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Centurion Bank: Seeking synergies - Views on News from Equitymaster
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Centurion Bank: Seeking synergies
Jul 14, 2005

Performance summary
Centurion Bank posted its final standalone results, before its merger with the Bank of Punjab, registering a robust 251% YoY growth in bottomline for 1QFY06. The bank has dwarfed some of the larger private banks in terms of advance growth (63% YoY) and maintained consistency in its fee income growth. Improved provisioning has also helped improve its asset quality. Margin pressures and asset concentration however continue to be areas of concern.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 851 993 16.7%
Other Income 66 206 212.1%
Interest Expense 430 463 7.7%
Net Interest Income 421 530 25.9%
Other Expense 481 573 19.1%
Net interest margin (%) 5.7% 5.3%  
Provisions and contingencies (28) 49 275.0%
Profit before tax 34 114 235.3%
Tax 2 2 0.0%
Profit after tax/ (loss) 32 112 251.3%
Net profit margin (%) 3.8% 11.3%  
No. of shares (m) 567 1,044  
Diluted earnings per share (Rs)* 0.2 0.4  
P/E (x)   34.83  
* (annualised)      

A stronger entity in the making
Centurion Bank is a new generation private sector bank undertaking a wide spectrum of commercial banking activities, primarily focused on the retail sector (80% of loan book). The bank has been 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. The bank has had a successful GDR issue in 4QFY05 and is en-route to merging Bank of Punjab with itself (swap ratio 9:4 for Bank of Punjab shareholders) to form Centurion Bank of Punjab.

What has driven performance in 1QFY06?
Swelling advance book: Although on a lower base, Centurion Bank has achieved a commendable 63% YoY growth in its advances portfolio during 1QFY06. Part of it could also be attributed to the fact that the bank is now far better capitalised (capital adequacy ratio of 20%) than during the corresponding period in FY05 (CAR of 5%). The retail segment that continues to comprise a major 82% of the advance book has grown by 67% YoY. Of this, Centurion Bank has maintained its market leadership by almost doubling its exposure in the two-wheeler loan segment. The corporate segment, though not a significant proportion of the book at present, has also witnessed a growth of 49% YoY. However, given Centurion Bank’s asset concentration on the auto loans segment (79% of total portfolio), the bank remains largely exposed to vulnerability in volume demand in the auto industry. As a reference point, we expect the Indian two-wheeler industry to grow at a CAGR of 12% for the next three years. This is, however, slower than the 15% CAGR achieved during the past three years.

Surging advances portfolio...
(Rs m) 1QFY05 1QFY06 % of total Change
Two-wheelers 5,427 10,168 43.8% 87.4%
CVs 5,655 8,185 35.3% 44.7%
Personal loans 1,135 1,855 8.0% 63.4%
Mortgages - 436 1.9% -
Other loans 1,710 2,552 11.0% 49.2%
Total retail loans 13,927 23,196 82.0% 66.6%
Corporate and SME 3,425 5,105 18.0% 49.1%
Total advances 17,352 28,301   63.1%

Margin pressures: Given its asset concentration in the high yielding auto loan and personal loan segments, Centurion Bank has historically enjoyed one of the highest net interest margins (NIMs) in the industry. Of late, however, with interest keeping an upward bias, the bank has felt the pressure of lower spreads on its margins. The NIMs have dipped from 6.1% in 3QFY05 and 5.6% in 4QFY05 to 5.3% in 1QFY06. In the coming quarters, if asset growth continues at the current pace, the pressure on margins is likely to become more visible.

Effective ALM: The bank has curbed its interest costs by replacing the high cost borrowings with low cost deposits (grew 19% YoY), thus effectively governing its asset liability management (ALM). Also, the cost of deposits has reduced to 5.1% from 5.6% in 1QFY05. Investments have been kept at a lower average duration of 9 months, thus providing better liquidity and hedge against interest rate fluctuations. A larger balance sheet size post merger with Bank of Punjab is expected to give the bank better economies of scale.

Balance sheet growth…
(Rs m) 1QFY05 1QFY06 % of total Change
Advances 17,352 28,301 62% 63%
Investments 9,910 12,751 28% 29%
Fixed assets 1,720 1,431 3% -17%
Other assets 6,857 3,408 7% -50%
Total assets 35,839 45,891   28%
Networth 1930 6328 14% 228%
Deposits 30048 35641 78% 19%
Borrowings 485 435 1% -10%
Other liabilities 3,376 3,487 7% 3%
Total liabilities 35,839 45,891   28%

Bancassurance tie up: The bank has entered into a tie up with ICICI Lombard (India’s leading private sector general insurance company) for selling insurance products. This is expected to further bolster its fee-based income (64% of other income). Having created strong visibility in its wealth management business with life insurance and asset management tie-ups, the bank hopes to significantly improve the contribution of fee income to its revenue stream going forward.

A new entity : Merger with Bank of Punjab will not only give Centurion Bank a better geographical reach and branch network, but will also complement its exposure in the corporate, SME and agriculture segments. The entity will also remain comfortable in terms of margins (NIM 4.8%) and capital (CAR 16%). However, although Centurion Bank has been able to prune its net NPA to advance ratio to 2.4%, the merged entity will continue to have poorer assets (net NPAs 3.6%) due to BoP’s high delinquency rates.

What to expect?
At the current price of Rs 15, the stock is trading at 2.8 times its 1QFY06 adjusted book value. This puts it at the higher end of the valuation spectrum. The merged entity is expected to have adjusted book value of Rs 4.4. Given the fact that the bank will be overcapitalized even after the merger is through, the return ratios will continue to be unattractive. Although we are enthused by the bank’s long-term prospects post merger, most of the upsides have been already factored into the price. Improvement in asset quality and sustenance in margins may, however, add weightage to the bank’s valuations going forward.

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