Techno Funda Note - Central Bank of India :: HDFC Securities

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Central Bank of India (CBOI) is one of the oldest and largest commercial PSU banks in India based in Mumbai. Established in
1911, CBOI was the first Indian commercial bank which was wholly owned and managed by Indians. As on March 2014 the
bank has 4573 branches across 27 Indian states and three Union Territories. At present, CBOI has overseas office at Nairobi,
Hong Kong and a joint venture with Bank of India, Bank of Baroda, and the Zambian government.
Investment Rationale:
Equity Infusion by LIC & stake sale in investments to boost Capital adequacy
One of the important factors for de-rating of PSBs in the down-cycle was capitalization, as Basel III implementation
significantly increased the core equity tier-I capital requirement. Basel-III norms raised the minimum required capital levels for
to 9% plus a “capital conservation buffer” at 2.5% in order to pay dividends to be achieved over a phased manner. This takes
total CAR to 11.5%. But the weakening profitability of the PSBs, in particular, constrained their retained earnings and raised
their overall capital requirement. As far as CBOI is concerned, as on March 2014, CRAR stood at 9.9% and Tier I at 7.4%.
To meet these capital adequacy norms, CBOI has approved fund raising of Rs 2,000 cr which was to be done by a combination
of capital infusion by the government, and raising monies by divesting its stake in various companies including its stake in
IL&FS and CentBank Home finance. The bank's board has also approved Rs 1,300 cr capital-raising by the AT-I instruments.
In the current fiscal the bank has raised Rs 1,208 cr in two tranches from Life Insurance Corporation of India (LIC) by allotting
shares on a preferential basis. In August 2014, it had sold 7.10 cr shares to LIC and raised Rs 581.61 cr (issued at Rs.81.83 per
share). Later in Jan 2015, it had raised Rs 626 cr by allotting 8.28 cr shares to LIC on a preferential basis (issued at Rs.75.55 per
share). LIC now holds around 15% stake in the bank while government’s stake would have come down correspondingly from
84.2% held as on Dec 31, 2014. As on Sep 2014, CRAR under BASEL III has gone up to 10.65 % with Tier I at 7.43 % post first
round of placement to LIC. After the second round, it would have increased further.
Further in order to raise funds, the bank has initiated the process to divest its stake in non-core assets. The lender is planning
to sell its stake in its housing finance subsidiary CentBank Home Finance and Infrastructure Leasing and Financial Services
(IL&FS), where it is one of the promoters. It has appointed merchant bankers for these sales. In CentBank Home Finance, the
bank holds 64.4 per cent stake and in IL&FS it is having 8.34 per cent stake. CBOI could garner ~Rs 1000 cr from stake sale in
both these companies though its timing could be uncertain. In addition CBOI has the option to divest its 2.8% stake in SIDBI to
raise funds.
Both the preferential allotment and the stake sale would raise its capital and enable it to meet the Basel III requirements.
Improvement in NPAs expected post Suzlon write-off & aggressive recovery measures
CBOI GNPAs & NNPAs as on Sep 2014 stood at Rs 11439.7 cr and Rs 6072.5 cr while GNPA% and NNPA% stood at 6.14% and
3.38% respectively. There has been a slight improvement compared to Q1FY15 & Q4FY14 when NNPAs have touched 3.62%
and 3.75%. There has been more aggression on the bank’s front to bring down its NPA levels visible in the last couple of
quarters. Its target is to bring down its NNPA level to 3.08% by end FY15.
Recently Wind Turbine maker Suzlon Energy announced the divestment of its German arm Senvion for USD 1 billion in order to
repay debt worth Rs 5000 cr. CBOI had lent to the company in the past and expects its exposure to reduce by 45-55% post this

deal. It also expects all term loan obligations until March 2015 to be paid off by the company. So we can expect lower NPA

levels/stressed asset levels in the coming quarters. Q4 generally is better in terms of asset quality for most PSU banks as more

recoveries are made through.

The bank is also taking some concrete steps to recover its loans. It had filed a case with CBI against Electrotherm India for

allegedly causing a loss of Rs 436 cr to CBOI. These steps would be helpful to recover dues from willful defaulters.

In FY14 bank had sold distressed loans of Rs 1278 cr (in Q4FY14). In Q1FY15 it sold off Rs 797 cr and in Q2FY15 it sold off Rs

267 cr. Year on Year total deductions which were just Rs 327 cr in Q1FY14 have increased to Rs 2133 cr in Q4FY14 and Rs 1851

cr in Q1FY15 and Rs 1713 cr in Q2FY15. Slippages too have come down from Rs 2400 cr in Q1FY14 to Rs 2034 cr in Q4FY14 and

Rs 1800 in Q1FY15 and Rs 1704 cr in Q2FY15. Net NPAs as a percentage of net advances have come down from 3.85% in

Q1FY14 to 3.75% in Q4FY14, 3.62% in Q1FY15 and 3.38% in Q2FY15. Net Standard Restructured accounts as on Sep 2014 stood

at Rs 27185 cr while the incremental increase in total restructured assets in Q1FY15 stood at Rs 1576 cr.

Sector-Wise NPA Q2FY15 (Rs cr) % share

Textiles 1169 10.2

Infrastructure 1159 10.1

Iron & Steel 570 5.0

Engineering 457 4.0

Gems 442 3.9

Power Generation 429 3.7

Construction 312 2.7

Oil 240 2.1

Aviation 24 0.2

Others 6638 58.0

Total 11449 100

CBOI’s maximum NPA exposure lies in Textiles at 10.2% and Infrastructure sector at 10.1% followed by Iron & Steel (5%),

Engineering (4%) and Gems & Jewellery (3.9%).

We could also see better macro conditions going forward in gradual manner over a couple of quarters that would also

contribute to bring down the NPA levels of CBOI.

Any fall in NPAs could straightaway lead to a ris in the Adjusted Book Value and hence a higher stock price.

Overall Performance of the bank has improved in the last couple of quarters

As on H1FY15 Yield on advances have gone up to 10.99% from 10.79% (FY14) while Cost of deposits have come down from

7.24% to 7.23%. Cost to income ratio has also witnessed a decline from 61.53% in FY14 to 59.4% in H1FY15. Provision coverage

ratio has also improved y-o-y from 42.46% in Q1FY14 to 50.68% in Q4FY14 and to 55% in H1FY15 .

Total Business of the bank has improved 6.1% y-o-y to Rs 433808 cr as on Sep 2014 while total deposits have gone up 7% to Rs

247489 cr. Total Advances stood at Rs. 1,86,319 cr recording y-o-y growth of 4.3%. NIMs improved from 2.45% in Sep 2013 to

2.85% in Sep 2014. Total Income increased to Rs. 7,021 cr from Rs. 6,237 cr in September 2013 recording y-o-y growth of

12.6%. All these are very gradual improvements which are happening in the performance of the bank the last couple of

quarters.

Under the organizational re-structuring process, Bank has delegated more powers to the Regional Managers to ensure

decision making faster and Zonal Managers will work as Business Facilitator for Regional Offices for achieving Corporate Goals

to promote greater autonomy within the bank.

Management has chalked some specific growth oriented plans in FY15. It expects its total business to grow by 12.5%, total

deposits to grow by 14.5% and total advances to grow by 9.9%. Share of CASA to be improved to 34.5%. On the NPA front,

CBOI plans to contain Gross NPA at 5.6% and Net NPA at 3.08%. NIM is expected to improve to the level of 3%.

Extensive Branch Network & High CASA

CBOI has an extensive branch network of banks with 4597 branches (Sep 2014) and is amongst largest commercial banks in

India. It is one of the oldest banks; over 100 years old - established in 1911. CBOI has 1696 branches (37%) in Rural region and

1285 branches in Semi Urban (28%) with lower exposure to urban and metropolitan areas. This would benefit with

government onus on improving rural banking. CBOI has also approached the Reserve Bank of India (RBI) for permission to

open representative offices in five more locations - Singapore, Dubai, Doha and London.

CASA remains high at 32.6% (as on Sep 14) giving the bank the advantage of low cost of funding. Management intends to

increase it to 35% in FY15. CASA % has been maintained in the last couple of quarters in between 32-33%. This reflects bank’s

competitive advantage in raising funds at a lower cost.

Concerns:

 Bank’s Net NPAs % had gone up in FY14 to 3.75% - so far the highest in last four years though subsequently coming down in

the last few quarters but quite marginally. As on Sep 2014 it was 3.38%. If macro conditions do not improve fast enough the

NPA levels may take time to come down. Further in case Suzlon share sale in Senvion faces regulatory hurdles, it could impact

the NPA/stressed assets of CBOI.

 Lack of service oriented outlook professionalism seen in most PSU Banks.

 Further Slowdown in business growth is a key systematic risk for the bank

 Disruption by employee union and the management’s inability to sustain pace of reforms could cause concern.

 Any disappointment in credit growth for the industry will affect SIB to that extent.

Valuation & Recommendation

CBOI is one of older banks established in 1911 and among the largest commercial PSU banks. It has the advantage of higher

CASA and extensive branch network. Among PSU banks specifically we may see two positive deltas in the form of loan book

growth and containment of asset quality once the macro conditions improve.

The Bank looks to be on the recovery path having earned Profits consecutively during last three-four quarters. There has been

progressive growth in the level and quantum of Profits - Rs 62 cr, Rs 162 cr in Q3 and Q4 last year and Rs 192 cr in Q1. In

Q2FY15, Net Profit was at Rs 102.9 cr. Margins have improved with NIMs at 2.85% as on Q2FY15.

CBOI was a consistent dividend player having paid 20-25% dividend every year from FY08 to FY13, but skipped paying dividend

in FY14 (looking at loss incurred in FY14 due to Rs.2000 cr + provisions made). If CBOI continues its good run, it could return to

the dividend list soon

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010935