Making The Most Of Money

It has often been stated by us that at times when the stock market does not provide a clear signal in terms of movement the best option is to move into a counter that offers a good dividend yield as also reasonable scope for capital appreciation. Corporation Bank is one such company which has been paying dividend on a consistent basis. In FY09, CBL announced a dividend of Rs 12.50 per share resulting in a dividend yield of 3.60 per cent based on its current market price of Rs 350. On the capital appreciation front, with its strong financial performance, expected business growth in FY10, the possibility of an improvement in net interest margins (NIM) and contained delinquencies we expect the scrip to provide an appreciation of 20-25 per cent in the next 12 months.  On the valuation front the scrip is trading at 1x of its book value which is less than 1.30x of other PSU banks. This provides scope for upward movement and hence we advise our readers to buy the scrip at current levels with a target price of Rs 425.

CBL has 1,079 branches and as of June 2009, with deposits of Rs 72,127 crore and advances of Rs 47,378 crore, its total business stands Rs 1,19,505 crore. An important factor is that while the other PSU banks have failed to show growth on the credit front, CBL has managed to post a credit growth of 21.63 per cent which is way ahead of the average industry credit growth of 16 per cent.  Further, even though the credit growth has been good the bank has maintained its asset quality. While the bank’s gross NPAs for the June 2009 quarter stood at 1.29 per cent as compared to 1.32 per cent of the June 2008 quarter, its net NPAs stood at 0.32 per cent as compared to 0.36 per cent respectively. Further, its loan portfolio is also strong with a major portion being deployed in high yielding infrastructure projects. Moreover, CBL’s exposure to the risky commercial real estate is only 6.7 per cent and in capital markets it is only 1.40 per cent, clearly indicating better asset quality.

In the June 2009 quarter its NIM stood at 2.26 per cent as compared to 2.43 per cent in June 2008 as well as the March 2009 quarter. However, this has been the case in the industry as a whole on account of the simple reason that since September 2008 the more profitable loan disbursals have slowed down but the high-cost deposits have continued to impact the margins. But the NIM is expected to improve on account of two factors, the first of which is that the management has stated that with its increasing branch network its CASA deposits are also expected to improve. Secondly, a major chunk of its high-cost borrowings are expected to get re-priced in the next three quarters resulting in better NIM. Further, the bank’s focus on the ‘other’ income is expected improve its bottomline.
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On the financial front, the basic reason for recommending the stock is its financial performance in Q1FY10 wherein it has posted a good topline as well as bottomline on a YoY as well as QoQ basis. For June 2009 its total income stood at Rs 2,101.53 crore (up 45.31 per cent over June 2008) and its net profit was at Rs 261.25 crore (up 41.75 per cent). On the valuation front the scrip is trading at 5.60x of its FY09 earning and 1x of its book value. With the other PSU banks trading at more than 1.30x of book value there is good scope for the scrip to move up. Our recommendation is that investors should buy the scrip with a target price of Rs 425 in the next one year.