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Spark Capital: Corporation Bank 1QFY14 result review - Capital constraint, management overhang compounds asset quality concerns: Maintain SELL




Spark Capital Advisors(India) Private Limited


05 Aug 2013





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Corporation Bank 1QFY14 result review - Capital constraint, management overhang compounds asset quality concerns: Maintain SELL Corporation bank’s (CRPBK) 1QFY14 performance was marked by continuing asset quality stresses, with incremental slippages of 2.9% translating into a 34% qoq rise in GNPAs. The overall stock of restructuring currently stands at 6.3% of the book; the restructured book has risen 2x since 2QFY12 while slippages on the 2QFY12 book are only 17% - an outlier compared to 30-40% slippage numbers reported by larger peers. Additionally, risky sector exposures have risen to 28% of the book against 25% in 1QFY13 while exposure to power is up 25% yoy to 10% of the book. PSL lending currently stands at 33% of ANBC and notwithstanding a 38% yoy rise in agri loans, agri continues to amount to only 8.6% of ANBC much below the mandated 18%; we expect both NIMs and asset quality to remain under pressure as these loans take-off. Opex was up 18% yoy, while pension liabilities are likely to be challenging in a wage revision year as CRPBK’s skewed rate of return on plan assets (9% 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 8.2%) would necessitate a further infusion of capital in FY14 (Rs. 8bn requested from the GOI), 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 at CMP would result in a 7% hit to FY14 ABV (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 7.5%. Even inclusive of a capital raise of Rs. 18bn therefore, the bank’s core T1 capital would be ~8.2% 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, costs and a management change on the anvil we maintain our SELL rating with a target price of Rs. 247, 0.7x our stress case FY14E ABV.

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