Corporation Bank--Stable margins and asset quality.ADD" says Kotak Sec

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Corporation Bank (CRPBK)
Banks/Financial Institutions
Stable margins and asset quality. Corporation Bank’s reported earnings growth of
21% yoy was driven by (1) strong NII growth of 42% yoy, (2) impressive advances
growth of 33% and (3) lower NPL provisions. Margins for the quarter were maintained
at 2.6%. Asset quality was stable qoq while slippages were less than 1%. The stock is
trading at 1.3X FY2012E PBR delivering RoEs of about 20%. While valuations are not
expensive, concerns on margins emerge. We maintain ADD rating with TP of `800.


Strong performance on NII continues but turning cautious on banks NIMs
Corporation Bank’s net interest income (NII) increased by 42% yoy in 2QFY11 to `7.1 bn driven by
healthy loan growth (up 33% yoy) and complete pass through of incremental costs (lending yield
and investment yields improved 40 bps). Our calculated spreads for the bank have remained
constant during the period at 2.5%. We are turning a bit cautious on the bank’s NIM (which was
flat qoq at 2.6%) as the rise in cost of funds (40 bps qoq) is ahead of current expectations. While
pricing power remains, ability and willingness to pass higher costs becomes critical. The recent
change in PLR by 25 bps in October and 50 bps in August offers some comfort for the near-term
margins but we would be cautious if the focus moves towards balance sheet growth, especially
given that the bank has seen margins compress sharply given its relatively weak liability franchise.
Business growth impressive; partly led by lower base rate compared to peers
Loans grew ahead of industry at 33% yoy and 8% qoq to `698 bn led by large corporate segment
while deposit grew by 20% yoy and 7% qoq to `969 bn led by healthy growth in CASA deposits
(34% yoy). We believe that the low base rate of 7.75% is enabling the bank to attract corporate
customers as nearly 70% of the incremental lending for the quarter was towards this segment.
CASA ratio improved 90 bps qoq to 25% in the current quarter led by strong growth in current
account deposits.
Asset quality stable for the quarter; no large slippage from restructured loans
Asset quality for the quarter was stable with gross NPLs increasing 2% qoq to `7.4 bn (1.1% of
loans, up 18% yoy) while net NPL declined 2% qoq to `2.7 bn (0.4% of loans, up 75% yoy).
Slippages were at 0.8% with one large corporate NPL slippage of `0.5 bn for the quarter.
Provision coverage ratio improved 150 bps qoq to 64% (79% including technical write-off).
The management highlighted that nearly 90% of advances are monitored under CBS without any
manual intervention. Restructured book remains unchanged at 4.2% of loans while the overall
slippages from the restructured book are at 6.3%. Loan loss provisions were at 0.5% for the
quarter compared to 0.8% in June 2010.