Corporation Bank’s (CorpBank’s) net profit increased 41.8% y-o-y to Rs2.6 billion during the recently concluded quarter. Although impressive, the growth was largely driven by a surge in the profit on the sale of investments.
The Bank’s operational efficiency declined sequentially, despite the improvement in its margin.
We expected the Bank to expand its loan book, which it was unable to do due to the low credit-demand scenario. This reduces our estimates for loan growth in FY10, although we have increased it thereafter. In addition, we have increased the estimates for the core-fee income growth.
We have valued the Bank using Discounted Equity Cash Flow (DECF) model, using a cost of equity of 16.24% and an estimated terminal growth rate of 9.56%. These changes bolster our fair-value estimate to Rs404, which implies limited upside from the present level.
Currently, the stock trades at a P/B of ~1.1x, which is high, considering the level of its NPAs and restructured asset portfolio. We downgrade our rating to HOLD.
The key drivers of change that increased our fair value estimate are our improved outlook on business-growth after incorporating Tier I and Tier II bonds, and a stable source of funding.
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