ICICI Bank's profit shoots up by 21%.. Wow!!

A classic example of how the headlines of corporate results can be misleading. ICICI bank reported 21% jump in profits which would make a good impression on an untrained eye but the reality is quite different.

If you go to the following link, you would find 3 documents http://www.icicibank.com/pfsuser/aboutus/resultsann/webcast.htm

The first Performance Review gives the management's version of story. It talks about growth in profits, strong net interest margins, falling cost of deposits due to higher portion of CASA deposits. It paints a rosy picture,

If you just ignore the text and read the numbers in second document, audited financial results you would see this very clearly in last 1 year
• Deposits fell by 11%
• Advances fell by 11.6%.
• NPAs rise to 4.63% at gross level and 2.33% at net level

It's not surprising that if you search 'NPA' in the 'Performance Review', you won't find any mention of it. You won't find mention of falling deposits and advances.
Now another statement copied verbatim from 'Performance Review'..along with its font size and style!! Current and savings account (CASA) ratio increased to 30.4% at June 30, 2009 from 27.6% at June 30, 2008.

Banking is all about gathering low cost funds and generating good returns by managing a portfolio of good quality advances. The Current and savings accounts give lower interests compares to fixed term deposits which helps a bank keep its cost of funds low. It's a key variable tracked by analysts.

In June 2008, the bank had deposits of 234,461 crores out of which 27.6% was CASA. This means they had 64,711 crores of CASA deposits and 169,749 crores of term deposits. In June 2009, the total deposits fell to 210,236 crores and percentage of CASA deposits rose to 30.4%. This means the CASA deposits in June 2009 were 63,911 crores and term deposits were 146234 crores.

This implies, CASA deposits fell by 1.24% and term deposits fell by whopping 13.8% in one year. This is a fact we know because last year when the rumors about health of the bank were spreading, people shifted their fixed deposits from ICICI to PSU banks.
Hence ratio of CASA deposits didn't rise because of good performance of the bank but due to drastic fall in the term deposits with the bank.

Management's attempt to highlight it as an achievement is tantamount to assuming that the people can't do this simple math.

The bank reported 21% increase in standalone profit after tax to Rs. 878 crore for the quarter ended June 30, 2009 from Rs. 728 crore for the quarter ended June 30, 2008 . Look out the details in the document. The net interest income fell by 5%, fee based income fell by 32.6%. The treasury operations showed a profit of 714 crores compared to loss of 594 crores in the same quarter last year. This shows that the rise in Profit after Tax was mostly due to treasury gains which are highly volatile. A small rise in interest rates can result in huge treasury losses due to fall in prices of govt securities held by bank in 'available for sale' category.

The bank also reported 68% increase in consolidated profit after tax. But they haven't filed their consolidated results with stock exchanges. The result document gives no details!

The results clearly show that ICICI Bank's honeymoon period is over. It has to do serious efforts to get bank on growth track. The performance review by the management reflects at best an ostrich like mentality to deny the obvious and at worst, it's a attempt to mislead investors.

The investors can take a lesson from this. The numbers reported in the corporate results can be misleading. They have to look at foot notes, analyze the details, slice and dice the documents to find the true picture. If you have to find oil, don't scratch the surface. You got to dig deep.


ashmehro said...

Insightful .. this is a concrete example of "polishing" and "re-packaging" the numbers to create a feel-good... thanks Kamlesh for the good work

Anonymous said...

Actually despite the hogwash there's an important mental model at work here and its the one called 'Framing'.

You can frame anything and any one actually if you have the skill for and in offices which have public interest attached to them i.e large corporates, public companies, governments etc. they will always this tool of 'framing' at their disposal and they will not shy away from using it! So its not an ostrich approach actually but its what i called 'communication management' and you will see it abundantly during the earnings season!

Needless to say its a commendable post! Keep 'em coming.

light said...

don't bank results have to be audited and past through the RBI before sign off ?

Anonymous said...

As usual, a good article to enlighten the average investor who goes by headlines. Looking forward to more such surgeries!
With such a legacy, ICICI should concentrate on cleaning up the mess. Instead, they are suing an executive of another bank who said that he doesnt recruit people who are from ICICI because he doesn't like the "ICICI" culture.

Kamlesh Pandey said...

In reply to comment from light: The Bank has not reported incorrect numbers. They have given incorrect interpretation of reported numbers. The results are unaudited when they are reported and the results have to be audited by auditors(not by RBI) at a later date. Companies have a free hand to interpret the results in the way they want. That's why most companies have a press release associated with the results and the interpretations are incorrect more often than not.

My advise is simple..don't rely exclusively on ready-to-eat products served on your plate. Cook your own food..Add a pinch of salt..Rip the flesh...Chew it well before you gulp it down.

Ravi said...

Hi Kamlesh,

I am a fan of all your postings and I really miss your posts for a very long time. Do you have any idea to post anything new. Its been almost 6 months since your last posted. Looking forward for new posts.


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