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Corporation Bank (CRPBK)
Banks/Financial Institutions
Recovering slowly. Corporation Bank’s reported earnings were ahead of our estimates
on the back of strong growth in non-interest income and lower tax rate. Importantly,
the bank is now on margin improvement course driven by shift in loan mix and less
dependent on the wholesale-funded business. Balance sheet has been cleaned (with the
migration exercise) resulting in sharp increase in NPLs. While risks remain high, the bank
will still deliver 18% RoE and trades at 0.8X FY2012E book. We retain BUY with a TP of
`600 (`630 earlier), largely on inexpensive valuations.
Specific issues gradually getting addressed; valuations inexpensive
We believe that Corporation Bank is gradually addressing some of the issues facing the bank. Loan
growth has decelerated sharply in recent quarters, portfolio is shifting towards better yielding
loans and non-interest income has picked up. Earnings growth of 14% yoy for the quarter was
driven by healthy growth in non-interest income (76% yoy) and lower tax rate (19%). Slippages in
the current quarter have been well ahead of expectations but we believe that the bank is
specifically addressing balance sheet issues (migration-led to higher slippages).
We are revising our estimates downwards broadly to factor the weak operating environment. Our
loan growth assumptions have been conservative at 17% CAGR for FY2011-13E. We expect
margin pressure to ease in the coming quarters as wholesale rates have peaked/ shift in loan mix,
but we don’t expect it to move towards the management target of 3% levels. At 0.8X FY2012E
book and 5X FY2012E EPS, valuations are attractive, given that the underlying business generates
RoE of about 18%. We maintain BUY rating with TP of `600 (from `630 earlier).
Margins expand 30 bps qoq to 2.4% on the back of better loan re-pricing
NIMs expanded 30 bps qoq to 2.4% on the back of better loan re-pricing and shift in loan mix.
Also, the last two quarters have witnessed a shift in loans towards high-yielding SME loans while
the bank is consciously shedding some of its wholesale loans. Yield on loans improved 60 bps qoq
while cost of deposits increased by 30 bps qoq. We note that the bank is well-positioned to
expand the CD ratio which is currently at 68%, one of the lowest among peers. We expect NIM to
show marginal improvement on the back of the above changes while wholesale deposit rates
appear to have peaked at current levels.
Loan growth slows to 17% yoy but SME loan growth remains high
After having grown fairly aggressively till FY2011 (37% yoy growth), Corporation Bank has
sharply slowed down loan growth over the past two quarters (1QFY11 grew by 22% while
2QFY12 grew 17% yoy). As against the initial focus of the bank towards large corporate,
FY2012 has shifted towards SME segment—loans to SME grew 57% yoy to `127 bn (16%
of loans as compared to 12% in September 2011). We expect the bank to deliver 17%
CAGR for FY2011-13E. Deposits grew faster at 24% yoy (flat qoq) to `1,206 bn. CASA ratio
is extremely low at 21.8%.
Weakness in asset quality; slippages higher at 2.6% levels
Asset quality trends were fairly weak in the current quarter with gross NPLs rising sharply
qoq. Gross NPLs increased 27% qoq to `10.8 bn (1.3% of loans) while net NPL increased by
81% qoq to `7.5 bn (0.9% of loans). Slippages were higher at 2.6% levels as the bank
completed the last leg of migration. Slippages were primarily from priority sector and SME
sector. Loan-loss provisions were higher at 0.9%. We note that the bank has taken higher
write-offs of loans as the provision coverage (ex write-off) declined to 31% (from 52%)
while provision coverage (including write-off) has improved to 85% from 75% levels.
Other operational highlights for the quarter
Cost-income ratio for the quarter was at 39% as compared to 42% in June 2011 as the
bank benefitted from strong growth in revenues (21% yoy). Operating expenses growth
remained high at 20% yoy primarily on the back of higher employee costs.
Non-interest income grew sharply by 76% yoy to `3.9 bn in 2QFY12. Treasury gains were
strong at `1.5 bn. Forex income tripled yoy to `505 mn. Income from written-off
accounts more than doubled yoy.
Total CAR was at 14.1% with tier-1 capital at 8.3%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Corporation Bank (CRPBK)
Banks/Financial Institutions
Recovering slowly. Corporation Bank’s reported earnings were ahead of our estimates
on the back of strong growth in non-interest income and lower tax rate. Importantly,
the bank is now on margin improvement course driven by shift in loan mix and less
dependent on the wholesale-funded business. Balance sheet has been cleaned (with the
migration exercise) resulting in sharp increase in NPLs. While risks remain high, the bank
will still deliver 18% RoE and trades at 0.8X FY2012E book. We retain BUY with a TP of
`600 (`630 earlier), largely on inexpensive valuations.
Specific issues gradually getting addressed; valuations inexpensive
We believe that Corporation Bank is gradually addressing some of the issues facing the bank. Loan
growth has decelerated sharply in recent quarters, portfolio is shifting towards better yielding
loans and non-interest income has picked up. Earnings growth of 14% yoy for the quarter was
driven by healthy growth in non-interest income (76% yoy) and lower tax rate (19%). Slippages in
the current quarter have been well ahead of expectations but we believe that the bank is
specifically addressing balance sheet issues (migration-led to higher slippages).
We are revising our estimates downwards broadly to factor the weak operating environment. Our
loan growth assumptions have been conservative at 17% CAGR for FY2011-13E. We expect
margin pressure to ease in the coming quarters as wholesale rates have peaked/ shift in loan mix,
but we don’t expect it to move towards the management target of 3% levels. At 0.8X FY2012E
book and 5X FY2012E EPS, valuations are attractive, given that the underlying business generates
RoE of about 18%. We maintain BUY rating with TP of `600 (from `630 earlier).
Margins expand 30 bps qoq to 2.4% on the back of better loan re-pricing
NIMs expanded 30 bps qoq to 2.4% on the back of better loan re-pricing and shift in loan mix.
Also, the last two quarters have witnessed a shift in loans towards high-yielding SME loans while
the bank is consciously shedding some of its wholesale loans. Yield on loans improved 60 bps qoq
while cost of deposits increased by 30 bps qoq. We note that the bank is well-positioned to
expand the CD ratio which is currently at 68%, one of the lowest among peers. We expect NIM to
show marginal improvement on the back of the above changes while wholesale deposit rates
appear to have peaked at current levels.
Loan growth slows to 17% yoy but SME loan growth remains high
After having grown fairly aggressively till FY2011 (37% yoy growth), Corporation Bank has
sharply slowed down loan growth over the past two quarters (1QFY11 grew by 22% while
2QFY12 grew 17% yoy). As against the initial focus of the bank towards large corporate,
FY2012 has shifted towards SME segment—loans to SME grew 57% yoy to `127 bn (16%
of loans as compared to 12% in September 2011). We expect the bank to deliver 17%
CAGR for FY2011-13E. Deposits grew faster at 24% yoy (flat qoq) to `1,206 bn. CASA ratio
is extremely low at 21.8%.
Weakness in asset quality; slippages higher at 2.6% levels
Asset quality trends were fairly weak in the current quarter with gross NPLs rising sharply
qoq. Gross NPLs increased 27% qoq to `10.8 bn (1.3% of loans) while net NPL increased by
81% qoq to `7.5 bn (0.9% of loans). Slippages were higher at 2.6% levels as the bank
completed the last leg of migration. Slippages were primarily from priority sector and SME
sector. Loan-loss provisions were higher at 0.9%. We note that the bank has taken higher
write-offs of loans as the provision coverage (ex write-off) declined to 31% (from 52%)
while provision coverage (including write-off) has improved to 85% from 75% levels.
Other operational highlights for the quarter
Cost-income ratio for the quarter was at 39% as compared to 42% in June 2011 as the
bank benefitted from strong growth in revenues (21% yoy). Operating expenses growth
remained high at 20% yoy primarily on the back of higher employee costs.
Non-interest income grew sharply by 76% yoy to `3.9 bn in 2QFY12. Treasury gains were
strong at `1.5 bn. Forex income tripled yoy to `505 mn. Income from written-off
accounts more than doubled yoy.
Total CAR was at 14.1% with tier-1 capital at 8.3%.
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