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Spark Capital: Corporation Bank 2QFY14 Result Review - Capital constraint compounds asset quality concerns: Maintain SELL




Spark Capital Advisors(India) Private Limited


13 Nov 2013





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Corporation Bank 2QFY14 Result Review - Capital constraint compounds asset quality concerns: Maintain SELL Corporation bank’s (CRPBK) 2QFY14 performance was marked by continuing asset quality stresses, with incremental slippages of 3.9% (annualised) translating into a 41% qoq rise in GNPAs. The overall stock of restructuring currently stands at 5.5% of the book; the restructured book has risen 2x since 2QFY12 while slippages on the 2QFY12 book are only 11% - an outlier compared to 30-40% slippage numbers reported by larger peers. Additionally, risky sector exposures have risen to 29% of the book against 25% in 1QFY13 while exposure to power is up 21% yoy to 10% of the book. PSL lending currently stands at 36% of ANBC and notwithstanding a 34% yoy rise in agri loans, agri continues to amount to only 9.1% 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 32% 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 7.1%) would necessitate repeated infusions of capital as the transition to BASEL 3 begins, we estimate a capital requirement of ~Rs.15bn every year over FY14-18 to support a 20% growth in RWAs (refer our note on BASEL 3 dated Aug 28, 2013). For FY14, the bank has only been allocated Rs. 4.5bn – capital infusion below book value at CMP would result in a 7% hit to FY14 ABV. We also note a sharp spike in loans to iron and steel (up 42% yoy), gems & jewellery (up 38% yoy) and textiles (up 28% yoy), adding to concerns of a 39% yoy growth in SME loans. With multiple headwinds continuing in the form of asset quality pressures, margins, capital, costs and profitability we maintain our SELL rating with a target price of Rs. 215, 0.7x our stress case FY14E ABV.

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