Buy Corporation bank Target:450

• We maintain our Buy recommendation on the stock with revised price Target of Rs450.see the highlights of the quarter results of corporation bank
  
• Corporation Bank has reported a healthy set of numbers for Q1FY2010, well ahead of our estimates (both at top line and bottom line fronts), led by robust treasury gains, stable margins and healthy business growth during the quarter. The bank reported a net profit Rs261.3 cr, up by 41.8% year on year (yoy), which is well ahead of our expectations.

• The net interest income came in at Rs467.5 cr, up by 23.7% yoy and 9.2% quarter on quarter (qoq) on account of healthy 21.6% year-on-year (y-o-y) advances growth coupled with stable net interest margin at 2.26% (reported), up marginally by 7 basis points qoq.
• The non-interest income increased by staggering 128% yoy to Rs359.3 cr mainly driven by strong treasury gains during the quarter. The bank recorded treasury gains of Rs185.4 cr in the quarter, a stupendous 46 times higher than that of Rs4.5 cr in Q1FY2009. Furthermore, leveraging of strong technology platform and better pricing of banking services resulted in a robust 38.3% y-o-y growth in core fee income.
• The operating expenses grew by 19.1% yoy and 3.6% qoq to Rs255.6 cr led by 23.4% yoy and 11.6% sequential increase in staff expenses. Meanwhile the other operating expenses grew by 15.8% yoy.
• The provision expenses grew sharply by 53.7% yoy to Rs155 cr as the bank utilized high treasury gains to shore up its loan loss coverage. The non-performing asset (NPA) provisions increased sharply by 71.4% yoy to Rs60 cr during the quarter. Meanwhile the other provisions spiked up to Rs66 cr from Rs5 cr in Q1FY2009, as the bank made provisions worth Rs53 cr towards wage revision and Rs13.5 cr towards sacrifice in restructured accounts.
• The asset quality deteriorated during the quarter, as the gross non-performing assets (GNPA) increased by 6.3% yoy and 9.4% qoq to Rs611.6 cr. In tandem the GNPA in percentage terms (% GNPA) inched up to 1.29% in the quarter versus 1.14% in Q4FY2009, while the percentage of net non-performing assets (% NNPA) stood at 0.32% in the quarter under review vis-à-vis 0.29% in the previous quarter. Driven by higher loan loss provisions made during the quarter, the provision coverage ratio improved to 78.6% from 75.8% in the previous quarter.
• During the quarter, the bank restructured loans worth Rs1,362.6 cr, slightly higher compared with Rs1,280.3 cr worth pending applications for restructuring as on March 31, 2009. The total restructured assets now stand at 5.1% of the total outstanding loans, which is largely in line with the quantum of restructuring done by its peers.
• The business growth during the quarter was healthy and well ahead of the industry growth. The advances grew by 21.6% yoy to Rs47,378 cr, while the deposits grew much faster at 31.8% yoy to Rs72,127 cr. However, the current account and saving account (CASA) deposits fell sharply by 27.6% sequentially, thereby leading to an over 800 basis point sequential and 400-basis-point y-o-y contraction in the CASA ratio to 23.3%.
• As on June 30, 2009, the bank remains well capitalized as its capital adequacy ratio (CAR) improved to 16.29% (as per Basel II), with a tier-I ratio of 9.63%. Corporation Bank by far has the best capital adequacy among its peers and a strong tier-I ratio leaves the bank with ample headroom to raise tier-II capital.

We have revised our earnings estimates upwards for FY2010 and FY2011 by 8.4% and 4.9% respectively to factor in robust treasury gains, strong core fee income growth and higher-than-expected business growth. At the current market price of Rs368, the stock trades at 5.2x FY2011E earnings per share (EPS), 2.5x FY2011E pre-provisioning profit (PPP) per share and 0.9x FY2011E adjusted book value (ABV) per share.