Stock Review: CENTRAL Bank of India

 

 

CENTRAL Bank of India, one of the latest to augment its statutory capital requirements, is planning to come out with a Rs 2,500-crore rights issue. Although the bank meets the existing capital adequacy norms, this additional dose of capital will enable it to expand its loan book by over 25% this year. This is an important step for the aggressive growth plans of the state-owned bank, which has outpaced the industry levels in terms of advances growth in the first half of 2010. The rights issue — the details of which are yet to be announced — will mainly increase the tier-I capital of the bank by 150 basis points to 8%. The total capital adequacy ratio (CAR) of the bank will increase to around 13% — much higher than the minimum 9% stipulated by the Reserve Bank of India (RBI). In the first half of the calendar 2010, CBI's advances grew by 19% as against the overall bank credit growth of 13%. While the bank has shown a high loan book growth with an adequate capital base, there are some areas where improvements are needed. For instance, the bank's net interest margin (NIM) had been hovering around 2% for the past couple of years. (NIM is the interest rate differential between the cost of lending and borrowing.)

   It was only in the June 2010 quarter that the bank posted a spurt in NIM to 2.9% thanks to two key developments. First, it shed high-cost bulk deposits of nearly Rs 20,000 crore at end March 2010, which reduced its cost of borrowings. Second, with overall increase in the interest rates, the yields on its floating rate advances improved. The NIMs, however, are expected to stagnate at the current level going forward.

   The recent interest rate hikes by RBI has forced most banks to increase their deposit rates to attract retail depositors. In coming quarters, such increases in the deposit rates could create pressure on the bank's NIMs.

   Until last year, asset quality had also been an area of concern for the bank. However, the renewed focus on recoveries and credit appraisal processes has put a check on its bad loans. Its net non-performing assets (NPA) came down to 0.7% as on June 30, 2010 from 1.2% by end FY09. However, this is still much higher compared to its larger peers such as Bank of Baroda and Punjab National Bank that have net NPAs of around 0.4%.

   CBI's stock has outperformed the Sensex by posting 22% returns compared to the benchmark's 14% from the start of the year. The bank appears poised for an aggressive growth drive; however, continuation of the rally in its scrip will depend on coming quarters.