Stock Pick From The Finance Sector

HERE IS WHY:

• A healthy set of numbers for FY13 re-rating the bank’s valuation
• Improved asset quality and recovery
• Decrease in high cost deposits likely to benefit the bank’s NIM in the near future

Most PSU banks in the Indian banking sector have posted satisfactory results for the latest financial year 2013. However, the Central Bank of India (CBI) posted decent results for the quarter with improving asset quality as compared to the same period last year. In addition to better business growth, the bank is available at an attractive price to book value of 0.74x, which makes it a good grab for investors. We believe the bank is a good long-term bet with an improving asset quality along with decent business growth and a dividend yield of 3.5 per cent. Investors can take exposure in this counter for the medium to long-term to benefit from capital appreciation in the Indian banking business. 

For FY13, the CBI posted a net profit of Rs 1015 crore against a net profit of Rs 533 crore in FY12 registering a handsome growth of 90.43 per cent. The net profit growth was majorly due to a sharp rise in recovery in written-off accounts and lower provisioning for non-performing assets. The bank’s total business income increased to Rs 23528 crore during FY13 from Rs 20545 crore in FY12, recording a YoY growth of 14.52 per cent. The higher business income was aided by better growth in the Net Interest Income (NII) and higher other income. The NII for the fiscal increased by 11 per cent to Rs 5738 crore. The signs of recovery can be clearly seen from the 24.43 per cent growth in its NII during Q4FY13 on a yearly basis. 

Shareholding Pattern ( 31/12/2012)
Indian Promoters	85.31
Banks Fin. Inst. and	7.65
FII’s	1.73
Private Corporate Bodies	0.74
Others	0.08
General Public	4.49

Further, the bank saw its other income grow by 47.36 per cent during last quarter and 19.50 per cent during the financial year, which is on account of better recoveries in written-off accounts and higher commission/exchange income. Apart from a decent business growth, the bank witnessed improvement in its asset quality. This will be a major trigger for its share price to go up in the future. 

During the latest quarter, the bank’s gross NPAs decreased considerably to 4.80 per cent from 5.64 per cent in Q3FY13. Further, its net NPAs also decreased dramatically to 2.90 per cent from 3.79 per cent in Q3FY13. Positively, the recoveries from its written-off accounts have increased by 110 per cent during the fiscal which clearly exhibits its improving asset in times when other PSU banks are struggling to recover their NPAs. Higher recoveries led to lower provisioning for its NPAs. During the quarter in question, provisioning by the bank was down by 48 per cent on a yearly basis and 29 per cent on a sequential basis. This will definitely result in higher profitability for the bank in the near term. Further, the bank’s management is desperately trying to bring down its gross NPAs percentage below four. 

In latest quarter, the bank’s Net Interest Margin (NIM) improved marginally to 2.68 per cent against 2.60 per cent in Q3FY13. Contrary to this, its yearly NIM decreased marginally to 2.65 per cent from 2.78 per cent in FY12. However, all Indian banks were struggling to improve their NIMs during the last year. Interestingly, the bank has managed to reduce its high cost deposits by almost 12 per cent during the fiscal. This reduction in high cost deposits will definitely lead to improvement in its NIMs over the next year. 

Though the bank, like other banks, is facing some issues in improving its NIM, the improved asset quality is a bigger positive for its stock. Further, the bank’s Return on Average assets has drastically improved to 0.44 per cent in FY13 against 0.26 per cent in FY12, clearly exhibiting an improvement in its profitability. We believe that going ahead the stock would give better appreciation.

LAST FIVE QUARTERS (Rs/Cr)
	Mar-13	Dec-12	Sep-12	Jun-12	Mar-12
Sales	5767.5	5461.96	5328.57	5302.62	4940.12
Other Income	636.07	356.85	352.06	322.35	431.64
Interest Expended	4233.11	4052.29	3912.71	3924.97	3676.52
Employee Cost	965.09	665.38	620.18	640.9	631.19
Provisions Made	445.08	627.67	427.12	352.94	858.69
Net Profit/(Loss)	169.15	179.94	329.92	335.95	-105.23
Equity Capital	1044.58	736.11	736.11	736.11	736.11