ICICI Bank: Five reasons why shares are rising

ICICI Bank shares rose 1.5 per cent on Monday as the bank reported a strong growth in profits.

Here are some pointers to watch:

• Profitability improving: ICICI bank reported a net interest margin of 3 per cent in March 2012 quarter. This is perhaps the first time the bank has touched that mark in several quarters. The bank’s management has told analysts that it could only improve on these numbers going forward. Net interest margin is the difference between the cost of borrowing and cost of lending of the bank. It is an important number to assess profitability of banks. HDFC Bank consistently clocks over 4 per cent. This is why the market gives HDFC Bank more value than ICICI Bank. ICICI Bank market cap is Rs 1,01,979 crore while HDFC Bank’s market cap is Rs 1,27,941 crore.

• Diversified and bigger loan book: Under K V Kamath’s leadership, ICICI Bank grew its retail loans aggressively. Since Chanda Kochhar took over from him, this has declined consistently. The bank has focused on growing other loans to diversify assets. In March 2012 quarter, retail loans accounted for 35 per cent of the total loans given by the bank. This was over 38 per cent in the March 2011 quarter. The number was close to 50 per cent three years ago. Corporate and project finance loans rose to 28.3 per cent from around 26 per cent while international loans grew to 27 per cent from 25 per cent. The total size of the loan book for ICICI Bank stands at Rs 2,53,730 crore, over 25 per cent higher than in the quarter ended March 2011.

• Asset quality improving: The non-performing assets or NPAs as a percentage of total loans fell to 0.62 per cent at the end of March 2012 quarter against 0.94 per cent in the year ago period. RBI has expressed a concern about the rising level of non-performing and restructured loans in the system. Overall, For ICICI Bank, there is a sharp jump of 116 per cent in loans that went for restructuring. They now account for 1.7 pe rcent of the total loan book at Rs 4,256 crore. However, the bank had warned analysts early and hence the stock market has not reacted to the number.

• CASA ratio rising: The current account-savings account (CASA) ratio stood at 43.6 per cent. This means 43.6 per cent of the total deposits of Rs 2,60,000 crore were current and savings deposits. This is due to over 14 per cent rise in the savings account balances. Two years ago, the CASA for ICICI bank was less than 30 per cent. A high CASA ratio is good for the bank as banks pay no interest on current account deposits and least interest on savings accounts. This is the cheapest source of money for banks.

• Brokers are upgrading the stock: “We recommend BUY on ICICI Bank with a price target of Rs.1103,” said Kotak Securities. “In our opinion, the quarter’s been a good one; numbers are up, enough justification for the market to at least start talking about a re-rating; we maintain our positive bias on the stock, and our target price of Rs1035,” said Citi Global markets. ICICI Bank’s current share price is Rs 885.60.