Corporation Bank Raise PO on positive riskreturn; Buy:: BoA ML

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Corporation Bank: Raise PO on positive riskreturn; Buy



􀂄 Raise PO to Rs875 on positive risk-return
We raise our PO on Corporation Bk to Rs875 (from Rs750) pegging at 1.6x
FY12E book, given 1) estimated earnings growth of +25% in FY11/12 sustaining;
2) RoAs rising to 1.3% (from 1.2%); 3) RoEs of +25% and; 4) overall better asset
quality (net NPLs at <0.5%; cover at +78%) and high cost efficiency (<36%). But,
our PO is still at a ~15% discount to Gordon multiples owing to low stock liquidity
(Govt. and LIC together own 84% of the stock). Our PO is on target PE of ~6.7x
(FY12E earnings).
2QFY11: Top line and fees drive earnings growth
Corp Bank’s 2QFY11 profit of Rs3.5bn (21% yoy) was ahead of BofAMLe by <2%
driven by better top line. Core operating profit (ex treasury) up 24% yoy. NII grew
by 42% yoy (2% ahead) driven by 33% loan growth. Margins expanded 36bps yoy
(2bps qoq) due to repricing of high cost deposits. Core fees grew +25% yoy.
Asset quality remains comfortable
Headline NPLs increased only 2% at gross level (1.1%) but are down 2% at net
level (at 0.4%); provision cover is at +78%. The bank has moved to an online
system of NPL recognition and almost +90% of total loans are accounted for,
balance by Dec’10. But there has been no increase on account of switching over.
Raise earnings <2%; growth of +25% each in FY11/12E
We raise our FY11/12E earnings by <2% to factor in stronger top line. While
margins are likely to remain low (~2.5%) in our view given low avg. CASA (~24-
25%), we believe this will likely be compensated by volume growth of +24% and
high cost efficiency (~36% cost-inc. ratio). Asset quality is expected to be
manageable, with net NPLs at <0.3%.