Analyst Research Report Snapshot

Title:

Spark Capital: Corporation Bank 4QFY14 Result Review - Capital constraint compounds asset quality concerns: Maintain SELL [TP: 216]

Price:

$58.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

13 May 2014

Pages:

7

Type:

AcrobatPDF

Companies referenced:

CRBK.NS

Available for Immediate Download
Summary:

Corporation Bank 4QFY14 Result Review - Capital constraint compounds asset quality concerns: Maintain SELL [TP: 216] Corporation bank’s (CRPBK) 4QFY14 performance was marked by continuing asset quality stresses, with incremental slippages of 3.4% (annualised) translating into a 131% yoy rise in GNPAs. The overall stock of restructuring currently stands at 5.0% of the book; the restructured book has risen 2x since 2QFY12 while slippages on the 2QFY12 book are only 11% - an outlier given the 30-40% slippage numbers reported by larger peers. Incremental restructuring amounted to Rs.6bn, translating into stressed asset formation of 5.2%, comparable to 6% witnessed in 3QFY14. Additionally, risky sector exposures have risen to 27% of the book against 24% in 1QFY13 with exposure to power rising to 9% of the book. PSL lending currently stands at 41% of ANBC and notwithstanding a 30% yoy rise in agri loans, agri continues to amount to only 11 % of ANBC - much below the mandated 18%; we expect both NIMs and asset quality to remain under pressure as these loans takeoff. Opex was up 14% 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 8.1%) would necessitate repeated infusions of capital as the transition to BASEL 3 begins, we estimate a capital requirement of ~Rs.15bn every year over FY15-18 to support a 20% growth in RWAs (refer our note on PSU banks dated Mar 21, 2014). We also note a sharp spike in loans to iron and steel (up 16% yoy), gems & jewellery (up 29% yoy) and textiles (up 18% yoy), adding to concerns of a 27% yoy growth in SME loans. Despite the strong business growth, core fee income was only up 4% yoy and we estimate an other income to assets ratio of 0.8% for FY15/16. 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. 216, 0.8x our stress case FY15E ABV.

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