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Saturday, November 8, 2008

Corporation Bank - Good stock for mid term

Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs321
Current market price: Rs210

Results in line with expectations

Result highlights

In Q2FY2009 Corporation Bank’s net profit grew by 18.7% year on year (yoy) to Rs191.5 crore, which is largely in line with our estimate of Rs178.0 crore.
The net interest income (NII) of the bank increased by 10.3% yoy to Rs406.7 crore during the quarter on the back of a robust 33.3% year-on-year (y-o-y) growth in advances. However, a significant 42-basis-point contraction in the net interest margin (NIM) restricted the NII growth to 10.3% yoy.
The NIM for the quarter has come in at 2.43%, down by 42 basis points from 2.85% in Q2FY2008 but flat sequentially. The y-o-y contraction in the NIM was a result of an increase in the cost of funds that outweighed the increase in the yields on the assets.
The non-interest income registered a paltry growth of 3.2% yoy on account of a 41.5% decline in the treasury gains. Notably, the core fee income (commissions, exchange & brokerage and foreign exchange [forex] income) increased by a healthy 34.3% yoy, mitigating the impact of the decline in the treasury gains.
The operating expenses declined by 5.6% yoy to Rs229.5 crore during the quarter from Rs243.2 crore in Q2FY2008. The operating expenses were contained primarily due to a 24.1% decline in the staff expenses even as the other operating expenses grew by 14.5% yoy.
The provisions during the quarter increased marginally by 3.0% yoy to Rs55.8 crore vs Rs54.2 crore in Q2FY2008 on account of a provision write-back of Rs3.1 crore towards investment depreciation coupled with lower provisioning towards standard assets.
In Q2FY2009, the asset quality of the bank remained largely stable on a sequential basis with the percentage of gross non-performing assets (%GNPAs) at 1.36% and the percentage of net non-performing assets (%NNPAs) at 0.40%. Importantly, the provision coverage declined to 70.7% from 81.7% in Q2FY2008 and 75.7% in Q1FY2009.
The business growth during the quarter was well above the industry growth. The advances stood at Rs43,547 crore, up 33.3% yoy, while the deposits stood at Rs60,278 crore, up 31.8% yoy. Importantly, the current account and savings account (CASA) ratio of the bank slipped to 25.6%, down 390 basis points yoy, which is worrisome.
As on September 30, 2008 the capital adequacy ratio (CAR) stood at a comfortable 11.75% compared with the year-ago level of 13.58%. The tier-I CAR stood at 9.60%, indicating that the bank has enough headroom to raise tier-II capital.
We are fine-tuning our estimates in view of the H1FY2009 results of the company. At the current market price of Rs210, the stock trades at 3.8x 2009E earnings per share (EPS), 2.2x 2009E pre-provisioning profit (PPP) and 0.6x 2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs321.

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