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Centurion Bank: In the reckoning - Views on News from Equitymaster
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Centurion Bank: In the reckoning
Jun 1, 2005

Putting to rest all apprehensions of being able to sustain competition, Centurion Bank, one of the smallest entities (in terms of asset size) in Indian retail banking space posted enthusing results for 4QFY05. Coupled with an impressive 10% growth in topline, the bank clocked a 32% growth in net interest income (NII). Asset quality and capital adequacy ratio, which were some of the major concerns regarding the bank in FY04, have also been appreciably resolved.

Performance Summary

Rs (m) 4QFY04 4QFY05 Change FY04 FY05 Change
Income from operations 832 911 9.5% 3,338 3,461 3.7%
Other Income 35 286 709.3% 630 645 2.3%
Interest Expense 475 442 -7.1% 2,038 1,682 -17.5%
Net Interest Income 357 470 31.6% 1,300 1,779 36.9%
Other Expense 533 613 15.0% 1,808 2,192 21.2%
Net interest margin (%) 5.1% 5.5% 4.6% 5.8%
Provisions and contingencies 506 47 -90.7% 842 (20) -102.3%
Profit before tax (646) 96 114.9% (721) 251 134.9%
Tax 331 - -100.0% 331 - -100.0%
Profit after tax/ (loss) (977) 96 109.8% (1,051) 251 123.9%
Net profit margin (%) -117.4% 10.5% -31.5% 7.3%
No. of shares (m) 567.4 1,013.0 567.4 1,013.0
Diluted earnings per share (Rs)* (6.9) 0.4 (1.9) 0.2
P/E (x) 60.5
* (annualised)

A turnaround story
Centurion Bank is a new generation private sector bank undertaking a wide spectrum of commercial banking activities, primarily focused on retail sector (80% of loan book). The bank has been recently recapitalised by a group of international investors of which the major shareholders include Bank Muscat, Keppel Corporation and Sabre Capital Worldwide. It has a network of 99 branches and 157 ATMs and holds leadership position in two-wheeler segment of the retail portfolio. After booking losses in FY04, the bank has turned around in FY05 and has had a successful GDR issue in 4QFY05.

What drove performance in 4QFY05?
Accelerating retail growth: The bank has been largely focused on retail assets and primarily on high yielding asset segments such as CVs (37% of retail) and two wheelers (43% of retail portfolio). It has witnessed a 69% growth in the retail portfolio over the last four quarters and anticipates this to accelerate further in the coming fiscals. Although retail will continue to remain a bulk of the bankís advance book in the coming fiscals, it does not rule out higher lending to the corporate segment as well.

Low cost funding: The bank has largely focused on low cost demand deposits (comprising 45% of total deposits) to bolster its net interest margins (NIMs). This has helped the bank clock one of the highest NIMs in the industry (5.5% in 4QFY05), notwithstanding the fact that the same is on a lower base. Although the bank acknowledges the fact that the current level of NIM is unsustainable in the long term, it hopes to remain amongst the forerunners in this respect. We however, do not fully agree with this argument, as in the rising interest rate regime auto loans (comprising a majority of Centurionís assets) tend to be most sensitive and may dampen the bankís incremental credit offtake. On the other hand, pressures on the deposit mobilization side may also impact the bankís spread. The tax benefits, which the bank had been enjoying so far due to a negative bottomline, are no longer due and will pressurise the bankís bottomline in the coming quarters.

Better quality of assets: The bank has done its best to improve its asset quality by not only paring its net NPA levels (2.5% of advances as against 7.5% of advances in FY03) but has also arrested the incremental delinquencies on the gross NPA side. The NPA coverage ratio of 65% is also above the industry average of 60%.

Other income- not a concern: With fee income constituting 64% of the bankís other income, it is well poised to insulate its bottomline against any hit on the treasury side. Also, having an average duration of 9 months (one of the shortest in the industry) in its treasury book makes it well hedged as compared to its peers to face the rising interest rates.

Recapitalisation: The capital adequacy ratio of the bank has risen from 4.3% in 4QFY04 to 23% in 4QFY05 (with 2 Tier II issues and a GDR issue). This has made the bank adequately capitalised to meet the future credit demands. While all the capital may not be required for garnering loan assets, the bank plans to utilize some of it for inorganic growth. This has however marginalized the return on assets and will continue to do so until the benefits of incremental growth filter into the bottomline.

Our view:

Valuations FY04 FY05
Net Profit (Rs m) -1051.4 251.1
CAR (%) 4.4 23.1
ROA (%) -3.1 0.6
ROE (%) -170.7 4.9
EPS (Rs) -1.9 0.2
Adj.book value per share (Rs) -0.11 3.4
At the current price of Rs 15, the bank is trading at 3.4 times its FY05 adjusted book value. This puts it at the higher end of the valuation spectrum. Given the fact that it is overcapitalized, the return ratios will also continue to be unattractive for some time now. The bank, however,seems to be an ideal acquisition target for larger banks looking at retail foray. Although the future prospects and the managementís vision for the bank seem enthusing, most of the positive upside seems to have been already factored into the prices.

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