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Centurion BOP: Inorganic merits

Feb 5, 2008

Performance summary
  • Interest income grows 76% YoY on the back of 60% YoY growth in advances and the merger with Lord Krishna Bank (LKB).
  • Net interest margin sustained at 4.0% in 9mFY08.

  • Cost to income ratio declines from 75% in 3QFY07 to 68% in 3QFY08.

  • Bottomline grows by 44% YoY and 27% during the three-month and nine-moth (including LKB profits) respectively.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 3,235 5,706 76.4% 8,464 15,860 87.4%
Interest Expense 1,860 3,807 104.7% 4,681 10,863 132.1%
Net Interest Income 1,375 1,899 38.1% 3,783 4,997 32.1%
Net interest margin (%)       4.1% 4.0%  
Other Income 1,018 1,600 57.2% 2,849 4,718 65.6%
Other Expense 1,778 2,219 24.8% 4,973 6,641 33.5%
Provisions and contingencies 73 543 643.8% 294 1,249 324.8%
Profit before tax 542 737 36.0% 1,365 1,825 33.7%
Tax 208 255 22.6% 432 657 52.1%
Profit after tax/ (loss) 334 482 44.3% 933 1,168 25.2%
Profit of erstwhile LKB - -   - 18  
Total profit after tax 334 482 44.3% 933 1,186 27.1%
Net profit margin (%) 10.3% 8.4%   11.0% 7.5%  
No. of shares (m)       1,478.1 1,873.5  
Book value per share (Rs)*         12.5  
P/BV (x)         4.5  
*Book value as on 30th September 2007

What has driven performance in 3QFY08?
  • Diversified portfolio: Centurion Bank of Punjab (CBoP) has the right size and management bandwidth to consummate acquisitions of both small and mid sized banks (as seen in Bank of Punjab merger). The bank was able to prove this with the LKB merger as well. The bank continued in its attempt to catch up with its peers in the private sector and clocked advance growth of 60% YoY largely led by the retail and SME segments. Also the bank is attempting to move away from its concentration in auto and two wheeler loans to home loans and other asset classes (helped by the portfolio of LKB).

    Balanced growth…

    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Advances 94,276   150,835   60.0%
    Retail 64,997 68.9% 90,228 59.8% 38.8%
    Housing loan 15,704 24.2% 28,739 31.9% 83.0%
    Personal finance 16,249 25.0% 18,046 20.0% 11.1%
    SME 11,690 12.4% 28,117 18.6% 140.5%
    Deposits 125,307   207,100   65.3%
    CASA 31,327 25.0% 50,740 24.5% 62.0%
    Term deposits 93,980 75.0% 156,361 75.5% 66.4%
    C/D ratio 75.2%   72.8%    

    Also, unlike most of its peers, the bank has not been very aggressive in terms of garnering high cost term deposits and has instead concentrated on its CASA base (current and savings account) that has grown by an appreciable 62% YoY (albeit on a low base).

  • Other income boost: The other income grew by 57% YoY in 3QFY08. CBoP’s presence in the southern state of Kerela (through LKB branches) will offer the bank an access to the NRI population in Gulf countries hailing from the state and provide impetus to its business arrangement with Bank Muscat, which is its largest investor. This is expected to help the bank widen its fee revenue base.

  • Controlling costs: With CBoP having completed its investments on the technology platform (LKB's Tier I branches are already on core banking) and due to the relatively lower average employee cost of LKB, we see CBoP being able to improve its cost efficiency over the next fiscals. The cost to income ratio of the bank from being one of the highest in the sector in FY07 (72%) is expected to pare to 55% by FY10, thus offering the bank considerable operating leverage.

What to expect?
At the current price of Rs 56, the stock is fairly priced at 3.0 times our estimated FY10 adjusted book value. CBoP's competence in terms of high technological expertise, quality of management and inorganic growth approach has enabled it to acquire size and scale at a faster clip as compared to its peers. Also, the bank's business model tracks that of multinationals like Citibank and HSBC, which rely largely on steady fee income. It therefore, despite being a newcomer with limited capital and reach, has overcome the barriers of entry in the sector.

Taking into account the long-term synergies due to the merger with LKB, the capital accretion and new business plans of the bank it is definitely a good long term play. Having said that, the current valuations of the bank warrant caution. Since the company has now been merged with HDFC we effectively discontinue our coverage on the stock.

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