CENTRAL BANK OF INDIA 2QFY11: Margins up 56bp QoQ:: Motilal oswal,

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CENTRAL BANK OF INDIA 2QFY11: Margins up 56bp QoQ; Asset quality stable QoQ

Central Bank of India (CBOI IN, Mkt Cap US$2.2b, CMP Rs239, Not Rated) 2QFY11 NII grew 135% YoY and 20% QoQ to 13.5b. While NII growth is strong, sharp decline in trading profits, moderation in fee income growth (down 25% YoY) and increase in opex (up 75% YoY) led to just 21% YoY and 13% QoQ growth in profits to Rs3.8b.

Key highlights

-          Strong NII growth of 135% YoY and 20% QoQ led by sharp improvement in margins. NIM expanded by 56bp QoQ (164bp YoY) led by stable cost of deposits (down 5bp QoQ) and sharp improvement in yield on loans (up 55bp QoQ) and yield on investments (up 23bp QoQ). Management guided for 3%+ NIM in FY11.

-          Loan growth remained strong at 8% QoQ (25% YoY) to Rs1.15t. Deposits grew 9% QoQ (10.8% YoY) to Rs1.67t. CD ratio improved to 69% in 2QFY11 vs 61% in 2QFY10, stable QoQ. Management expects loan growth of 23-24% and deposits growth of 16% in FY11.

-          Non-interest income fell 40% YoY (flat QoQ) to Rs2.5b due to sharp decline in treasury profits and decline in fee income. Treasury profits declined to Rs430m vs Rs600m in 1QFY11 and Rs1.6b in 2QFY10. Recoveries were strong during the quarter at Rs550m. Fee income grew 21% QoQ but declined 26% YoY (due to higher base).

-          Operating expenses increased 74% YoY basis to Rs8.1b (up 17% QoQ) led by sharp increase in both employee and establishment expense. Cost to core income ratio declined to 55% v/s 61% in 2QFY10 (flat QoQ).

-          Asset quality remained stable QoQ. GNPA in absolute terms were flat QoQ at Rs26.3b; however, in % terms GNPA declined 15bp QoQ to 2.28% and NNPA declined 11bp QoQ. PCR remained stable QoQ at 70% v/s 69% in 1QFY11.

-          Gross slippages in the quarter stood at Rs2.3b (annualized slippage ratio of 88bp) and Rs5.2b in 1HFY11 (annualized slippage ratio of 1%).

-          Bank will raise capital via rights issue in 2HFY11 to boost CAR.

Valuation and view

-          We expect Central Bank to report EPS of Rs34 in FY11 and Rs42 in FY12. BV would be Rs138 in FY11 and Rs175 in FY12.

-          RoA is expected to improve to 0.8% in FY11-12 vs 0.6% in FY10. On back of higher leverage, RoE will look superior at 26%+ over FY11-12. Our earning estimates do not factor in the rights issue.

-          The stock trades at 5.7x FY12E EPS and 1.4x FY12E BV. Not Rated.