Recommendation: Hold

Current price: Rs 316 (at the time of publishing this tip)

Price target: Rs 965

Key points:

• ICICI Bank has reported a bottom line of Rs 1,014.2 crore for Q2-FY2009, marginally below expectation mainly because of a lower-than-expected growth in advances during the quarter. The net interest income of the bank registered a growth of 20.2% yoy. The calculated net interest margin expanded by 32 basis points yoy and by ten basis points sequentially to 2.21%.
• The non-interest income saw decline of 9.4% yoy. Notably, the fee income grew by a healthy 26.2% yoy but this growth was outweighed by a weak treasury performance (a loss of Rs 153 crore in Q2-FY2009 vs a gain of Rs 175 crore a year ago). The operating expenses declined by 11.7% yoy, mainly because of lower direct marketing expenses and staff expenses (down 62.5% and 6.1% yoy respectively). Clearly, the bank is focusing on efficiency improvement and cost rationalisation.
• The asset quality of the bank continued to deteriorate on both absolute and relative bases. The gross non-performing assets jumped up by 11.6% sequentially to Rs 9,501.5 crore, primarily driven by higher slippages in the retail segment. On a relative basis, the asset quality deteriorated by 138 basis points and 50 basis points yoy at gross and net levels to 4.18% and 1.91% respectively.
• The advances growth moderated further to 7.2% yoy (as against a 13% growth in Q2-FY2008) while deposits registered a decline of 2.1% yoy as the bank moved away from term deposits. Consequently, the CASA ratio improved by 240 basis points sequentially to 30%.
• At the current market price, the stock trades at 7.6x 2009E earnings per share, 3.8x 2009E pre-provisioning profit and 0.7x 2009E book value.
• I am little bit of concerned about this stock. I expect the stock to shoot to levels of Rs 965 over next 9-12 months, but would strongly advise investors to Hold on to it until further detailed analysis is available.