Corporation Bank - 'Gaining Ground' - BUY (Target Rs648, Upside 16.7%)

CMP Rs555, Target Rs648, Upside 16.7%

Corporation Bank is all set to establish a pan-India presence. Excess reliance on term deposits and tepid LDR had dragged margin performance for the last several quarters. Further, while asset quality remained at comfortable levels, CASA ratio was in the low 28-29% range. With above system loan growth, enhanced focus on garnering CASA deposits thereby leading to improvement in margins, planned branch addition especially in North India, and limited accretion in NPLs, we expect Corporation Bank to witness healthy 21% CAGR in its balance sheet and 22% CAGR in net profit over FY10-12E. Recommend BUY with a six-month time frame.

Above system loan growth; focus across all segments of credit

Traditionally, Corporation Bank has outpaced the system loan growth. During FY10, the bank reported a healthy 30% yoy growth in loans (highest amongst its peers). Growth was witnessed across all segments - Large corporate (up 53% yoy), SME (up 24% yoy) and Retail (up 25% yoy). With a view to ensure hassle-free flow of credit, the bank has set up care centres at all zonal offices. The expansion plans, in addition to strong brand identity and increasing credit demand, will enable the bank to witness sturdy 25% CAGR in loan book over FY10-12E.

Branch addition targeted at enhancing CASA franchise

As against 100+ branches added during FY10, the bank management has guided for 200+ branch addition during FY11. With rich presence in South and West India, a large number of new branches are now targeted to be set up in North India and semi-urban and Tier III cities. During the year, some of the existing and new branches were targeted at mobilising retail and CASA deposits. Net interest margins for the bank have remained in a low range of 2.25-2.5% of past several quarters. This was on account of the bank’s heavy reliance on term deposits and tepid LDR.

Valuation gap with peers point towards re-rating - BUY

Traditionally, Corporation Bank has traded at par with its larger peer Bank of Baroda. However, in recent past, this valuation gap has widened significantly. We assign 1.15x multiple to FY12PB to arrive at  price target of Rs648. Improvement in margins on the back of enhanced CASA ratio and better asset quality management is likely to enable the bank command premium valuation.  BUY.