Corporation Bank 2Q earnings beat; Maintain Buy on positive risk return 􀂄BofA Merrill Lynch,

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Corporation Bank
2Q earnings beat; Maintain Buy
on positive risk return
􀂄 2Q: +25% beat on treasury gains, offset by credit costs
Corp Bk’s 2Q earnings came in at Rs4.0bn, a 14% yoy growth and a +25% higher
than est. driven by a) treasury gains, partly offset by higher credit costs driven by
higher than estimated slippages (+2x qoq). Top-line growth modest (~4% yoy),
but ~3% ahead driven by 17% loan growth and margin decline by 45bps yoy (up
32bps qoq). Core fee growth strong (+30% yoy). CASA, while down yoy by
+320bps, is up qoq by 80bps, to ~22%.
Slippages rise +2x qoq, but asset quality is manageable
Corp Bank’s slippages increased by +2x qoq to Rs5bn driven by corporate / nonpriority
slippages. However, mgmt. is looking at corporate recovery in the ensuing
quarters. Resultantly, headline gross NPLs increased qoq by 27% (at 1.3%) and
net increased by 81% qoq (at 0.9%), provision cover at ~65% (vs. ~75% in 1Q).
We estimate FY12 slippages at ~Rs16/20bn (vs. Rs8.1bn in FY11) and credit
costs normalizing at +60/80bps in FY12/13.
Maintain Buy and PO on positive risk-return
While 2Q earnings beat was +25%, we more or less maintain our FY12/13
(earnings tweak by ~1%), as we normalize strong 2Q treasury gains and build in
higher credit costs. We maintain our Buy rating and PO, as risk-return remains
positive, with stock trading at 0.9x FY12E adj. book / 0.8x FY13E adj. book, with
RoEs of still +20%. Our PO is still at a +30% discount to Gordon theory multiples.
We believe the discount may remain owing to weak liability franchise, as also we
remain worried on its +55% SME loan growth that makes the loan profile riskier
and, low stock liquidity (Govt. & LIC own ~84% of stock).