Corporation Bank : Lower NIMs

Corporation Bank : Lower NIMs But Improved Asset Quality!

Q2FY13: Key Highlights

Asset quality: Asset quality improved during the quarter on account of slower slippages and fresh restructuring. Provisioning expenses increased 30% YoY and the provision coverage ratio was maintained at 60%. However, unlike previous quarter, recovery / up-gradations were lower at mere Rs 50 crores (12% of opening NPA) vs. Rs 165 crores in Q1FY13. Gross NPA and Net NPA stood at Rs. 1949 crores and Rs. 1351 crores respectively.

Loan portfolio declined QoQ: Loan growth was down in Q2FY13 by 0.4% QoQ with a major drawdown in corporate segment (-6% QoQ). Other segments however saw healthy tractions viz – Retail, Agri and SME up 53%, 39% and 23% YoY.

CASA ratio: CASA improved marginally by 20 bps QoQ to 20.9%. However we believe that overall CASA franchise remains weak and any reduction in high cost deposit portfolio will come at the cost of lower balance sheet growth.

Outlook: The bank plans to add 300 branches during FY13 to current 1600 branches primarily in semi-urban and rural areas. Increased branch network would help the bank to improve its CASA, reduce the PSL shortfall and retail credit growth in future. The Banks CAR currently stands at 13%, hence the growth of bank could be pegged and under current situation scope for capital infusion seems limited. 

Valuations

Corporation bank is entering its next growth phase with its aggressive branch expansion and with above-average business growth, valuation at 0.7x FY14 ABV seems quite compelling. Despite sequential improvement in asset quality since Q2FY12, we continue to remain cautious due to the bank’s high exposure to stressed sectors. After factoring in margin and NPA pressures, we still maintain a BUY on the stock with a target price of Rs 496 (from earlier TP of Rs 547) thus valuing it at 0.8x FY14E ABV.

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