Saturday, October 8, 2011

Corporation Bank


Amidst headlines of Moody’s downgrading banks in Portugal, UK, Italy and at home our own SBI, isn’t it little out of place to discuss a PSU Bank as an investment idea?  Second reason that makes this looks out of place is that in current fall, it is very difficult to zero down to one banking stock when most of them are quoting at dirt cheap valuations.  But then, fundamental equity investing is more about making your bets when there is fear, uncertainty and investors are moving into “cash” (read USD) as the preferred asset class.

PSU banks seem increasingly commoditised business with very little moat and pricing power. So why prefer a Corporation Bank over another 20 banks when many of those left out have better branch network, brand recall and size. On the lower end of spectrum, you have one trading at half of IPO price, and another at half of book value, well nearly.

Nobody can be certain that we have seen the peak of interest rate cycle, with RBI’s hawkish stance continuing and policy rates again under the scanner in Second Quarter Review of Monetary Policy on October 25, 2011.  In short, we can see even lower price levels for banking stocks.

Coming to Corporation Bank, it is a well established Bank with GOI and LIC holding 58.5% and 25.5% respectively.


Financial Summary
Amt in Rs crore
Indicator
2007-08
2008-09
2009-10
 2010-11
Networth
4,228.51
4,896.51
5,774.87
7,137.81
Deposits
55,424.42
73,983.91
92,733.67
116,747.50
Advances
39,185.57
48,512.16
63,202.56
86,850.40
Total Business
94,609.99
122,496.07
155,936.23
203,597.90
Total Income
5,216.33
7,174.57
8,481.03
10,459.62
Operating Profit
1,251.14
1,796.61
2,136.73
2,622.40
Net Profit
734.99
892.77
1,170.25
1,413.27
Key Ratios
CAR %
12.09
13.66
15.00
14.11
ROA %
1.38
1.28
1.28
1.21
ROE %
17.38
18.23
20.26
20.70
EPS (Rs)
51.24
62.24
81.58
96.60
BV (Rs)
294.79
341.36
402.60
481.85
NIM %
2.71
2.26
2.07
2.52
Non int/Tot inc
13.42
17.06
17.61
12.66
Gross NPA %
1.47
1.14
1.02
0.91
Net NPA %
0.32
0.29
0.31
0.46
Dividend (Rs)
10.50
12.50
16.50
20.00


Positives:
What struck me about its balance sheet is the kind of capital utilization it has shown in building assets:
(1) Share Capital of Rs 148.13 crore and Total assets are Rs 1.43 lakh crore. Asset/Equity Ratio of 968 is phenomenal for a midcap PSU Bank, whichever way we look at it. CAR is at 14.11 % as per Basel 2, with Tier 1 capital at 8.69%.
(2) There is hardly any equity dilution in last 10 years, which means y-o-y growth in networth of Rs 7,137 crore is entirely organic.
(3) Asset quality is relatively better than most PSU banks, both at gross (0.91%) and net (0.46%) NPA levels as at 31-03-2011. Since then, there is marginal increase of 7% in gross on q-o-q basis in Q1-FY2012. The bank maintains a decent PCR of 74% as at end of June 2011.
(4) It crossed total business (deposits + advances) of Rs 2 lakh crore in FY 2011. Business has grown 8 times in last 10 years.
(5) Infrastructure accounts for about 17% of bank’s credit exposures and SMEs for 13%.
(6) CD Ratio as on 31.03.2011 stood at 73%. Advances registered a growth of 28% in FY 2011. I don’t think current FY will see such type of growth.
(7) Cost Income Ratio at 38.5% is quite decent, and likely to further reduce in this year.

Concerns:
(1) CASA at 26% is lower than some of the peer banks.
(2) NIM was at 2.5% as at end of FY 2011 but fell to 2.1% in Q1-FY2012 due to higher mobilization of term deposits and higher cost of deposits.
(3) There were some allegations/ complaints about alleged irregularities in issuance of tenders and sanction of loans which are under inquiry by CVC/CBI. We can see some press reports here. It is difficult to comment on these issues from outside but it can be reasonably expected that with change of guard (new Chairman has joined wef October 01, 2011), it should get cleaned up.
(4) Trading volume is less given the low floating stock (84% held by GOI/LIC).

Stock parameters
CMP: Rs. 405.25 (FV Rs. 10); Market Cap: Rs. 6,006 crore; 52-week high/low (NSE): Rs.814.30/ 401.90; 200 DMA: Rs. 534.

Valuation parameters
PE: 4.20; P/BV: 0.84; Dividend yield: 4.93% (based on DPS of Rs 20 for FY2011).

Outlook
Historically, it has traded at 1 time trailing P/BV.  There are quite a few catalysts that can help it re-rate from here, provided interest rate environment starts softening by Q4-FY2012. Investors who have 3-4 year kind of time horizon on this stock can reap handsome gains and dividends.

10 comments:

  1. Hi Shikhar,
    came across few excellent thought provoking and hilarious videos of Prof.Vaidyanathan.

    Giving below 2 links

    http://www.youtube.com/watch?v=-QFYMnUL16c

    http://www.youtube.com/watch?v=V9gjofsi4vI&feature=related

    Its like Indian economy explained by Indian Economist and not some foreigner.

    A must watch.

    Vikas

    ReplyDelete
  2. Hello Shikhar,

    Can you help me on these questions
    1.Annual Loan growth ~ > 20% and profit growth ~ > 18 of PSU banks has been in par with private banks. but still what reason you think PSU banks are trading at dirt cheap valuations compared to Private indian banks? I understand the NPA of private banks is better than PSU but does it justify low valuations.
    2.do you think INDIAN BANK and JAMMU & KASHMIR BANK are good banks ? They've Net interest margin > 3 % , ROA is > 1.2 , assets/equity ratio < 14 , loan loss provision is more than 75 %.

    ReplyDelete
  3. Hi Sagar,

    You have very incisive & valid observations.

    1. I won't like to club all PSU Banks as one basket, there are many different creatures in that group. But broadly speaking:
    (i) Market is not liking majority shareholder's approach due to government dithering in infusion of capital in SBI. Would you like owner of a business behaving like this?
    (ii) Adjusted BV is much lower for some PSU banks due to asset quality concerns emerging from infra, power (both pvt & SEBs) & agri sectors. Aviation exposures are bad too, though not classified.
    (iii) Large G-Sec portfolio need to be marked to market in rising interest rate scenario.

    2. Indian bank has some of the best indicators among peers. Question is degree of relative attractiveness.J&K bank is an avoid.

    Regards

    Shikhar

    ReplyDelete
  4. Thanks Shikhar for responding.
    1.As per my understanding if bank makes a provision for NPA/loss that amount goes on liability of balancesheet. So if a bank is making 80% provision , and if in future bank will write down remaining 20% npa, then should we consider book value as 20% inflated(or adjusted book value is lower by 20%) ?
    2.Why should we avoid J & K ? what are the reasons ?

    ReplyDelete
  5. Hi Sagar,

    1. On ABV, most of them take a shave of 15-25% depending on net NPA. But it's more than arithmetic part since restructured book is not factored there, that's where analyst judgement comes. These are standard assets and no specific provisions held. And forward ABV is a still more tough call.
    2. There is some issue of state govt interference, don't want to say more.

    ReplyDelete
  6. Thank you sir well said on restructure loans. how does corporation bank fare on this ? how can we calculate book value by taking into account restructure loan ?

    ReplyDelete
  7. Hi Sagar,

    On restructured loans, most good banks disclose number of accounts and also amount o/s.

    2 important points to be analysed are : (a) trend/growth in restructured loans compared to previous years and (b) NPLs + Restructured as % of gross loan book.

    I believe Corp bank is doing ok so far, despite jump in net NPLs to 0.91% as at 30-09-2011 from 0.46% as at 31-03-2011, mainly due to switch to system based recognition. What needs to be watched is whether they can bring it back to around 0.5-0.6% mark by end of this fiscal.

    ReplyDelete
  8. Thanks Shikar for responding to my queries patiently and generously..you straightened the restructuring thing in my head..all your stock ideas are well researched and have value ..keep the good work :)

    ReplyDelete
  9. Hi Shikhar

    Financial summary of corporation bank --- Debt/Equity ratio is not included on this blog. isn't it a important parameter to measure the leverage of bank and its solvency ?

    Corporation bank has increased the ratio from 11 % to 16 % in last 5 years. does it indicate bank has leveraged more on equity to grow the balance sheet ? what is the safe ratio ?

    should we prefer banks who can keep debt/equity ratio stable and grow their balance sheet ?

    ReplyDelete
  10. Hi Sagar,

    Debt equity ratio is a crude indicator for assessing banks.

    There are far more sophisticated analysis in CAR analysis under Basel 2 approaches which include RWA based on NFB exposures as well (just "Loans & Advances" do not give you correct picture of risk assumed by a bank).

    Corporation Bank is well placed in terms of average risk weights. May be, I'll touch upon that in an update post.

    They will need to augment Tier-1 sometime in FY13.

    Shikhar

    ReplyDelete