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Central Bank of India - Raise estimates, target price; retain Buy
n Raise estimates, target price; maintain Buy. Central Bank’s (CBoI) 2QFY11 profit rose 20.7% yoy, driven by robust net interest income (NII) and higher NIM. We raise our EPS 23.9% for FY11e and 19.4% for FY12e, given higher NIM assumptions. Due to better RoE, we raise our target price, from `178 to `296 (1.4x FY12e PABV). We retain Buy as we expect better NIM to improve profitability. At 1.1x FY12e ABV, valuations are modest.
n Margins rise substantially, CASA share improves. Growth in credit (25.8% yoy) was faster than that in deposits (10.8% yoy), leading to credit-to-deposit expanding to 67.8% from 59.7%. NII grew 134.6% yoy, with NIM improving 107bps yoy to 3.4%. CASA’s share rose 358bps yoy to 34.4%, growing faster than total deposits at 23.6% yoy. We expect CBoI to register NIM of 2.6%/2.8% in FY11e/12e, led by a better credit-deposits ratio and the ability of the bank to maintain spreads, owing to likely better credit demand over FY11-12 and stable CASA share of +30%.
n Stable asset quality, adequate NPA coverage. Gross NPAs rose a mere 0.9% qoq, with NPA coverage adequate at 70.5%. Capital adequacy, at 11.65%, is barely sufficient for business growth. But, government intends capitalizing CBoI, with `14bn already infused. Management expects raising an additional `20bn, which would support growth and capitalize against loan defaults.
n Valuation and risks. At our target price of `296, CBoI would trade at 1.4x FY12e and 1.1x FY13e ABV. Risks: Sharp increase in wholesale liabilities, higher-than-estimated NPAs.
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