The sale of another State asset got underway last week with the invitation of tenders for ICC Bank. Despite its previous role as a development bank, it has not been a drag on its owner, and will turn out to have been a lucrative investment, following the sale.

Dividends amounting to £13.6 million (€17.3 million) were paid in the past five years which compare favourably with the issued share capital of £36.9 million (€46.9 million). As a development bank it underpinned many indigenous companies which would not be around today but for its role. Now with the increasing demand for new capital to keep the capital adequacy ratios in line with requirements, the State had to put in £15 million in the form of a right issue last year. The continuing need to top up its capital base, and its small size, make the sale inevitable.

However, valuing the bank is not straightforward because it consists of two separate parts; a lender and a venture capitalist. The best way to value ICC is to look at the separate parts.

Its last annual report showed the book value of investments at £14.7 million (listed £3.4 million, unlisted £11.3 million). However, the market value is much higher at £36.9 million (listed £5.6 million, unlisted £31.3 million), indicating unrealised gains of £22.2 million.

The portfolio of unlisted investments could have a lot of potential. It consists of 56 investments with shareholdings ranging from 10 per cent to 35 per cent. Very few are start-ups and most have been in business for about three years.

Interestingly, the proportion of information technology (IT) companies has been growing. In the 1994 fund, for example, IT companies accounted for 26 per cent. In the latest fund, IT companies account for around 30 per cent.

The biggest potential gains can be made from IT companies. While they are also risky, the risk is much less that it was a number of years ago. The group which buys ICC would have the opportunity to sell off this portfolio, or hope for future gains, by keeping it. However, it must now be valued at more than £40 million.

Getting a value of ICC's lending operations, excluding the venture capital side, is not straightforward, as the dividend income, provisions against investments, and dealing profits, have to be excluded. Dividend income amounted to £693,000, and the provisions against investments, amounted to £1.1 million in 1998. However, the dealing profits are included in other operating income of £6.3 million, and the annual report does not give a breakdown. While these profits tend to be very lumpy, they are understood to have been £3.9 million in 1998.

The profit before tax comes down to some £15 million, from £20.7 million with their exclusion. A 30 per cent tax charge bring the net profit down to £15 million.

These figures are somewhat historic as already ICC is nine months into its latest financial year and it has already published interim results showing a 25 per cent rise in profits. If profits have grown by say 10 per cent (taking a conservative view) this year, then ICC, ex the venture capital side, could be generating a net profit of some £16.5 million. A 15 p/e would place a value of £240 million on the banking side. So it could be argued that ICC has a value of some £280 million.

Financial institutions looking at ICC will, of course, focus on the movement in its net interest income, the quality and composition of its loan book, and the employees. Net interest income showed a healthy enough rise from £17.3 million to £19.5 million in the six months to April 6th 1999. While bad debt provisions went up from £1.5 million to £2.3 million, the percentage of non-performing loans to total loans fell from 1.1 per cent to 0.9 per cent which is a continuation a healthy trend.

ICC has been successful in developing niche areas in the small to medium sized business sector. Such a portfolio would be of more interest to domestic suitors - such as Bank of Ireland, Irish Life & Permanent, Irish Intercontinental Bank and to a lesser degree Anglo Irish - than foreign groups.

The 358 ICC employees will have a 14.9 per cent stake (5 per cent free and 9.9 per cent at a discount) under terms of an Employee Share Ownership plan (ESOP). If a bidding company were to offer its shares to buy the employees stake, then the ICC employees would end up as shareholders of the enlarged group. That however, could be insignificant; in Bank of Ireland's case, for example, it would represent less than 1 per cent.

ICC Bank will not necessarily be sold to the highest bidder, as the ICC employees will have an input, but an offer close to £300 million, or above, would be an attractive proposition for the State.