Stock Market Result Update on Central Bank of India for 2QFY2012

Stock Market Result Update on Central Bank of India for 2QFY2012 with an Neutral recommendation.

For 2QFY2012, Central Bank of India reported a 35.6% yoy drop in its net profit to `244cr, above our estimates due to higher fee income and recoveries and lower provisioning expenses than estimated by us. The bank has switched over all accounts worth `10lakhs and above, while the rest (`26,000cr comprising 20% of loan book) will be switched over in 2HFY2012. At the CMP, the stock is trading at 0.7x FY2013 ABV. We remain Neutral on the stock.

Asset quality under stress; NIM remains flat: The bank’s business growth was moderate during 2QFY2012, with advances growing by 1.7% qoq (up 12.7% yoy) and deposits increasing by 1.3% qoq (up 12.2% yoy). CASA ratio managed to improve by 24bp qoq to 32.8% on the back of 2.5% qoq growth in saving account deposits during 2QFY2012. Cost of deposits for 1HFY2012 stood at 7.0% (6.8% in 1QFY2012), leading to reported NIM remaining flat at 3.0%. Recoveries for the quarter stood strong at `50cr, registering growth of 194.1% qoq. Forex gains were also strong for 2QFY2012 at `74cr (`14cr in 1QFY2012), leading to sequential 15.1% growth in other income to `324cr. The bank’s asset quality deteriorated during 2QFY2012, with gross NPA ratio at 2.9% (2.3% in 1QFY2012) and net NPA ratio at 1.4% (0.9% in 1QFY2012). Slippages for 2QFY2012 stood at `1,244cr (annualized slippage ratio of 3.8%) compared to `598cr in 1QFY2012. A late starter in CBS implementation, the bank commenced the switchover to NPA-based recognition system only post 1QFY2012. The bank has switched over all accounts worth `10lakhs and above, while the rest (`26,000cr comprising 20% of loan book) will be switched over in 2HFY2012.

Outlook and valuation: At the CMP, the stock is trading at cheap valuations of 0.7x FY2013E ABV compared to its trading range of 0.5–1.5x with a median of 1.15x since its listing in 2007. However, due to near-term concerns on asset quality because of the pending switchover of accounts worth `10lakhs and below to system-based NPA recognition, we maintain our Neutral view on the stock.