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Margins remain under pressure; asset quality woes continue
Valuations price in most negatives; stock trades at 1.1x FY11 BV
After a strong 37% earnings CAGR over FY08-11, we expect CBK’s core performance to be weak,
given the current margin and asset quality headwinds. We model in margin contraction of ~50bp in
FY12 on account of higher slippages and rising cost of funds (due to higher share of bulk deposits
and lower CASA share). Slippages and/or restructuring are likely to be elevated in the near term,
before stabilizing due to (1) migration to system-based NPL recognition, (2) higher-than-industry
credit growth in past years, and (3) higher share of infra loans. Despite factoring all negatives, RoA
is likely to be 1% and RoE at 18-19%. YTD CBK has corrected by over 30% (underperforming Bankex
by ~15%). We believe current valuations factor in most of the negatives. We maintain Buy with a
target price of INR555.
Return ratios to moderate: Over FY02-11, CBK posted superior RoA of 1.1%+ and RoE of 23%+.
However, due to migration to system-based NPA recognition, CBK’s asset quality has come under significant
strain, impacting margins, credit costs, and thereby earnings. Nevertheless, RoA is likely to remain
healthy at ~1%. However, the recent equity dilution will lead to a fall in RoE to ~19%.
Expected fall in interest rates a key trigger: CBK will be a key beneficiary of the stable/declining
interest rates due to high proportion of wholesale bulk deposits (~35%) on its balance sheet. Expected
moderation in cost of funds and lower strain in asset quality will help to improve margins. We model in
~50bp decline in FY12 and flat NIM in FY13.
Capital not a constraint for growth: Recently, CBK raised ~INR20b (~12% of existing net worth) through
a QIP issue, leading to increase in its tier-I ratio from 9.5% to 11%. This makes the bank adequately
capitalized for its future growth plans. Moreover, higher government holding at ~68% (after dilution) provides
CBK with ample headroom to raise capital when required for future growth.
Asset quality woes continue: While the slippage ratio declined from 2.4% in FY10 to 2.1% in FY11, it
remains higher than peers. Moreover, strong loan growth over the past couple of years, high proportion of
infra loans and volatile asset quality raises concerns. We factor in slippage ratio of 2.3% for FY12 (2.07%
in FY11) and credit cost of 60bp in FY12 and FY13 v/s 43bp in FY11.
Bulk deposits to drag margins; slippages to remain high
Post balance sheet restructuring in FY08, CBK
recorded strong business growth, with loans and
deposits growing at a CAGR of ~26% and
~24%, respectively over FY08-11. We expect
business growth to remain healthy, as we build
in loan CAGR of 21% and deposit CAGR of
20% over FY11-13.
After improving considerably in FY11, CBK's
margins are likely to contract sharply on the back
of higher cost of funds due to larger share of
bulk deposits (~35%) and lower CASA share
(~25% - calculated; as of June 2011) and higher
slippages. We model in ~50bp decline in FY12
and flat NIM in FY13.
We expect slippages to remain elevated on
account of (1) migration to system-based NPL
recognition, (2) higher proportion of infra loans,
and (3) higher slippages in restructured portfolio
(4% of outstanding loans, of which 8% have
already slipped into NPA; lower than its peers).
Lower growth in employee expenses and tight
leash on operating expenses should result in
continued decline in cost-to-income ratio. As a
result, the bank can benefit from operating
leverage, which will continue to play out.
1QFY12: CASA ratio declines sharply; muted fee income performance
Loan growth continues to be healthy at 24%
YoY. However, it was largely flattish on a QoQ
basis.
CASA growth continues to be highly volatile.
CASA deposits declined 8% QoQ, led by 38%
QoQ decline in CA deposits. SA deposits grew
4% QoQ and 14% YoY. As a result, CASA ratio
(calculated) declined sharply by 290bp to 25.4%.
In 1QFY12, NIM declined ~45bp QoQ (after
30bp QoQ decline in 4QFY11) to 2.4%. Sharp
increase in slippages led to interest income
reversal (INR2.1b), impacting NIM by ~25bp.
Further, cost of deposits increased 83bp QoQ,
whereas yield on loans improved 59bp QoQ,
adversely impacting NIM. The steep margin
decline despite equity infusion of INR20b in
4QFY11 came as a negative surprise.
Non-interest income growth in 1QFY12
remained tepid, led by loss on sale of investments
and muted fee income growth. CEB grew 6%
YoY, lagging balance sheet growth considerably,
while forex income grew 29% YoY. We have
modeled in a modest 10% YoY growth in fee
income in FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margins remain under pressure; asset quality woes continue
Valuations price in most negatives; stock trades at 1.1x FY11 BV
After a strong 37% earnings CAGR over FY08-11, we expect CBK’s core performance to be weak,
given the current margin and asset quality headwinds. We model in margin contraction of ~50bp in
FY12 on account of higher slippages and rising cost of funds (due to higher share of bulk deposits
and lower CASA share). Slippages and/or restructuring are likely to be elevated in the near term,
before stabilizing due to (1) migration to system-based NPL recognition, (2) higher-than-industry
credit growth in past years, and (3) higher share of infra loans. Despite factoring all negatives, RoA
is likely to be 1% and RoE at 18-19%. YTD CBK has corrected by over 30% (underperforming Bankex
by ~15%). We believe current valuations factor in most of the negatives. We maintain Buy with a
target price of INR555.
Return ratios to moderate: Over FY02-11, CBK posted superior RoA of 1.1%+ and RoE of 23%+.
However, due to migration to system-based NPA recognition, CBK’s asset quality has come under significant
strain, impacting margins, credit costs, and thereby earnings. Nevertheless, RoA is likely to remain
healthy at ~1%. However, the recent equity dilution will lead to a fall in RoE to ~19%.
Expected fall in interest rates a key trigger: CBK will be a key beneficiary of the stable/declining
interest rates due to high proportion of wholesale bulk deposits (~35%) on its balance sheet. Expected
moderation in cost of funds and lower strain in asset quality will help to improve margins. We model in
~50bp decline in FY12 and flat NIM in FY13.
Capital not a constraint for growth: Recently, CBK raised ~INR20b (~12% of existing net worth) through
a QIP issue, leading to increase in its tier-I ratio from 9.5% to 11%. This makes the bank adequately
capitalized for its future growth plans. Moreover, higher government holding at ~68% (after dilution) provides
CBK with ample headroom to raise capital when required for future growth.
Asset quality woes continue: While the slippage ratio declined from 2.4% in FY10 to 2.1% in FY11, it
remains higher than peers. Moreover, strong loan growth over the past couple of years, high proportion of
infra loans and volatile asset quality raises concerns. We factor in slippage ratio of 2.3% for FY12 (2.07%
in FY11) and credit cost of 60bp in FY12 and FY13 v/s 43bp in FY11.
Bulk deposits to drag margins; slippages to remain high
Post balance sheet restructuring in FY08, CBK
recorded strong business growth, with loans and
deposits growing at a CAGR of ~26% and
~24%, respectively over FY08-11. We expect
business growth to remain healthy, as we build
in loan CAGR of 21% and deposit CAGR of
20% over FY11-13.
After improving considerably in FY11, CBK's
margins are likely to contract sharply on the back
of higher cost of funds due to larger share of
bulk deposits (~35%) and lower CASA share
(~25% - calculated; as of June 2011) and higher
slippages. We model in ~50bp decline in FY12
and flat NIM in FY13.
We expect slippages to remain elevated on
account of (1) migration to system-based NPL
recognition, (2) higher proportion of infra loans,
and (3) higher slippages in restructured portfolio
(4% of outstanding loans, of which 8% have
already slipped into NPA; lower than its peers).
Lower growth in employee expenses and tight
leash on operating expenses should result in
continued decline in cost-to-income ratio. As a
result, the bank can benefit from operating
leverage, which will continue to play out.
1QFY12: CASA ratio declines sharply; muted fee income performance
Loan growth continues to be healthy at 24%
YoY. However, it was largely flattish on a QoQ
basis.
CASA growth continues to be highly volatile.
CASA deposits declined 8% QoQ, led by 38%
QoQ decline in CA deposits. SA deposits grew
4% QoQ and 14% YoY. As a result, CASA ratio
(calculated) declined sharply by 290bp to 25.4%.
In 1QFY12, NIM declined ~45bp QoQ (after
30bp QoQ decline in 4QFY11) to 2.4%. Sharp
increase in slippages led to interest income
reversal (INR2.1b), impacting NIM by ~25bp.
Further, cost of deposits increased 83bp QoQ,
whereas yield on loans improved 59bp QoQ,
adversely impacting NIM. The steep margin
decline despite equity infusion of INR20b in
4QFY11 came as a negative surprise.
Non-interest income growth in 1QFY12
remained tepid, led by loss on sale of investments
and muted fee income growth. CEB grew 6%
YoY, lagging balance sheet growth considerably,
while forex income grew 29% YoY. We have
modeled in a modest 10% YoY growth in fee
income in FY12.
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