59,147 | | | | 1,316 | | | | (3.4 | ) |
Non-interest expenses | | | 19,147 | | | | 12,353 | | | | 275 | | | | (35.5 | ) |
Profit before provisions | | | 42,053 | | | | 46,794 | | | | 1,041 | | | | 11.3 | |
Provisions | | | 7,920 | | | | 10,343 | | | | 230 | | | | 30.6 | |
Profit before tax | | Rs. | 34,133 | | | Rs. | 36,451 | | | US$ | 811 | | | | 6.8 | % |
The following table sets forth, for the periods indicated, the outstanding balances of key assets and liabilities.
| | | Outstanding balance at March 31, | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Advances | | Rs. | 1,305,394 | | | Rs. | 1,144,172 | | | US$ | 25,454 | | | | (12.4 | )% |
Deposits | | | 1,080,069 | | | | 888,942 | | | | 19,776 | | | | (17.7 | ) |
The second half of fiscal 2009 was impacted by the global financial and liquidity crisis and loss of business confidence. These effects continued until the early part of fiscal 2010, due to which the wholesale banking business was impacted through subdued credit demand from the corporate sector and slower domestic corporate activity. The wholesale banking loan book declined by 12.4% from Rs. 1,305.4 billion at year-end fiscal 2009 to Rs. 1,144.2 billion at year-end fiscal 2010, primarily due to the above factors and the impact of the rupee appreciation on foreign currency denominated loans of our overseas operations. The wholesale banking segment continued to maintain its focus on increasing non-interest bearing deposits. Term deposits decreased by 26.7% from Rs. 964.3 billion at year-end fiscal 2009 to Rs. 707.2 billi on at year-end fiscal 2010, reflecting our conscious strategy of reducing wholesale deposits.
Profit before tax of the wholesale banking segment increased from Rs. 34.1 billion in fiscal 2009 to Rs. 36.5 billion in fiscal 2010 primarily due to a higher level of net interest income and reduction in operating expenses. These positive impacts were offset by a lower level of non-interest income and higher provisioning on restructured loans.
Net interest income increased by 17.2% from Rs. 26.5 billion in fiscal 2009 to Rs. 31.1 billion in fiscal 2010. Net interest income increased in fiscal 2010, due to the benefit of lower funding costs as a result of a decline in systemic interest rates, on the existing floating rate wholesale loan portfolio.
Non-interest income decreased by 19.1% from Rs. 34.7 billion in fiscal 2009 to Rs. 28.1 billion in fiscal 2010. Fee income including appraisal, advisory and syndication fees decreased due to subdued credit demand from the corporate sector and slower domestic corporate activity during fiscal 2010. Further, the fee income of our overseas branches also decreased due to reduced international activity by Indian corporates.
Non-interest expenses decreased by 35.5% from Rs. 19.2 billion in fiscal 2009 to Rs. 12.4 billion in fiscal 2010, primarily due to the Bank’s strategy of controlling operating expenses.
Provisions and contingencies increased by 30.6% from Rs. 7.9 billion in fiscal 2009 to Rs. 10.3 billion in fiscal 2010, primarily due to provisioning of Rs. 2.5 billion on account of the restructuring of corporate loans.
Treasury
The following table sets forth, for the periods indicated, the principal components of profit before tax.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Net interest income | | Rs. | 5,789 | | | Rs. | 11,507 | | | US$ | 256 | | | | 98.8 | % |
Non-interest income | | | 10,794 | | | | 17,874 | | | | 398 | | | | 65.6 | |
Total income | | | 16,583 | | | | 29,381 | | | | 654 | | | | 77.2 | |
Non-interest expenses | | | 1,801 | | | | 1,615 | | | | 36 | | | | (10.3 | ) |
Profit before provisions | | | 14,782 | | | | 27,766 | | | | 618 | | | | 87.8 | |
Provisions | | | 1,713 | | | | 322 | | | | 7 | | | | (81.2 | ) |
Profit before tax | | Rs. | 13,069 | | | Rs. | 27,444 | | | US$ | 611 | | | | 110.0 | % |
The following table sets forth, for the periods indicated, the closing balances of key assets and liabilities.
| | | Closing balance at March 31, | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Investments | | Rs. | 1,026,642 | | | Rs. | 1,208,507 | | | US$ | 26,886 | | | | 17.7 | |
Deposits | | | 45,910 | | | | 1,330 | | | | 30 | | | | (97.1 | ) |
Borrowings | | | 673,237 | | | | 942,636 | | | | 20,971 | | | | 40.0 | |
Our treasury operations include the maintenance and management of regulatory reserves, proprietary trading in equity and fixed income, a range of products and services, such as forward contracts and interest rate and currency swaps, and foreign exchange products and services. It also includes investments made by ICICI Eco-net Internet and Technology Fund, ICICI Equity Fund, ICICI Emerging Sectors Fund, ICICI Strategic Investments Fund and ICICI Venture Value Fund.
Profit before tax of the treasury segment increased from Rs. 13.1 billion in fiscal 2009 to Rs. 27.4 billion in fiscal 2010, primarily due to higher profits from our equity portfolio, realized gain and mark-to-market loss reversal on our credit derivatives portfolio and write-back of provisions related to receivables from derivatives contracts. This was offset by lower profits from government securities and other domestic fixed income positions and lower income from foreign exchange and derivatives transactions.
Net interest income increased by Rs. 5.7 billion from Rs. 5.8 billion in fiscal 2009 to Rs. 11.5 billion in fiscal 2010, primarily due to a reduction in the average cost of term deposits from 9.2% in fiscal 2009 to 7.7% in fiscal 2010 and also due to an increase in the average current and saving account deposits in the total deposit base from Rs. 580.5 billion in fiscal 2009 to Rs. 640.6 billion in fiscal 2010. This resulted in higher net positive income derived from transfer pricing of assets and liabilities.
Non-interest income increased from Rs. 10.8 billion in fiscal 2009 to Rs. 17.9 billion in fiscal 2010. The benchmark equity index BSE SENSEX increased by 80.5% from 9,709 at year-end fiscal 2009 to 17,528 at year-end fiscal 2010 compared to a decline of 38% during fiscal 2009. We made a profit of Rs. 4.6 billion from our equity portfolio in fiscal 2010 against a loss of Rs. 4.8 billion in fiscal 2009. During fiscal 2010, the contraction in credit spreads due to improved global market conditions resulted in income of Rs. 4.0 billion, comprising the reversal of mark-to-market provisions and realized gains on the credit derivatives portfolio compared to loss of Rs. 2.8 billion in fiscal 2009. In fiscal 2009, the Bank reversed an amount equal to Rs. 4.4 billion relating to receivables under derivatives contracts that were overdue for more than 90 days, in accordance with the Reserve Bank of India guidelines. In fiscal 2010 there was a net write back of Rs. 0.4 billion. During fiscal 2010, the Bank capitalized on market opportunities to realize gains from its government securities portfolio and other domestic fixed income positions. However, the opportunities were limited compared to fiscal 2009. The Bank earned a profit of Rs. 6.8 billion on government securities portfolio and other domestic fixed income positions in fiscal 2010 compared to Rs. 20.6 billion in fiscal 2009. Our fixed income portfolio generally benefits by declining interest rates. During fiscal 2009, due to various accommodative monetary measures the yield on ten-year government of India securities after increasing from 7.94% at year-end fiscal 2008 to a peak of about 9.47% declined sharply to a low of 5.09% at
January 5, 2009. We positioned ourselves to take advantage of the change in the interest rate scenario by increasing the duration of the government securities as well as taking trading positions to benefit from the drop in yields. This resulted in significant gains from the fixed income securities during fiscal 2009. During fiscal 2010, the concerns over the fiscal deficit, together with the Reserve Bank of India’s gradual exit from expansionary monetary policy and inflationary pressures, led to expectations of hardening of interest rates. The yield on ten-year government of India securities after declining in the initial months increased by 81 basis points from 7.01% at year end-fiscal 2009 to 7.82% at year-end fiscal 2010.
Other Banking
The following table sets forth, for the periods indicated, the principal components of profit before tax.
| | | | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Net interest income | | Rs. | 8,423 | | | Rs. | 5,099 | | | US$ | 113 | | | | (39.5 | )% |
Non-interest income | | | 9,926 | | | | 9,396 | | | | 209 | | | | (5.3 | ) |
Total income | | | 18,349 | | | | 14,495 | | | | 322 | | | | (21.0 | ) |
Non-interest expenses | | | 6,950 | | | | 5,584 | | | | 124 | | | | (19.7 | ) |
Profit before provisions | | | 11,399 | | | | 8,911 | | | | 198 | | | | (21.8 | ) |
Provisions | | | 5,320 | | | | 1,177 | | | | 26 | | | | (77.9 | ) |
Profit before tax | | Rs. | 6,079 | | | Rs. | 7,734 | | | US$ | 172 | | | | 27.2 | % |
The following table sets forth, for the periods indicated, the outstanding balances of the key assets and liabilities.
| | | Outstanding balance at March 31, | |
| | | | | | | | | | | | | |
| | | (in millions, except percentages) | |
Investments | | Rs. | 190,868 | | | Rs. | 143,663 | | | US$ | 3,196 | | | | (24.7 | )% |
Advances | | | 390,827 | | | | 356,029 | | | | 7,921 | | | | (8.9 | ) |
Deposits | | | 443,297 | | | | 406,064 | | | | 9,034 | | | | (8.4 | ) |
Borrowings | | | 122,134 | | | | 102,532 | | | | 2,281 | | | | (16.0 | ) |
Other banking business includes our hire purchase and leasing operations, our overseas banking subsidiaries, ICICI Bank UK, ICICI Bank Canada and its subsidiary ICICI Wealth Management Inc. (up to December 31, 2009), and ICICI Bank Eurasia LLC., and other items not attributable to any particular business segment of the Bank.
Profit before tax of other banking segment increased from Rs. 6.1 billion in fiscal 2009 to Rs. 7.7 billion in fiscal 2010, primarily due to a decline in provisions. ICICI Bank UK and ICICI Bank Canada also experienced a decrease in net interest income due to a decline in their net interest margins.
Net interest income decreased by 39.5% from Rs. 8.4 billion in fiscal 2009 to Rs. 5.1 billion in fiscal 2010, primarily on account of interest received on income tax refunds due upon the completion of pending income tax assessments of Rs. 3.4 billion in fiscal 2009 compared to Rs. 1.2 billion in fiscal 2010. The net interest income also decreased due to a decrease in the net interest margins of ICICI Bank UK and ICICI Bank Canada. The net interest margin of ICICI Bank UK and ICICI Bank Canada decreased primarily due to a decline in LIBOR rates during fiscal 2010. ICICI Bank UK and ICICI Bank Canada have a largely floating rate LIBOR loan portfolio while a large part of their funding is fixed rate customer deposits. Also during fiscal 2010, ICICI Bank UK and ICICI Bank Canada held a higher level of lower yielding liquid investments, resulting in a decline in interest income more than a decline in interest expense.
