Healthy core performance CUB :: Centrum

Healthy core performance
CUB’s Q2FY13 core performance (Rs1283mn, 26.4% YoY) came in line with our
estimates driven by a healthy NII and fee income performance. Higher
provisioning during the quarter contained the bottomline at Rs804mn (vs
estimate of Rs853mn) as GNPA was up 21% QoQ. However, asset quality
matrix still remains robust with %GNPA at 1.24% and restructured assets at
4.5% of loans. We continue to remain positive on the stock driven by its ability
to deliver consistently robust return ratios. Maintain Buy with a revised target
of Rs65.
NIM expands 15bps QoQ: The reported NIM expanded by 15 bps QoQ to
3.3%, driven primarily by easing in cost of funds as blended yields were flat
QoQ at 10.7%. The NIM expansion was in line with our expectations. The NIM
expansion along with continued healthy credit growth (27% YoY) led to a
robust 24% YoY growth in NII. The management has guided for stable NIMs
for H2FY13, which we believe is achievable considering gradual easing in
funding costs and pricing power enjoyed by the bank in key segments.
Asset quality slips but remains comfortable: CUB’s asset quality matrices
deteriorated during Q2FY13 with GNPA jumping 21% QoQ though %GNPA
still remains comfortable at 1.24%. Slippage rate inched up higher to 1.9%
(from 1.5% in previous quarter). It should be noted that the slippages of
Rs610mn includes a pharma company exposure of Rs320mn, which slipped
due to temporary cashflow mismatch. The management expects recoveries
from this account during H2FY13. Conservatively, we have factored in a 2%
slippage rate and credit cost of 70bps for FY13.

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Strong credit growth: The advances book grew by a strong 27% YoY, though
lower than the average +30% growth seen in the last four quarters. From
segment perspective, corporate (46% YoY) and agriculture (41.4% YoY)
continue to remain the primarily drives of incremental loan growth while SME
segment loan growth has tapered down to 15% YoY. However, on a sequential
basis the bank has allowed sizable large corporate loans to run off the book
while adding agri and trade related credit to the book. We expect the FY13
loan book growth at 28% YoY.
Deep discount rights issue (1:4): CUB has announced a rights issue in 1:4
ratio and priced the rights issue at a deeply discounted price of Rs20 (vs CMP
of Rs60). While at deep discount, it is inline with the last rights issue done in
2009. The rights issue along with employee reservation shares implies a
dilution of 31% in the current equity base. Given the deep discounted rights
issue pricing, the book value is likely to get diluted by ~9% for FY14. The
capital raising is likely to fetch Rs2580mn, which will further shore up capital
adequacy (current CAR at 13.26% of which Tier I constitutes 12.54%).
Remain positive on ability to deliver consistently robust return ratios: At
current market price of Rs59, the stock trades at 1.5x FY2014E ABVPS. We
continue to like the stock given the well displayed ability to deliver
consistently high return ratios across operating environments. We maintain
Buy with a revised target price of Rs65, an upside of 10% from current levels.