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.
