Buy Corporation Bank

TARGET Rs.630
CMP Rs.430.00

Robust Core Result
Corporation Bank (Corp bk) reported Rs. 3 bn net profit in Q3FY10, registering a growth of 19% YoY (beats our estimates) led by robust core result. Advances grew by 26% YoY whereas Deposits grew by 36%. Net Interest Income reported growth of 26% YoY and 19% QoQ mainly due to strong Advance growth and maintained margins (QoQ). Operating expenses de‐grew by 4% due to higher AS15 provisions made in FY09. Its non‐interest income grew 11% despite of lower treasury gains mainly due to better than expected growth in forex & fee income. This resulted in strong PPP (Preprovisioning Profit) growth of 23%. Excluding treasury, the bank reported a healthy PPP growth of 58% YoY. Cost to Income ratio improved to 35% in 3QFY10, (among the best in the Industry). Bank is well capitalized with CAR of 17.2% & Tier‐1 of 10.4%, which will ensure business growth without dilution concerns for 18‐24 months.

Margins Improving Sequentially
NIMs during Q3FY10 decreased to 2.54% from 2.7% YoY led by sharp decrease in Credit‐Deposit ratio (to 67% vs 73% in 3QFY09) and decrease in share of CASA deposit by 194 bps YoY to 23%. However, the bank has reported a sequential improvement in margins by 24 bps led by sequential improvement in CASA by 87 bps, re‐pricing of bulk deposits and improvement in Credit ‐ deposit ratio by 220 bps. We expect this trend to continue for next few quarters, which will further result in margin improvement QoQ. Going forward, as the demand for credit start picking up, we will see bank diluting non‐SLR investments, which are low yielding and expose the bank to higher investment and money market risk. Currently, the bank is sitting on Rs 42 bn of MF investment (vs 0.9 bn in Mar’09) which we expect to be replaced with high yielding advances in next few quarters, hence improving the margins.

One of the concerns for the bank is lower percentage of low cost deposits (CASA). Although CASA share seems to have increased QoQ to 23.3% in Q3FY10 but this is still much lower than other comparable PSU banks. Going forward, the management expects to increase its CASA share substantially towards the 30% mark and have started taking steps to achieve the same.

Increased Delinquencies but Asset Quality Healthy
Gross NPAs ratio increased by 14 bps QoQ to 1.3%, while the Net NPA ratio increased by 16 bps to 0.45% due to higher slippages. Incremental slippage ratio (annualized) has increased to 1.35% during Q3FY10 as against 0.71% for H1FY10. But still, it is much lower than industry average and was largely witnessed in agri portfolio under Debt Waiver Scheme. NPA coverage ratio (excluding write‐offs) declined to 66% from 75% in Q2FY10 but including written off accounts, coverage ratio is very healthy at about 74%. Bank has restructured loans to the tune of Rs.25 bn, which is 4.4% of advances & SME share in restructured advance is at Rs 1.44 bn. As current NPA levels are low and coverage ratio is healthy, we don’t foresee any major concern in asset quality.

OUTLOOK & VALUATION
Corporation Bank – established in 1906 – is one of the leading south based bank with a business size of above Rs. 1 trillion. It is a PSU bankwith Government holding of 57.2% with the other major shareholder being LIC holding 26.3% stake. It has an excellent track record of earning profit since its inception. It has a countrywide presence with over +2100 outlets in India (1096 branches and 1057 ATMs) with high focus in Tamil Nadu, Kerala, Goa, Karnataka, AP and Maharashtra. All its branches are under CBS. The Bank currently trades at an attractive valuation of 0.9x FY11E ABV and 5x FY11E Earnings.

Maintain Buy rating with increased price target of Rs. 630 (at 1.4x of its FY11E ABV). Well‐capitalized with high government holding (57%), higher than industry growth, sustainable ROE of 20%, well‐managed asset quality, improving CDR, strong franchise value and high dividend yields are the key factors which make the Bank an attractive buy.

COMPANY DESCRIPTION
Corporation Bank – established in 1906 – is one of the leading south based bank with a business size of above Rs. 1.4 trillion. It is a PSU bank with Government holding of 57.2% with the other major shareholder being LIC holding 26.3% stake. It has an excellent track record of earning profit since its inception. It has a countrywide presence with over +2100 outlets in India (1096 branches and 1057 ATMs) with high focus in Tamil Nadu, Kerala, Goa, Karnataka, AP and Maharashtra. All its branches are under CBS.

OUTLOOK & VALUATION
We expect business growth at 20‐21% in FY10‐11E & Net Interest Income at 21‐23%. We have made higher NPA provisions for FY11 and expect lower treasury gains, hence we target Net Profit growth of 17% for FY11E. The Bank currently trades at an attractive valuation of 0.9x FY11E ABV and 5x FY11E Earnings. Maintain Buy rating with increased price target of Rs. 630 (at 1.4x of its FY11E ABV). Well‐capitalized with high government holding (57%), higher than industry growth, sustainable ROE of 20%, well‐managed asset quality, improving CDR, strong franchise value and high dividend yields are the key factors which make the Bank an attractive buy.

Report card

Attribute	Value	Date
PE ratio	6.98	03/02/10
EPS (Rs)	62.24	Mar, 09
Sales (Rs crore)	1,860.64	Dec, 09
Face Value (Rs)	10
Net profit margin (%)	12.88	Mar, 09
Last dividend (%)	80	24/04/09
Return on average equity	18.23	Mar, 09