Sushil Finance is bullish on Corporation Bank and has recommended buy rating on the stock with a target of Rs 805 in its September 09, 2011 research report.
“Corporation Bank (Corp Bank) in Q1FY12 has posted a net profit of Rs.3.52 bn, a modest growth of 5% YoY, mainly dragged by subdued core operations. • During Q1FY12, NII grew by a mere 1.4% YoY and stood at Rs.7.1 bn, mainly dragged by sharper rise in cost of deposit and faster deposit growth (relative to its Advances growth). Its Advances grew 25% YoY (de-grew 9% QoQ), while Deposits grew at 29% YoY (1% QoQ). Its term deposits profile saw a growth of 35% YoY (8% QoQ) while CASA grew by 13% YoY. However, CASA’s share in total deposits fell sharply by 307 bps YoY & 495 bps QoQ, now forming 21% of the total deposits. • The Bank’s non interest income growth at 9% YoY was slower due to lower recoveries from written off accounts and lower treasury income, although its fee income saw a decent growth of 14% YoY. • Its operating expenses grew by 23% YoY due to amortization of provision on employee pension & gratuity. Its Cost to Income ratio increased in the quarter and stood at 43.7% in Q1FY12 as compared to 37.7% in Q1FY11. • The Bank’s total provisions in Q1FY12 increased by 32% YoY to Rs.1.67 bn. This was largely driven by higher provisions on investment depreciation (Rs.706 mn in Q1FY12 as against Rs.76 mn in Q1FY11), alongwith revised provisioning norms mandated by RBI on NPAs & restructured assets, although its incremental slippages remained contained at 0.2% (not-annualised) of Advances for the quarter. The Bank’s Net Profit saw a marginal growth of 5% and stood at Rs.3.52 bn for Q1FY12.”
“In Q1FY12, NIMs sharply fell by 36 bps YoY & 40 bps QoQ and stood at 2.1%, mainly due to higher mobilization of term deposits and higher cost of deposits, leading to a sharp rise in cost of funds. While the Bank intends to maintain its NIMs at nearer to 3% levels, considering the steep QoQ contraction in NIMs in Q1, pressure in core operations and sharp decline in credit-deposit ratio (740 bps QoQ & 420 bps YoY) during Q1, we have incorporated a 34 bps fall in its NIMs for FY12 to 2.18% (from 2.52% in FY11). • Although NPAs increased in Q1FY12, the Bank witnessed a decline in slippage rate to less than 1% at 0.8% (annualized) during Q1FY12 from 1.1% (annualized) in Q4FY11. The bank witnessed some slippages in the agriculture and other priority sector category, while its restructured loan portfolio stood at 4.1% of advances in Q1FY12. • In absolute terms, Gross NPLs increased by 7% QoQ & 17% YoY and Net NPLs increased by 3.5% QoQ & 49% YoY. In percentage terms, its Gross NPLs grew by 16 bps QoQ but fell by 4 bps YoY and stood at 1.1%, while Net NPLs increased 6 bps QoQ & 9 bps YoY, and stood at 0.5% in Q1FY12. Since the Bank has already migrated to 100% system based NPA recognition, no negative surprises expected from that side going forward. • The Bank has been able to maintain decent provision coverage ratio of 74.9% (incl. technical writeoffs) and the Bank’s CAR (Basel II) stands at a healthy 14.1% with a Tier-I ratio of 8.7%. • The Bank has increased its Base rate & BPLR by 40 bps & 50 bps to 10.65% & 15.00% respectively, effective from 01st August 2011. During Q1FY12, the Bank has opened only 1 new branch. • In FY12, it intends to open 200 branches taking it to 1,561 branches from 1,362 currently.”
“Corporation Bank is one of the leading south based bank with a business size of above Rs. +1.9 trn. The GOI holds 58.5% stake while the other major shareholder LIC holds 25.5% stake. Corp Bank has managed to grow at a decent pace in the past few years and maintained a high quality asset profile. However, in light of challenging credit offtake conditions & considering the steep sequential slide in its NIMs during Q1FY12, we have reduced our biz & NII growth estimates. Going forward, we expect its Advance & Deposit to grow by 19% & 18% in FY12E and 17.9% & 16.8% in FY13E, while its Net Profit to grow at 1% in FY12E & at 13% in FY13E. The Bank currently trades at an attractive valuation of 0.8x FY13E ABV & 4.1x FY13E Earnings. We believe the stock can trade at 1.4x P/ABV given its sustainable 20% ROE. We maintain BUY with a revised price target of Rs.805,” says Sushil Finance research report.
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