ICICI Securities:Buy Corporation Bank target Rs 828

We resume coverage of Corporation Bank post our interaction with the new
management. The management’s stance to change the bulk-deposit-ridden ALM
strategy coupled with improving asset yields will lead to margin improvement of
~20bps over FY11E-12E. This, supported by its healthy cost-ratios (lowest among
peers), low credit costs and contained delinquency ratios will help sustain RoAs.
Given adequate capitalisation (tier 1 at 8.64% not including Q1FY11 profits), we
see no impediment to a sustained 27% credit CAGR through FY12E, which will
maintain high leverage, thereby driving RoEs to +20% by FY12E. We value the
stock at 1.5x FY12E P/ABV (implied 1.45x FY12E BV) or Rs828/share, suggesting
18% upside. Maintain BUY.
􀁦 Changing loan book composition + improved ALM = Better margins. The bank
is looking to expand its SME and retail books and reduce credit concentration in
large corporates. This is likely to show results in the ensuing quarters, adding to
yields as well. The deposits are currently characterised by Rs250bn (~27%) in bulk
deposits, which was necessitated by the bank’s inability to shore up average CASA
(24.1% in Q1FY11), while the credit book expanded at 28.3% CAGR over FY07-10.
Incremental focus will be on garnering CASA through various initiatives and
replacing bulk with lower-cost liabilities. We expect the margin improvement to
fructify over FY11E-12E, with NIMs rising ~20bps in FY11E-12E (NII CAGR ~29%).
􀁦 Delinquencies to remain low; credit costs contained. Though we expect the bank
to continue maintaining low delinquencies and healthy asset quality (GNPAs at
1.1%, provision coverage ratio of 76.4% by FY12E), we prefer to be conservative
and build in higher loan-loss provisions of 70bps in FY11E and 65bps in FY12E
(average credit costs at 52bps over FY08-10).
􀁦 Fee income to remain strong, cost-ratios to sustain. The bank’s early roll-out of
the core banking platform was instrumental in 19.6% other income CAGR (less
treasury) over FY07-10. We expect the core fee income to move in line with the
credit growth, strongly aided by rising syndication fees. While the costs are due to
rise given pension and gratuity requirements, cost ratios would remain competitive.
􀁦 Valuations attractive, yet to catch up with fundamentals. The stock currently
trades at 1.2x FY12E P/BV and 5.9x FY11E P/E. Going ahead, margin traction
would effect further RoA improvement while strong growth will ensure a wellleveraged
balance sheet. Thus, we expect core RoEs to sustain at 19-20% and
valuations to better reflect the bank’s improving fundamentals. We anticipate fair
value at 1.5x FY12E ABV (implied 1.45x FY12E BV) or Rs828/share, i.e., an upside
of 18% from the current levels.