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Spark Capital: 4QFY13 Result Reviews of Corporation Bank




Spark Capital Advisors(India) Private Limited


13 May 2013





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Corporation Bank 4QFY13 result review - Capital constraint compounds asset quality concerns: Maintain SELL Corporation bank’s (CRPBK) 4QFY13 performance was marked by continuing asset quality stresses, with incremental restructuring of Rs. 12.5bn taking the sheen off a 10% sequential decline in GNPAs. The overall stock of restructuring currently stands at 6.1% of the book; the restructured book has risen 2x since 2QFY12 while higher provisioning on restructured stock (Rs. 720mn) will keep provisioning elevated into FY14. Additionally, risky sector exposures have risen to 28% of the book against 25% in FY13 while exposure to power is 10% vs 8% in 1QFY12. PSL lending currently stands at 38% of ANBC and notwithstanding a 32% yoy rise in agri loans, agri continues to amount to only 9.4% of ANBC much below the mandated 18% and we expect both NIMs and asset quality to remain under pressure as these loans take-off. Opex was up 13% qoq, while pension liabilities are likely to be challenging in a wage revision year as CRPBK’s skewed rate of return on plan assets (8.85% against 8% for most PSU banks) could mean a two-fold impact on costs, a key risk in our view. CRPBK’s low T1 capital (at 8.3%) would necessitate a further infusion of capital in FY14, (in FY13 the bank only received Rs. 2bn of capital from the GOI as against a request for Rs. 10bn), ensuring the capital overhang remains; capital infusion below book value remains a key risk (refer our note “Heads I win; Tails, you lose” dated Sep 07, 2012). Compounding the problem is a dependence on hybrid T1 instruments adjusted for which T1 capital is currently at 7.6%. Even inclusive of a capital raise of Rs. 15bn therefore, the bank’s core T1 would be ~8% at end FY14, meaning frequent infusions as the transition to Basel 3 starts. With multiple headwinds continuing in the form of asset quality pressures, margins, capital and costs we maintain our SELL rating with a target price of Rs. 361, 0.8x our stress case FY14E ABV.

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