Buy Corporation Bank:TP of Rs700 -Slippages rise on one-off: Emkay

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Corporation Bank Slippages rise on one-off

BUY

CMP: Rs 564                                        Target Price: Rs 700

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n     CRPBK’s Q3FY11 NII/PAT at Rs8.4bn/Rs3.8bn better than expected driven by 27% yoy growth in advances and 7bps qoq expansion in NIMs to 2.7%.

n     Some of the NII driven by one-off opportunities as other interest has almost doubled. Also avg advances growth for quarter at 31.5% vs quarter end growth of 26.8%

n     Slippages rate increased significantly to 1.6% (annualized) from 1.0% in preceding quarter, primarily led by Rs1.2bn slippage from crop loans. PCR as per RBI norms at 72.81%

n     Valuations not unreasonable at 1.0x FY12E ABV. We maintain our BUY recommendation on stock with TP of Rs700

 NII growth ahead of expectation

CRPBK’s NII for Q3FY11 grew by 40.5% yoy to Rs8.4bn, ahead of our expectation. The

strong growth in NII was driven by 26.8% yoy growth in advances and 7bps qoq

improvement in NIM’s at 2.7% for the quarter. Some of the NII growth could have also

been driven by one-off opportunities as other interest has almost doubled and also as

the average advances growth for quarter at 31.5% vs quarter end growth of 26.8%

Advances growth remain robust

The advances grew by a robust 26.8%yoy to Rs719.3bn during the quarter. The strong

growth during the quarter was driven by growth across the segments viz. Large

corporate, Retail, SME and agriculture segments.

CASA deposit declines 1.5%qoq

The CASA proportion declined by 78bps qoq to 24.3% during the quarter as growth in term

deposit outpaced growth in CASA deposits.

Other income growth at 17%qoq

The other income grew by 17.0%qoq led by higher trading gains and forex income during

the quarter. The fee income however remains almost flat at Rs1.7bn for the quarter.

Core operating profit grew by a strong 51.3% yoy

Driven by higher NII growth, the operating profit grew by a strong 36.8%yoy to Rs7.4bn.

However adjusted for treasury gains and pension liabilities, core operating profit growth was

even stronger at 51.3%yoy at Rs7.6bn. The bank has provided Rs550mn for 2nd pension

liabilities in Q3FY11 and will provide another Rs550mn in the next quarter as well. The total

pension liabilities are to the tune of Rs5.4bn, which is to be amortised over five years.

Provisioning expenses rise in line with higher slippages

The credit cost increased significantly to 0.34% from 0.13% in preceding quarter led by

sharp increase in slippages.

Slippages rise sharply driven by crop loans

During the quarter, the slippages rate increased significantly to 1.6% (annualized) from 1%

in preceding quarter, led by fresh slippage of Rs2.8bn. Of the total slippages, Rs1.2bn were

from crop loans, which the management expects to recover in the forthcoming quarters.

However management also indicated that there is one more account of Rs1.3bn which

could slip in the next quarter.

Valuations and view

The stock is currently quoting at 1.1x FY11E ABV and 1.0x FY12E ABV. In past (between

FY05-08), we have seen that Corp Bank’s NIMs show resilience due to long term maturity

of the deposits and liabilities (2 years +). However, we are cutting our estimates for

FY11E/FY12E by ~6.5%/13.8% to take into account higher provisioning requirements.

We believe that the valuations are not unreasonable looking at 21-22% RoEs. We maintain

our BUY recommendation on the stock with price target of Rs700 (1.3x FY12E ABV).