Stock Market Result Update on Corporation Bank for 1QFY2012

Stock Market Result Update on Corporation Bank for 1QFY2012 with a Buy recommendation and a Target Price of `566 (12 months).

For 1QFY2012, Corporation Bank registered marginal net profit growth of 5.3% yoy (up 1.8% qoq) to `351cr, marginally above our estimates. The bank wrote back excess tax provision of ~`63cr during the quarter, leading to an effective tax rate of 14.1% for 1QFY2012. Asset quality remained stable with slippage ratio under 1% for 1QFY2012. We maintain our Buy rating on the stock.

Loan book shrinks significantly; asset quality stable: During 1QFY2012, the bank’s advances declined substantially by 9.1% qoq (up by healthy 21.8% yoy) to `78,904cr, while deposits increased marginally by 0.9% qoq (up by healthy 29.4% yoy) to `117,782cr. The bank did not undertake any branch network expansion in 1QFY2012. Although the yield on advances increased by 89bp qoq to 11.2%, higher cost of deposits led to reported NIM declining by 38bp sequentially to 2.1%. During 1QFY2012, other income decreased by 40.9% qoq to `290cr due to a 58.1% qoq fall in treasury income to `34cr. On the asset-quality front, the bank showed signs of improvement in 1QFY2012, with the slippage rate declining from 1.1% in 4QFY2011 to 0.8% in 1QFY2012. The bank has already shifted fully to system-based NPA recognition.

Outlook and valuation: The bank’s low CASA ratio (~26%) has contributed to higher margin pressures, given high prevailing interest rates. However, currently the stock is trading at 0.7x FY2013E ABV, one of the cheapest in the industry, which we believe provides a margin of safety from the current macro headwinds. Also, the key positive for the bank is its proactive investment in modern distribution and payment systems, which has led to consistently faster CASA growth than peers. Further, with the switchover to system-based NPA recognition already out of the way, we expect relatively lower concerns to surface on the asset-quality front compared to peers. We recommend Buy on the stock with a target price of `566.