Central Bank of India-Sell Central Bank of India; target of Rs 94: IIFL

IIFL is bearish on Central Bank of India and has recommended sell rating on the stock with a target of Rs 94 in its September 22, 2011 research report.

“Central Bank of India, having grown advances ahead of the system in the past two years (23% CAGR), we believe that Central Bank’s loan growth could be lower in the current fiscal. In Q1 FY12, loan book contracted by 4% qoq making it difficult for the bank to catch-up with the system in weakening credit demand scenario. Further, Central Bank is in the process of shifting its credit profile from the large and mid corporate segment (64% of advances) to retail and SME segments. Objectives behind this strategy being diversification of portfolio and structurally improving the loan yield. A significant improvement in deposit profile (decline in share of bulk deposits) drove substantial margin improvement (140bps) in FY11. In Q1 FY12, NIM corrected by 50bps qoq to 3% due to increase in CoD, decline in investment yield and material correction in the C/D ratio. Central Bank raised its Base Rate by 75bps on August 1st which should support improvement in loan yield. CASA recovery and shedding of high-cost bulk deposits should largely offset the impact of higher retail term deposits cost. Hence, NIM is likely to stabilize near 3% in near-to-medium term. NII would grow behind loan growth in FY12 due to margin decline.”

“Central Bank has seen high slippages in recent quarters with the annualized delinquency ratio near 2%. Unlike other PSU banks, these slippages were not driven by transition to system recognition of NPLs. The bank started this exercise meaningfully from Q2 FY11. This implies that elevated delinquencies would continue in ensuing quarters. The challenging macro environment would only exacerbate asset quality deterioration. We estimate FY12 delinquency ratio at 1.6% against bank’s aggressive expectation of 1.3-1.5%. Credit cost is estimated to increase to 0.9-1% in FY12 and FY13. We expect 39% CAGR in LLP over FY11-13. We expect Central Bank to underperform Bankex over the next six months. On the grid of the two key concerns haunting the sector viz slowing credit growth and asset quality deterioration, Central Bank ranks much higher than peers. Further, bank’s RoA would remain comparatively lower (0.7-0.8%) even after the anticipated improvement. Though valuation appears cheap both in absolute terms (0.8x FY13 P/adj.BV) and relative terms (15-20% discount to peers), it could de-rate further as macro challenges intensify. Expected poor performance in the next two quarters would also be an overhang. We initiate coverage on Central Bank with a SELL rating and 9-month price target of Rs 94,” says IIFL research report.