Corporation Bank : BUY

Strong Recoveries Spur PAT

Buoyed by robust recoveries of Rs 928 mn in 4QFY11, Corporation Bank’s (CRPBK) PAT grew 11% YoY. Net interest income declined 8% QoQ mainly due to 68 bps QoQ increase in cost of funds. The bank has relied heavily on short-term borrowings in 4QFY11, to provide short-term loans to some AAA rated corporates (albeit at lower spreads). Non-interest income grew 74% QoQ mainly on higher recoveries. Operating expenses rose 19% QoQ led by rise in staff cost which grew 25% QoQ. Staff expenses include Rs 740 mn of pension liability for retired employees.

Key highlights

• Asset quality impressive: Asset quality for the bank remained impressive in FY11 with slippage ratio of 0.9% which is amongst the best in PSU banks. In 4QFY11, the bank recognized income of Rs 928 mn (19% of other income) from recovery of bad debts which provided traction to PAT. Gross NPAs fell 13.4% QoQ whereas Net NPAs declined 3.8% QoQ.
• Provision coverage ratio stood at 74.7%.
• Strong biz growth: Deposits grew 26% YoY, lagging behind credit growth of 37.4% YoY.  However, on an avg. basis, advances grew at 28% YoY while deposits grew by 21.2% YoY. Due to skewed business growth, C-D ratio was at 74% and the mgmt intends to bring it down to 70% going forward.
• Margins decline:  NIMs declined by  19  bps  QoQ  to  2.52% mainly due to 68 bps QoQ rise in cost of deposits.
• Management expects NIMs to improve going forward as they will focus more on improving share of high-yielding advances such as retail (up 12% QoQ), SME (up 40% QoQ) and midcorporate segments.

Valuation

Strong recoveries and robust business growth are the key highlights of 4Q results. Though NIM contracted by 19 bps QoQ, going forward it is likely to be maintained as the bank will focus on high-yielding segments. CRPBK is focusing on increasing its branches (add 200 branches in FY12) which would help in augmenting its CASA ratio (26%). We have a Buy rating on the stock with a TP of Rs 720 (1.3x FY12E ABV)