Central Bank Of India – Reiterate Avoid

In the current economic scenario, one of the weakest banks in this space is probably the Central Bank of India (CBI). Investors will recollect that while updating the March quarter results of the bank, we had given this scrip the ‘avoid’ tag. On an YTD basis, the stock has moved nowhere even though the broader indices have appreciated by around 10 per cent. In fact, the June quarter numbers show a further deterioration in its performance. The bank has the weakest asset quality among its peers, unstable margins and muted business growth.   

Asset quality, in fact, has become a serious issue for the bank. Its net NPAs increased from a meagre 0.87 per cent in June 2011 to 3.22 per cent in the June 2012 quarter. On a sequential basis it climbed by 13 basis points, which is definitely not a good sign. Meanwhile, the net interest margin (NIM) also contracted by 35 basis points to 2.64 per cent. However, on a sequential basis it increased marginally by 5 basis points. As on June 31, 2012, its capital adequacy ratio (CAR) stood at 11.58 per cent with Tier 1 CAR below 7.5 per cent – definitely at a low level. We believe that even though Basel III still has a lot of time to come into effect, the CBI may face pressure in maintaining its CAR.

On the business front, its growth was unimpressive as it posted only 12.6 per cent on a YoY basis. Its deposits grew by just 6 per cent to Rs 1,96,977 crore while the advances showed a decent growth of around 22 per cent to Rs 1,54,244 crore. The wholesale and retail segments performed well during the quarter, helping the bank to post decent bottomline growth. On a YoY basis its profit increased by 30 and 26 per cent respectively. The treasury segment did not perform up to expectations during the quarter as the revenue increased marginally by 7 per cent and profit from the same nosedived to 44 per cent.

On the positive side, while the bank had posted loss during the last quarter, it has at least come into the green zone by posting net profit growth of 20 per cent to Rs 336 crore. Further, the CASA ratio of the bank almost remained stable at 33 per cent. In our view, with the dismal June numbers the bank would continue facing headwinds in the next couple of quarters. We advise our readers to ignore the counter until the bank shows clear signs of recovery on the asset quality front and also tries to stabilise its NIM.