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Investment Thesis
• Valuations are very attractive: Trades
at 5.5x F2012e earnings, 1.0x F2012e
BV and 3.9x F2012e PPOP.
• We expect Corporation Bank to
generate an average ROA of 1.1% in
F2012/13 and ROE of 19 & 21% in
F2012 & F2013 respectively.
• Expect reasonable volume growth and
falling credit costs to offset potential
margin pressures in F2012.
• Tier 1 position of the bank is
comfortable at 9.8% (as of December
2010, adjusted by adding profits of
F9M11 & recent capital infusion).
• Weak CASA franchise (CASA to total
funding at 24%) is a risk
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• Slippages and upgrades/recoveries to
be reported in QE Mar 2011 and QE
June 2011 results.
• Trend in system-wide loan growth
(released on a fortnightly basis).
• Trend in short rates (given relatively
weak CASA)
Key Risks
• Sharp rise in short rates (given
relatively weaker CASA ratio)
• Higher than expected slippage from
restructured loans into NPLs.
• New impaired loan formation
accelerates further
Price Target Rs725 Derived from our probability weighted residual income model.
Bull
Case
Rs870
1.6x F2013e
BVPS
Stronger than expected economic growth. Loan growth in
F2012-13 averages 25% -- higher than base case estimates
implying that NII growth and fee income is higher than
expectations; New NPL formation rate slows to materially below
normalized levels implying that credit costs drop sharply.
Base
Case
Rs775
1.4x F2013e
BVPS
Margins likely to compress in F2012, but falling credit costs
will help preserve profitability. We expect margins to compress
by 35 bps by end-F2012 from current levels of 2.7%. Building in a
volume growth of 17% in F2012 & 18% in F2013. Expect credit
costs to decline to 64 bps in F2012 (vs. 75 bps in F2011) owing to
slowing new NPL formation.
Bear
Case
Rs425
0.8x F2013e
BVPS
Disruptive rise in interest rates: Inflation rates remains at higher
levels for longer and hence resulting in a disruptive rise in rates in
the system. This will result in loan growth being slower than
expectations and new NPL formation to potentially re-accelerate.
In this scenario, we build in a sharper compression in margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Valuations are very attractive: Trades
at 5.5x F2012e earnings, 1.0x F2012e
BV and 3.9x F2012e PPOP.
• We expect Corporation Bank to
generate an average ROA of 1.1% in
F2012/13 and ROE of 19 & 21% in
F2012 & F2013 respectively.
• Expect reasonable volume growth and
falling credit costs to offset potential
margin pressures in F2012.
• Tier 1 position of the bank is
comfortable at 9.8% (as of December
2010, adjusted by adding profits of
F9M11 & recent capital infusion).
• Weak CASA franchise (CASA to total
funding at 24%) is a risk
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• Slippages and upgrades/recoveries to
be reported in QE Mar 2011 and QE
June 2011 results.
• Trend in system-wide loan growth
(released on a fortnightly basis).
• Trend in short rates (given relatively
weak CASA)
Key Risks
• Sharp rise in short rates (given
relatively weaker CASA ratio)
• Higher than expected slippage from
restructured loans into NPLs.
• New impaired loan formation
accelerates further
Price Target Rs725 Derived from our probability weighted residual income model.
Bull
Case
Rs870
1.6x F2013e
BVPS
Stronger than expected economic growth. Loan growth in
F2012-13 averages 25% -- higher than base case estimates
implying that NII growth and fee income is higher than
expectations; New NPL formation rate slows to materially below
normalized levels implying that credit costs drop sharply.
Base
Case
Rs775
1.4x F2013e
BVPS
Margins likely to compress in F2012, but falling credit costs
will help preserve profitability. We expect margins to compress
by 35 bps by end-F2012 from current levels of 2.7%. Building in a
volume growth of 17% in F2012 & 18% in F2013. Expect credit
costs to decline to 64 bps in F2012 (vs. 75 bps in F2011) owing to
slowing new NPL formation.
Bear
Case
Rs425
0.8x F2013e
BVPS
Disruptive rise in interest rates: Inflation rates remains at higher
levels for longer and hence resulting in a disruptive rise in rates in
the system. This will result in loan growth being slower than
expectations and new NPL formation to potentially re-accelerate.
In this scenario, we build in a sharper compression in margins.
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