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Strong loan growth
During 4QFY11, Corporation Bank’s net profit of Rs3.5bn (up 11% YoY)
was higher than estimates driven by higher than expected treasury gains.
But aggressive loan growth (up 37% YoY) and lower CASA ratio can lay
pressure on margins going forward. Moderation in asset quality pressures
was a positive surprise. While capital infusion by government has helped
to boost its capital adequacy ratio, it may need additional capital to
support asset growth. Corporation bank trades at discount to PSU banks
and healthy NIMs and asset quality are key for any re-rating. Maintain
BUY with target price of Rs660 based on 1x forward adjusted PB.
Aggressive loan growth may put margins under pressure
During 4QFY11, Corporation Bank’s NII grew by 19% YoY, but declined by
10% QoQ, as the loan growth was offset by margin pressures. We believe
that bank’s aggressive loan growth (37% YoY/ 21% QoQ) could put margins
under further pressure as its CASA ratio of 26% of deposits and CASA growth
of 14% YoY are much lower than Tier I PSU Banks. During 4QFY11, NIMs
declined by 19bps QoQ (up 2bps YoY) to 2.5%. Profits were boosted by
treasury gains that formed 21% of pre-tax profit and helped to offset higher
than expected staff costs (up 48% YoY) due to provisioning under the second
pension liability.
Lower slippages was a positive surprise
During 4QFY11, fresh slippages declined by 42% QoQ and as a result the
delinquency ratio moderated to 1% of previous year’s loans. Gross NPAs rose
by 21% YoY, but were down 14% QOQ. Over FY11, Corporation Bank’s
provisioning has lagged behind accretion to NPAs that has resulted in 20ppt
YoY drop in coverage ratio and net NPLs have more than doubled. Coverage
ratio including technical write-off is at 75% and restructured loans formed
3.6% of loans.
Profitability is higher than peers
Over FY11-13, we expect bank’s loans to grow at 22% Cagr and drive 17%
Cagr in earnings. We believe that improvement in CASA ratio is critical to
growth and profitability. ROE of +21% are higher than peer banks, but with
tier I CAR of 8.7% (including capital infusion by government) it may need to
raise further capital to support asset growth. Our target price of Rs660 is
based on 1x FY13CL adjusted price to book.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong loan growth
During 4QFY11, Corporation Bank’s net profit of Rs3.5bn (up 11% YoY)
was higher than estimates driven by higher than expected treasury gains.
But aggressive loan growth (up 37% YoY) and lower CASA ratio can lay
pressure on margins going forward. Moderation in asset quality pressures
was a positive surprise. While capital infusion by government has helped
to boost its capital adequacy ratio, it may need additional capital to
support asset growth. Corporation bank trades at discount to PSU banks
and healthy NIMs and asset quality are key for any re-rating. Maintain
BUY with target price of Rs660 based on 1x forward adjusted PB.
Aggressive loan growth may put margins under pressure
During 4QFY11, Corporation Bank’s NII grew by 19% YoY, but declined by
10% QoQ, as the loan growth was offset by margin pressures. We believe
that bank’s aggressive loan growth (37% YoY/ 21% QoQ) could put margins
under further pressure as its CASA ratio of 26% of deposits and CASA growth
of 14% YoY are much lower than Tier I PSU Banks. During 4QFY11, NIMs
declined by 19bps QoQ (up 2bps YoY) to 2.5%. Profits were boosted by
treasury gains that formed 21% of pre-tax profit and helped to offset higher
than expected staff costs (up 48% YoY) due to provisioning under the second
pension liability.
Lower slippages was a positive surprise
During 4QFY11, fresh slippages declined by 42% QoQ and as a result the
delinquency ratio moderated to 1% of previous year’s loans. Gross NPAs rose
by 21% YoY, but were down 14% QOQ. Over FY11, Corporation Bank’s
provisioning has lagged behind accretion to NPAs that has resulted in 20ppt
YoY drop in coverage ratio and net NPLs have more than doubled. Coverage
ratio including technical write-off is at 75% and restructured loans formed
3.6% of loans.
Profitability is higher than peers
Over FY11-13, we expect bank’s loans to grow at 22% Cagr and drive 17%
Cagr in earnings. We believe that improvement in CASA ratio is critical to
growth and profitability. ROE of +21% are higher than peer banks, but with
tier I CAR of 8.7% (including capital infusion by government) it may need to
raise further capital to support asset growth. Our target price of Rs660 is
based on 1x FY13CL adjusted price to book.
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