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Corporation Bank (CRPBK)
Banks/Financial Institutions
Strong margins but asset quality slips. An early lending rate hike during the quarter
cushioned the rise in deposit costs, but asset quality deteriorated on the back of select
one-offs slippages. Near-term concerns remain as the risk on margins could be higher,
due to its weaker liability franchisee. However, we still expect RoEs to remain near 20%
levels. Valuations are attractive at 1.1X FY2012 PBR, but we retain ADD, owing to its
weaker liability franchisee. We revise TP to `700, factoring higher cost of equity.
Early hike in lending rates helps margins expand 7 bps qoq to 2.7%
Corporation Bank’s net interest income (NII) increased by 41% yoy in 3QFY11 to `8.4 bn (15%
higher than our estimates) driven by better pricing of loans which offset the rise in cost of funds.
Lending yields increased by 30 bps qoq while cost of funds increased by 12 bps qoq (lower than
41 bps reported in 2QFY11). Despite margin performance being ahead of expectations, we
maintain our cautious stance as the liability franchise is relatively weaker and costs could rise
sharper than the current quarter run-rate. Recent hikes in lending rates should comfort the sharp
rise in lending rates but we factor 15 bps decline in 4QFY11E and FY2012E, respectively.
Loan growth ahead of industry; CASA ratio at 24%
Loans grew ahead of industry at 27% yoy and 3% qoq to `719 bn led by large corporate segment
and SME segment. Deposits grew by 17% yoy and 2% qoq to ` 985 bn led by healthy growth in
CASA deposits (22% yoy). CASA ratio declined by 70 bps qoq to 25% but current account
deposits declined by 8% qoq while savings deposits increased by 3% yoy. On the back of strong
performance in FY2011, we are factoring credit growth to moderate to 18% CAGR for FY2012-13
against our earlier estimate of 22% CAGR.
Slippages driven by select one-offs; NPL reported without manual intervention
Asset quality showed pressure during the quarter with gross NPLs increasing 23% qoq to `9.1 bn
(1.3% of loans, up 22% yoy) while net NPL increased 53% qoq to `4.1 bn (0.6% of loans, up
60% yoy). Slippages were high at 1.6% - three accounts accounting for 70% of slippages. One of
these accounts pertain to agriculture exposure which the management expects to recover over the
next couple of quarters. Loan loss provisions were at 0.9% for the quarter compared to 0.5% in
September 2010. Lower provision resulted in coverage ratio declining 880 bps qoq to 55% (73%
including technical write-off). NPL reporting has no more manual intervention. Restructured book
remains unchanged at 4.2% of loans while the overall slippages from the restructured book are at
7.5%.
Disappointing performance on core fee income
Corporation Bank saw overall non-interest income increasing by 5% yoy to `2.6 bn in
3QFY11 as the contribution from treasury income declined by 12% yoy and performance on
core fee income was disappointing at 3% yoy growth. Forex income showed strong growth
at 61% yoy to `322 mn. Bad debt recovery during the quarter was at `0.2 bn compared to
0.3 bn in 2QFY11. We are building flat fee income growth in FY2011 given the subdued
performance in 9MFY11.
Other operational highlights for the quarter
Cost-income ratio for the quarter was at 33% for the quarter compared to 39% in
2QFY11. Staff costs has been flat for the quarter but the bank has made provisions for
second option through the employee expense line (had also made provisions in the last
couple of quarters as well).
The bank has made a provision of `0.5 bn for pension (9MFY11 provision of `1 bn). The
bank has estimated a liability of `5.4 bn for second pension benefit. We expect the bank
to make an additional provision of ` 0.5 bn in 4QFY11 assuming a 5 year amortization.
Total CAR was at 14.3% with tier-1 capital (excluding current quarter profits) at 8.1%. As
a part of capital infusion in banks by GoI, Corporation Bank expects about `1.9 bn by
March 2011.
Valuations attractive but prefer banks with stronger franchise; maintain ADD
We are broadly maintaining our estimates and believe that we still are somewhat
conservative in our earnings. However, any change in focus of management towards growth
at lower margins can offset cushions that are available especially on loan loss provisions. At
1.1X FY2012 PBR, valuations are attractive, given that the underlying business generates RoE
of about 20%. However, we prefer being cautious gives its liability franchise and maintain
our ADD rating on the stock with TP of `700, valuing the bank at 1.3X FY2012 PBR.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Corporation Bank (CRPBK)
Banks/Financial Institutions
Strong margins but asset quality slips. An early lending rate hike during the quarter
cushioned the rise in deposit costs, but asset quality deteriorated on the back of select
one-offs slippages. Near-term concerns remain as the risk on margins could be higher,
due to its weaker liability franchisee. However, we still expect RoEs to remain near 20%
levels. Valuations are attractive at 1.1X FY2012 PBR, but we retain ADD, owing to its
weaker liability franchisee. We revise TP to `700, factoring higher cost of equity.
Early hike in lending rates helps margins expand 7 bps qoq to 2.7%
Corporation Bank’s net interest income (NII) increased by 41% yoy in 3QFY11 to `8.4 bn (15%
higher than our estimates) driven by better pricing of loans which offset the rise in cost of funds.
Lending yields increased by 30 bps qoq while cost of funds increased by 12 bps qoq (lower than
41 bps reported in 2QFY11). Despite margin performance being ahead of expectations, we
maintain our cautious stance as the liability franchise is relatively weaker and costs could rise
sharper than the current quarter run-rate. Recent hikes in lending rates should comfort the sharp
rise in lending rates but we factor 15 bps decline in 4QFY11E and FY2012E, respectively.
Loan growth ahead of industry; CASA ratio at 24%
Loans grew ahead of industry at 27% yoy and 3% qoq to `719 bn led by large corporate segment
and SME segment. Deposits grew by 17% yoy and 2% qoq to ` 985 bn led by healthy growth in
CASA deposits (22% yoy). CASA ratio declined by 70 bps qoq to 25% but current account
deposits declined by 8% qoq while savings deposits increased by 3% yoy. On the back of strong
performance in FY2011, we are factoring credit growth to moderate to 18% CAGR for FY2012-13
against our earlier estimate of 22% CAGR.
Slippages driven by select one-offs; NPL reported without manual intervention
Asset quality showed pressure during the quarter with gross NPLs increasing 23% qoq to `9.1 bn
(1.3% of loans, up 22% yoy) while net NPL increased 53% qoq to `4.1 bn (0.6% of loans, up
60% yoy). Slippages were high at 1.6% - three accounts accounting for 70% of slippages. One of
these accounts pertain to agriculture exposure which the management expects to recover over the
next couple of quarters. Loan loss provisions were at 0.9% for the quarter compared to 0.5% in
September 2010. Lower provision resulted in coverage ratio declining 880 bps qoq to 55% (73%
including technical write-off). NPL reporting has no more manual intervention. Restructured book
remains unchanged at 4.2% of loans while the overall slippages from the restructured book are at
7.5%.
Disappointing performance on core fee income
Corporation Bank saw overall non-interest income increasing by 5% yoy to `2.6 bn in
3QFY11 as the contribution from treasury income declined by 12% yoy and performance on
core fee income was disappointing at 3% yoy growth. Forex income showed strong growth
at 61% yoy to `322 mn. Bad debt recovery during the quarter was at `0.2 bn compared to
0.3 bn in 2QFY11. We are building flat fee income growth in FY2011 given the subdued
performance in 9MFY11.
Other operational highlights for the quarter
Cost-income ratio for the quarter was at 33% for the quarter compared to 39% in
2QFY11. Staff costs has been flat for the quarter but the bank has made provisions for
second option through the employee expense line (had also made provisions in the last
couple of quarters as well).
The bank has made a provision of `0.5 bn for pension (9MFY11 provision of `1 bn). The
bank has estimated a liability of `5.4 bn for second pension benefit. We expect the bank
to make an additional provision of ` 0.5 bn in 4QFY11 assuming a 5 year amortization.
Total CAR was at 14.3% with tier-1 capital (excluding current quarter profits) at 8.1%. As
a part of capital infusion in banks by GoI, Corporation Bank expects about `1.9 bn by
March 2011.
Valuations attractive but prefer banks with stronger franchise; maintain ADD
We are broadly maintaining our estimates and believe that we still are somewhat
conservative in our earnings. However, any change in focus of management towards growth
at lower margins can offset cushions that are available especially on loan loss provisions. At
1.1X FY2012 PBR, valuations are attractive, given that the underlying business generates RoE
of about 20%. However, we prefer being cautious gives its liability franchise and maintain
our ADD rating on the stock with TP of `700, valuing the bank at 1.3X FY2012 PBR.
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