Buy Corporation Bank - Motilal Oswal

CORPORATION BANK 2QFY11: Strong loan growth; Margins and asset quality stable QoQ; Buy

Corporation Bank's (CRPBK IN, Mkt Cap US$2.3b, CMP Rs730, Buy) 2QFY11 net profit at Rs3.5b (up 21% YoY) is in line with our estimate. NII grew 42% YoY and 3% QoQ to Rs7.2b (est of Rs7.2b) led by 36bp YoY expansion in NIM (stable QoQ) and improving CD ratio. Business growth remained strong with loan growth of 33% YoY (8% QoQ) and deposits growth of 20% YoY (7% QoQ).

Key highlights

• Higher yield on loans (up 44bp QoQ) and yield on investments (up 38bp QoQ) led to stable margins QoQ despite pressure on cost of deposits (up 41bp QoQ).
• Deposits grew 20% YoY (6.5% QoQ) whereas loans grew 33% YoY (7.7% QoQ). CD ratio remained stable QoQ at 72%.
• Strong traction continues in CASA deposits with growth of 34% YoY and 11% QoQ. CASA ratio improved by 96bp QoQ and 263bp YoY to 25%.
• Non interest income declined 25% YoY and 15% QoQ due to lower treasury gains. Bank booked treasury gains of Rs45m vs Rs747m in 2QFY10 and Rs135m in 1QFY11. Fee income (incl forex) was flat QoQ and declined 5% YoY (on a higher base).
• Asset quality during the quarter was stable with Gross NPA increasing marginally by ~2% QoQ. GNPA and NNPA in percentage terms declined by 6bp and 4bp QoQ to 1.05% and 0.39% respectively. Calculated Provision coverage ratio stood at 63.6%, however including technical write-off coverage ratio stood at 78.5%.

Margins stable QoQ; balance sheet growth remains strong

• NIMs were stable QoQ (expanded by 36bp YoY) as yield on loans (up 44bp QoQ) and yield on investment (up 38bp QoQ), negated the impact of rising cost of deposits (up 41bp QoQ). Yield on loans improved 44bp QoQ as low cost loans were replaced by higher yielding loans.
• Management expects margins to moderate in 2HFY11 as pressure on cost of funds has increased however, remains confident of achieving blended margin of 2.5%+ in FY11. For FY12 it targets NIM of ~3%.

Margins remained stable QoQ (%)

Business growth remains strong

• Deposits grew 20% YoY (6.5% QoQ) whereas loans grew 33% (7.7% QoQ). CD ratio remained stable QoQ at 72%; however, improved sharply from 65% in 2QFY10 (a key factor to improvement in margins YoY).
• CASA deposits grew 34% YoY and 11% QoQ led by strong traction in both savings and current deposits. Saving bank deposits grew 31% YoY and 7% QoQ and Current deposits grew by 39% YoY (17% QoQ, due to increase in IPO float). CASA mix improved 263bp YoY to 25%. Management expects strong traction in CASA to continue and targets CASA ratio to improve 100-200bp every year.
• On back of strong pipeline (Rs250b of sanction) management has guided for ~25% loans and 22% deposits growth in FY11.

Flat fee Income QoQ; Employee expenses increase

• Non-interest income declined 25% YoY and 15% QoQ on account of lower treasury gains. For the quarter treasury gains were Rs45m vs Rs747m in 2QFY10 and Rs135m in 1QFY11.
• Fee income (incl. forex) was flat on a sequential basis and declined by 5% on a YoY basis (on a higher base). Management expects fee income growth to pick up in 2HFY11 with increased in corporate and loan growth related fees.
• Recoveries during the quarter stood at Rs306m vs Rs593m in 1QFY11 and Rs270m in 2QFY10.
• Employee cost increased by 62% YoY and 9% QoQ, due to higher provision made towards wage revision and gratuity. Bank has provided Rs300-400m in 1HFY11 for gratuity related expense (covered up to now). Management has not yet provided for 2nd pension option and has indicated liability of ~Rs6b if all the employees opt for the scheme.
• Other operating cost was up by 17% YoY and 5% QoQ. Cost to core income ratio was up by ~200bp both QoQ and YoY due to higher employee expense during the quarter. Management expects decline in employee cost (excluding for 2nd pension provision) and cost efficiency to drive Cost to income ratio lower.

Asset quality stable QoQ

• Asset quality during the quarter was stable with Gross NPA increasing marginally by ~2% QoQ. GNPA and NNPA in percentage terms declined by 6bp and 4bp QoQ to 1.05% and 0.39% respectively. Reported Provision coverage ratio stood at 63.6%, however including technical write-off coverage ratio improved by 180bp to 78.5%.
• Slippage ratio (annualized) in 1HFY11 stood at ~1.1% vs 1% in FY10. During the quarter one large corporate account fell in to NPA (Rs540m) for which bank has already provided. Total restructured book at the end of 2QFY11 stood at Rs29b (4.15% of loan book) and of this cumulatively Rs1.8b (6.1% of the restructured book) of loans has slipped as NPAs.

Valuation and view

- CRPBK's key strengths are (1) Cost efficiencies (Cost/Core income ratio less than 40%), (2) Strong CAR of 14.5%, and (3) Relatively low NPAs.

- We expect the bank to report 19% EPS CAGR over FY10-12, on back of strong loan growth and stable margins. We expect RoEs to remain at ~22% and RoA of 1.1%+ over FY10-12E.

- We expect CRPBK to report EPS of Rs99 in FY11 and Rs115 in FY12. BV will be Rs478 and Rs566 in FY11 and FY12.

- Stock trades at 6.3x FY12 EPS, 1.3x FY12 BV. Maintain Buy with a target price of Rs850 (1.5x FY12 BV).

Source : Equity Bulls

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