Your success is our success

Asset quality surprise negatively

n

February 04, 2013

Rating Hold CMP Rs429

Previous Reco Hold Target Price Rs440

NA NA 5,999 19,781 n n n

Corporation Bank (CRPBK IN) Q3FY13 NII at Rs8.8bn (+2.5% yoy) better than expected, however with significantly higher provisions, PAT was lower than exp at Rs3.0bn NIMs expanded 12bps qoq helped by 1) improvement of 611bps in LDR to 74.4% 2) 24bps qoq decline in cost of deposits, as the bank shed portion of high cost bulk deposit Asset quality worsens with net slippages highest in many years at Rs6.7bn. With 48% provision on incremental slippages, PCR decline to 58% from 60.4% in Q2 Capital infusion of Rs2bn to provide temporary relief. High credit cost to keep RoA under pressure at 0.8%. Val at 0.9x / 0.8x FY13/14E ABV with 5%+ div yield provides some respite

EPS Chg FY13E/FY14E (%) Target Price change (%) Nifty Sensex

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

1M -10 -11

3M 8 1

6M 12M 6 -7 3 -10

Higher provisions drag bottomline; Asset quality worsens

Corporation Bank (CRPBK IN) Q3FY13 NII at Rs8.8bn (+2.5% yoy) was better than expectation aided by 6.4%qoq (13.1%yoy) growth in advances and 12bps qoq expansion in NIMs to 2.35%. Moreover other income was also a tad better than expected at Rs3.9bn helped by higher trading/ Fx gains and recovery. However due to significantly higher provisions at Rs4.1bn, net profit came in below expectation at Rs3.0bn. Fresh slippages came in higher at Rs7.0bn (slippage rate 2.7%, annualised), with recovery/ upgradations remaining at just 6% of opening NPAs. As a result GNPA increased by 17%qoq to Rs22.8bn. However as the bank provided only 48% on the incremental slippages, provision cover (including technical write off) came down by 242bps to 58%. Restructuring for the quarter was moderate at Rs2.6bn (0.24% of advances). Cumulatively restructured portfolio stand at Rs89bn (8.5% of loans). On the balance sheet front: While advances grew by 6.4%qoq, deposit declined by 2.3%qoq, resulting in 611bps increase in LDR to 74.4%. CASA franchise remains fragile with CASA deposits accounting for 20.5% of total deposits. Tier I CAR as at the end of Q3FY13 was just 8.08%, with NPL/ Networth ratio higher at 18%
Exhibit 1: Yield Analysis % Yield on assets* Cost of funds* NIM* Yield on advances # Cost of deposits# NIM #
Source: Company, Emkay Research

Relative price chart

525 Rs % 20 490 12 455 4

420

-4

385

-12

350 Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Nov-12

-20 Jan-13

Corporation Bank (LHS)

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector
Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

Banking & Financial Services CRPBK IB 1,481 10 148 540/ 360 64/ 1,194 109,226 0.9

Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 9.15 6.81 2.34 11.91 7.64 2.66 9.08 6.96 2.11 11.71 8.03 2.41 9.05 7.05 2.00 11.62 8.10 2.29 9.23 7.25 1.98 11.75 8.30 2.23 9.19 7.10 2.10 11.55 8.06 2.35

YoY (bps) 5 29 -25 -36 42 -31

QoQ (bps) -4 -16 12 -20 -24 12

Shareholding Pattern (%)

Dec'12 Sep'12 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg

Jun'12 58.5 3.7 30.4 2.1 5.3

58.5 3.5 30.6 2.0 5.4

58.5 3.5 30.3 2.3 5.4

Pradeep Agrawal pradeep.agrawal@emkayglobal.com +91-22-66121340 Kashyap Jhaveri kashyap.jhaveri@emkayglobal.com +91-22-66121249 Aalok Shah aalok.shah@emkayglobal.com +91-22-66121336

Financial Snapshot (Standalone)

Y/E Mar FY11A FY12A FY13E FY14E Net Income 41,956 46,395 48,725 54,850 Net Profit 14,133 15,060 14,072 15,032 EPS (Rs) 95.4 101.6 92.2 98.5 ABV (Rs) 455.0 500.0 502.2 553.8 RoA (%) 1.1 1.0 0.8 0.8 RoE (%) 21.9 19.5 15.9 15.0 PE (x) 4.5 4.2 4.7 4.4

(Rsmn)
P/ABV (x) 0.9 0.9 0.9 0.8

Emkay Global Financial Services Ltd.

Result Update

Emkay

Corporation Bank

Corporation Bank
Exhibit 2: Quarterly tables Rs mn Net Interest Income Other Income Fee Income Net Income Total Operating Expenses As % Of Net Income Employee Expenses As % Of Net Income Other Expenses As % Of Net Income Operating Profit As % Of Net Income Provisions Prov for NPA PBT Total Tax Adjusted PAT Extra Ordinary Items Reported PAT Reported EPS
Source: Company, Emkay Research

Result Update

Q3FY12 8,616 4,417 2,103 13,032 4,775 36.6 2,473 19.0 2,302 17.7 8,257 63.4 3,015 1,769 5,242 1,222 4,020 0 4,020 27.1

Q4FY12 8,339 4,233 2,362 12,572 4,430 35.2 2,161 17.2 2,269 18.0 8,143 64.8 3,377 1,783 4,766 1,253 3,513 0 3,513 23.7

Q1FY13 8,083 3,276 2,067 11,359 4,662 41.0 2,390 21.0 2,272 20.0 6,698 59.0 2,166 2,390 4,532 830 3,702 0 3,702 25.0

Q2FY13 8,032 3,260 2,395 11,292 4,435 39.3 2,036 18.0 2,399 21.2 6,858 60.7 2,688 2,292 4,169 112 4,057 0 4,057 27.4

Q3FY13 8,834 3,870 2,387 12,704 5,114 40.3 2,634 20.7 2,481 19.5 7,589 59.7 4,061 3,239 3,529 497 3,032 0 3,032 20.5

YoY (%) 2.5 -12.4 13.5 -2.5 7.1 6.5 7.8 -8.1 34.7 83.2 -32.7 -59.3 -24.6 -24.6 -24.6

QoQ (%) 10.0 18.7 -0.3 12.5 15.3 29.3 3.4 10.7 51.1 41.3 -15.4 342.9 -25.3 -25.3 -25.3

YTD' 13 24,950 10,405 6,848 35,355 14,211 40.2 7,060 20.0 7,151 20.2 21,144 59.8 8,915 7,922 12,230 1,439 10,790 0 10,790 72.8

YTD' 12 23,128 11,206 5,955 34,334 13,406 39.0 6,972 20.3 6,434 18.7 20,929 61.0 6,642 4,397 14,287 2,742 11,545 0 11,545 77.9

YoY (%) 7.9 -7.1 15.0 3.0 6.0 1.3 11.1 1.0 34.2 80.2 -14.4 -47.5 -6.5 -6.5 -6.5

Key Highlights

Loan growth driven by SME/ Retail and Agri : Advance grew by a healthy 6.4%qoq to Rs1.04tn aided by 11.7%qoq growth in SME, followed by 8-9%qoq growth each in Retail and Agri segments. However corporate & others grew by a moderate 3.7%qoq (-4.3%yoy) as the bank continue to shed short term bulk corporate advances in conjunction with its strategy to downsize bulk deposits book. Over the last nine months the short term bulk corporate advance book has come down from Rs180bn in March 2013 to Rs80bn now. Lower cost and improvement in LDR benefited margins: NIMs expanded by 12bps qoq to 2.35% helped by 1) 611bps increase in LDR to 74.4% 2) 24bps qoq decline in cost of deposits to 8.06% and 3) 5 bps increase in yield on investments. Cost of deposits came down during the quarter as the bank shed a portion of high cost bulk deposit during the quarter, as was also reflected in 1.8%qoq decline in term deposits. Bulk deposit was at about 25%(including CD at 9%) of total deposit at the end of Q2FY13. Higher recovery and trading gains offset flattish fee income growth: Non interest income grew by 18.7%qoq to Rs3.9bn helped by higher trading gains at Rs671mn and recovery of Rs440mn. However fee income remain flat qoq at Rs2.4bn. Asset quality worsens: Asset quality witnesses sharp deterioration with slippages coming substantially higher at Rs7.0bn with recovery/ upgradation also at just Rs288mn ( 6% of opening GNPAs). As a result net slippages at Rs6.7bn was the highest in last many years. Slippages largely accrued in the corporate segment with three accounts from Aviation, Coke and Iron & steel sector, contributing about Rs3.4bn. Moreover with just 48% provisioning on incremental slippages, provision cover slipped to 58% in Q3FY13 from 60.4% in previous quarter. Restructuring portfolio stable at 8.5%: Q3FY13 saw restructuring to the tune of Rs2.5bn (0.24% of loans) inline with last quarter. Cumulatively restructuring at Rs89bn now accounts for 8.5% of loans. However ex-Air India and SEB, the restructured portfolio stands at Rs55.7bn or 5.3% of loans. The bank does not have any major restructuring in the pipeline. 2

Emkay Research

February 04, 2013

Corporation Bank

Result Update

Tier I at just 8.08%; Govt infusion of Rs2bn to provide only temporary relief: As the advances grew by a healthy 6%qoq, banks tier I ratio has fallen further to 8.08% from 8.4% in previous quarter. Though the government proposed to infuse Rs2bn by March 2013, it will only provide temporary relief as the bank require more than Rs10-15bn to pent up its tier I ratio to more comfortable level of say 9%.

Valuations and view

While the bank put up satisfactory performance on the operating side with 6%qoq growth in advances and 12bps margin expansion, higher slippages and poor recoveries (6% of opening GNPAs) for the second consecutive quarter was disappointing. Resultantly the credit cost likely to move up to 1% in FY13/14 from 0.6% in FY12, which will keep pressure on the RoAs. Moreover lower core-tier I ratio at 8.08% will warrant more capital infusion in future over and above Rs2bn proposed by the government in March 2013. However, any capital infusion by the government at current suboptimal valuations will be a risk to our ABV estimates. Valuations at 0.9x / 0.8x FY13/FY14 ABV remains reasonable given risk in-terms of possible dilution. Dividend yield at ~5% provides some respite. Maintain HOLD with price target of Rs440.

Exhibit 3: Loan Mix Rs bn Retail Agriculture SME Corp & Others Total
Source: Company, Emkay Research

Q3FY12 149.4 64.9 132.8 576.7 923.8

Q4FY12 202.9 71.4 143.4 587.0 1,004.7

Q1FY13 198.4 72.1 146.6 568.3 985.5

Q2FY13 211.7 80.0 157.8 532.1 981.6

Q3FY13 228.8 87.3 176.4 552.0 1,044.4

YoY (%) 53.1 34.5 32.8 -4.3 13.1

QoQ (%) 8.1 9.0 11.7 3.7 6.4

% of total 21.9 8.4 16.9 52.9 100.0

Exhibit 4: Deposit Profile Rs bn Current Deposits Saving Deposits CASA Term deposits Total Deposits CASA (%)
Source: Company, Emkay Research

Q3FY12 96 171 268 999 1,266 21.1

Q4FY12 123 178 301 1,060 1,361 22.1

Q1FY13 94 184 278 1,063 1,341 20.7

Q2FY13 108 193 301 1,137 1,437 20.9

Q3FY13 98 189 287 1,117 1,404 20.5

YoY (%) 1.8 10.5 7.3 11.8 10.9 -67

QoQ (%) -9.0 -1.9 -4.5 -1.8 -2.3 -45

Exhibit 5: Asset Quality Rs mn Gross NPA (Rs bn) Net NPA (Rs bn) Gross NPA (%) Net NPA (%) Net NPLs/Net worth (%) Provision cover (%) Provision cover incl tech w/off (%)
Source: Company, Emkay Research

Q3FY12 12,492 8,852 1.4 1.0 10.7 29.1 62.9

Q4FY12 12,740 8,694 1.3 0.9 10.5 31.8 65.3

Q1FY13 16,894 11,855 1.7 1.2 13.7 29.8 61.0

Q2FY13 19,493 13,510 2.0 1.4 14.9 30.7 60.4

Q3FY13 22,841 16,976 2.2 1.6 18.1 25.7 58.0

YoY (%) 82.9 91.8

QoQ (%) 17.2 25.6

Emkay Research

February 04, 2013

Corporation Bank

Result Update

Key Financials Income Statement

Y/E Mar (Rsmn) Net interest income Other income Net income Operating expenses Pre provision profit PPP excl treasury Provisions Profit before tax Tax Tax rate Profit after tax FY11A 29,397 12,559 41,956 16,417 25,539 27,634 6,206 19,333 5,200 26.9 14,133 FY12A 31,469 14,926 46,395 17,835 28,560 32,209 9,512 19,048 3,987 20.9 15,060 FY13E 34,845 13,879 48,725 19,085 29,640 30,990 13,085 16,555 2,483 15.0 14,072 FY14E 39,132 15,718 54,850 21,454 33,396 35,246 13,354 20,042 5,011 25.0 15,032

Balance Sheet
Y/E Mar (Rsmn) Liabilities Equity Reserves Net worth Deposits Borrowing & Others Total liabilities Assets Cash and bank Investments Customer assets Others Total assets 103,924 434,527 868,504 28,466 1,435,422 116,980 474,746 1,004,690 40,025 1,636,441 93,544 507,252 1,107,078 37,542 1,745,416 125,456 563,761 1,258,680 39,962 1,987,860 1,481 69,897 71,378 1,167,475 196,570 1,435,423 1,481 81,278 82,759 1,361,422 192,260 1,636,441 1,527 93,147 94,673 1,443,107 207,635 1,745,416 1,527 103,981 105,508 1,656,352 226,000 1,987,860 FY11A FY12A FY13E FY14E

Key Ratio (%)

Y/E Mar (Rsmn) NIM Non-II/avg assets Fee income/avg assets Opex/avg assets Provisions/avg assets PBT/avg assets Tax/avg assets RoA RoAE GNPA (%) NNPA (%) FY11A 2.5 1.0 0.3 1.3 0.4 1.5 0.4 1.1 21.9 1.1 0.5 FY12A 2.2 1.0 0.3 1.2 0.4 1.2 0.3 1.0 19.5 1.4 0.9 FY13E 2.2 0.8 0.3 1.1 0.7 1.0 0.1 0.8 15.9 2.5 1.6 FY14E 2.2 0.8 0.3 1.1 0.6 1.1 0.3 0.8 15.0 2.5 1.7

Valuation Table
Y/E Mar Net profit (Rs mn) Shares in issue (mn) EPS (Rs) PER (x) FDEPS(Rs) FDPER (x) Book value (Rs) P/BV (x) Adj book value (Rs) P/ABV (x) P/PPP (x) Dividend yield (%) FY11A 14,130 148 95.4 4.5 95.4 4.8 481.9 0.9 455.0 0.9 2.6 4.4 FY12A 15,049 148 101.6 4.2 101.7 4.5 558.7 0.8 500.0 0.9 2.4 4.5 FY13E 14,072 153 92.2 4.7 95.0 4.8 620.1 0.7 502.2 0.9 2.3 5.2 FY14E 15,032 153 98.5 4.4 101.5 4.5 691.1 0.6 553.8 0.8 2.1 5.2

Emkay Research

February 04, 2013

Corporation Bank

Result Update

Emkay Global Financial Services Ltd. 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com
DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates are participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may assume that Emkay Global Financial Services Limited and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Emkay Global Financial Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom. All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Emkay. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of Emkay or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Emkay Research

February 04, 2013

www.emkayglobal.com 5