Corporation Bank- Contraction in margins; we lower estimates but retain a Buy ::anand rathi,

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Corporation Bank
Contraction in margins; we lower estimates but retain a Buy
On our assumptions of lower loan growth and NIM, we reduce
FY12-13 EPS estimates for Corporation Bank by ~4%. We value
the bank at 1.3x 1HFY12 BV and maintain a price target of `786.
We retain a Buy based on the favorable risk-reward at a PBV of
0.8x FY13e, given 0.9% RoA and ~19% RoE over FY11-14e.
 Credit growth moderates. After rising 37.4% yoy (and 20.7%
qoq) in 4QFY11, credit growth moderated to ~22%. Deposit
growth rose to 29.4% yoy, but was flat qoq. We expect credit and
deposits to grow ~21% in FY12.
 NIM declined steeply; likely to bounce back. In 1QFY12,
credit-deposits slipped to 67% vs. 74.4% in 4QFY11 due to a qoq
drop in advances. Further, lower CASA and high reliance on bulk
deposits led to a ~40bps decline in NIM. Hence, net interest
income was flat yoy and declined 7.1% qoq. We expect FY12
NIM to settle at 2.2-2.3% (~30bps decline yoy) on better creditdeposits and increase in lending yields.
 Asset quality stable. Gross NPAs rose 7.1% qoq; however,
slippage was contained at ~0.75%. Asset quality continues to be
healthy, with net NPAs of 0.52% and NPA coverage ratio of
1.07%.  
 Valuation and Risks. At our Sep ’12 target price of `786, the
stock would trade at a PBV of 1.3x FY12e and 0.9x FY13e. We
introduce FY14 estimates and expect 19.8% CAGR in profits over
FY11-14. Key risks: continuing macro headwinds and thereby
slower loan growth, margin contraction and higher NPA costs.