Marwadi Shares & Finance (MSFL) has maintained 'Buy' on Corporation Bank with a price target of Rs 496 as compared to current market price (CMP) Rs 397 with upside potential of 25% in its report dated Nov. 16, 2012. The broking firm gave following investment rationale on the stock:
The Business for the bank grew by 19.6% y-o-y with Advances & Deposits growing by 20% & 19% respectively. The loan book growth was driven by Corporate (+46%) while Retail (+31.7%) and Agri (+38.5%) too supported strongly. The CASA Deposits grew by 14.3% while the ratio improved by 21bps to 20.9% q-o-q
The NIM for the quarter contracted by 6bps q-o-q to 2.23% due to flattish sequential advance growth as well as 7% q-o-q rise in term deposits resulting in 20bps increase in cost of deposits which negated the positive improvement of yields on advances. The NII growth of the bank stood at 8% y-o-y as against 10.9% expected. The re-pricing benefit is likely to flow in H2FY13 for the bank, which in turn should see margin improvement. Non Interest income declined by 18% on account of sharp decline in treasury and exchange profits.
The slippages for the quarter stood at Rs 4.5 billion, resulting in annualized slippage ratio of 1.8% v/s 2.9% q-o-q. The slippages were largely in Agri, SME and large industry segment. Further, the upgrades + recoveries were lower sequentially while bank also didn't resort to aggressive write-offs; thereby resulting in 15% rise in GNPA's q-o-q on absolute basis. The Gross and Net NPA ratio stood at 1.97%/1.38% respectively v/s 1.7%/1.2% q-o-q. The bank continued with higher NPL provisions (+40% y-o-y) and thereby maintained PCR (incl. w/off) at 60.4%. Additional restructuring during the quarter was to the extent of Rs 2.5 billion, thus taking the overall restructured book to 9% of the loan book. Cumulative slippages in this book are to the extent of 13.8%. The stressed asset for the bank (GNPA + Restructured book) stands at 11%
The stock has not participated in the recent run up in banking stocks and is currently trading at attractive valuations of 0.7x of its FY13E & 0.6x of FY14E Adjusted Book Value (ABV). The concern largely persists on the slippages for the bank which has been fairly volatile since past few quarters as well as high proportion of corporate book (47% of the loan book) and hence not providing comfort on asset quality. While H1FY13 has been lean we believe that the earnings performance should improve in H2FY13 on account of margin improvement. We maintain our BUY recommendation with a Target price of Rs 496.
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