Stock Idea - ICICI Bank

Recommendation: Buy

CMP = Rs 601 (at the time of this recommendation)

Price target: Rs 1,204

Key points:

• Margins and not volumes is what ICICI Bank seems to be focusing on now. The current account and savings account growth will be the key driver for margin expansion going forward. A deceleration in the advances book growth and a near 100% growth in the incremental growth proves the point.
• With seasoning of credit portfolio, the bank has seen an up tick in delinquencies. Rapid growth in unsecured lending (CAGR of 82%) as compared to total advances (CAGR of 24%) over the past three years is likely to put further strain on the asset quality. The rising interest rate scenario may further worsen things for the bank.
• ICICI Bank's contingent liability increased by 105% in FY2008. 90% of this constitutes exposure in currency & interest rate swaps and other derivative instruments. In view of the Reserve Bank of India's latest provisioning guidelines related to these instruments, the bank may have to make additional provisions. Unfavorable market conditions raises concern over the bank's higher exposure to sensitive sectors like real estate and capital markets. The management, however, believes that the road ahead will be challenging considering the worsening global and domestic economic scenario. Despite this, the management is bullish on India's long-term growth prospects and foresees robust growth outlook for the Indian financial sector. 
• At the current market price of Rs 601, the stock trades at 13.7x 2009E earnings per share.
• I maintain a strong Buy recommendation on the stock with a price target of Rs 1,204.