Company Review: Corporation Bank

Company Review: Corporation Bank

We attended the analyst meet of Corporation Bank to discuss the Q2FY09 performance of the bank and its strategy going forward.

The bank has taken several initiatives to increase its demand deposits and targets 30% CASA ratio by the end of FY2009 and 35% by FY2010. It also aims to increase the share of its non-interest income in the total income and bring it back to 15% in the coming quarters.

Our calculations indicate that during Q3FY09, Corporation Bank should be able to write back a major part of the investment depreciation provisions made during Q1FY09, positively impacting the bank’s bottom line.

It has raised Rs200 crore through lower tier-II bonds and is in the process of raising another Rs300 crore of tier-II capital in the current quarter. With these capital issuances the capital adequacy of the bank is likely to cross 12% by the end of Q3FY09.

Outlook and valuation

The business growth for Corporation Bank has been above the industry average in the first half of FY2009.

However, the growth is likely to moderate going forward due to slowdown in credit demand from corporate segment.

Besides, the bank’s cautious stance towards lending to retail segment with a view to maintain its asset quality may also lead to moderation in asset growth going forward.

The management has guided for a 20-25% advances growth during FY2009. Importantly, the management’s ability to balance growth and profitability along with qualitative asset growth will be watched for in the coming quarters.

At the current market price of Rs179, the stock trades at 2.9x 2009E earnings per share, 1.7x 2009E pre-provisioning profit and 0.5x 2009E book value. We maintain our BUY recommendation on the stock with a price target of Rs321.