Recommendation: Buy
CMP = Rs 471 (as of Monday)
Price target: Rs 542
Result highlights:
- Corporation Bank's (CORP) Q2FY2008 profit after tax (PAT) grew by 27% year on year (yoy) to Rs 161.3 crore. The growth was primarily driven by a higher non-interest income component. However, the net interest income (NII) growth was better than that of most peers. A surge in the operating expenses due to higher provisioning on account of AS-15 related staff expenses restricted the overall profit growth.
- CORP's total assets grew by 18% yoy and 5% quarter on quarter (qoq) while the reported NII grew by 17.5% yoy and 7.3% qoq. The NII (adjusted for amortisation) grew by 15.3% yoy and 7% qoq. Its adjusted net interest margin (NIM) showed a sequential improvement unlike many of its peers as it was the only bank that aggressively reduced deposit rates after its dismal NII performance in Q1FY2008 (when NII had seen a growth of 7.8% yoy).
- The non-interest income grew by 62% yoy and by 32.3% qoq to Rs 183.2 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth was the trend for all public sector banks during Q2FY2008.
- CORP's operating expenses jumped up by 25.3% yoy to Rs 243.2 crore mainly due to a 39.2% jump yoy in the staff expenses brought about by a Rs47-crore AS-15 related expense charged during the quarter. Despite such a sharp jump in the operating expenses, the operating profit growth was robust at 33.4% yoy brought about by a higher non-interest income growth. However, the core operating profit growth was moderate at 8.7% yoy.
- The bank's business growth moderated with advances up by 17% yoy from a 25% growth yoy reported during March 2007. The deposit growth also moderated from 28.8% to 20% for the same period. Its total assets grew by 18% yoy compared with a growth of 30% yoy reported in March 2007.
- The bank's asset quality continues to remain one of the best in the industry with the gross non-performing asset (NPA) down by 21 basis points to 1.9% and the net NPA lower by 11 basis points to 0.35% sequentially.
- CORP has been the first bank to cut deposit rates and show some sequential improvement in its NIM in Q2FY2008. The non-interest income growth is expected to be much better in future. It will be driven by higher treasury gains that would help in improving the bank's return on equity (RoE) by 230 basis points to 17.3% in FY2009 from 15% reported in FY2007.
- The bank's earnings are expected to grow at a compounded annual growth rate (CAGR) of 20.1% between FY2007 and FY2009, which is much better than its past performance. At the current market price of Rs471 the stock is quoting at 8.7x its FY2009E earnings per share (EPS), 4.5x pre-provisioning profit (PPP) and 1.4x FY2009E book value (BV).
- I maintain Buy recommendation on the stock with a 12-month price target of Rs 542.
