Central Bank of India: centering on average performance

Central bank of India is a public sector bank, established in 1911. This is pretty big bank with branches in almost all the states (27 out of 29 states) and 3656 branches.

Last year was exceptionally good for central bank of India when its productivity increased, business per employee shot up, and operational and services metrics showed much improvement. Let’s take a look at the numbers to find out the details.

Year	Mar, 06	Mar, 07	Mar, 08	Mar, 09	Mar, 10
Interest Income	5385.58	6234.21	7995.54	10455.19	12064.31
Other Income (Fee)	551.24	561.83	902.35	1069.97	1735.25
Total Income	5,936.82	6,796.04	8,897.89	11,525.16	13,799.56
Interest Expenses	3005.51	3759.79	5772.47	8226.72	9519.01
Provisioning and Contingencies	891.68	405.08	540.36	543.16	711.89
Operating Expenses	1782.22	2133.16	2034.89	2184.05	2510.42
Total Expenses	5679.41	6298.03	8347.72	10953.93	12741.32
Extraordinary Item	0	0	0	0	0
Earnings per share	2.29	15.36	11.88	12.45	24.87
Net Profit	257.41	498.01	550.17	571.23	1,058.24
Net Interest Income	2,380.07	2,474.42	2,223.07	2,228.47	2,545.30
Net Worth	3441.97	3789.83	5942.76	6412.05	7692.24
Deposits	66482.65	82776.28	110319.67	131271.85	162107.47
Borrowing	310.81	782.01	449.10	804.25	7326.64
Total Debt	66793.46	83558.29	110768.77	132076.10	169434.11
Advances	37483.48	51795.47	72997.43	85483.20	105383.49
Total Assets	74681.04	93008.09	123955.79	147655.24	182671.64
Contingent Liabilities	13985	12274.66	17758.85	20862.34	33989.99
Bills for collection	3702.14	4449.38	6332.29	5347.55	10122.68
Book value	26.10	77.25	76.81	86.26	107.96
Growth in interest income		15.76%	28.25%	30.76%	15.39%
Growth in total income		14.47%	30.93%	29.53%	19.73%
Growth in Net Profit		93.47%	10.47%	3.83%	85.26%
Reserves	1,810.19	2,179.84	2,699.95	3,081.99	3,959.08
Fixed Assets	724.84	767.27	2320.29	2277.99	2343.29
Face Value	10	10	10	10	10
Dividend per share	0.5	3	2	2	2.2
Free reserves per share	10.07	42.43	42.59	45.03	59.03

Based on these data, the following ratios will give a true picture of the bank.

Year	Mar, 06	Mar, 07	Mar, 08	Mar, 09	Mar, 10
Profitability Ratios
Interest Spread	3.3	3.32	2.48	3.1	2.8
Net Profit Margin	4.92%	7.69%	6.31%	4.99%	7.70%
Return on Equity (%)	9.07%	15.97%	15.46%	14.43%	23.03%
Return on Asset	0.34%	0.54%	0.44%	0.39%	0.58%
Cost Efficiency (Int Cost / Int Income)	55.81%	60.31%	72.20%	78.69%	78.90%
Other Income % (Other Income / Total Income)	9.29%	8.27%	10.14%	9.28%	12.57%
Management Efficiency Ratios
Interest Income / Total Funds (%)	7.3	7.73	7.85	8.44	8.21
Net Interest Income / Total Funds (%)	3.07	3.22	2.47	2.29	2.37
Non-Interest Income / Total Funds (%)	0.05	0.04	0.28	0.11	0.21
Operating Expense / Total Funds	2.33	2.48	1.83	1.57	1.49
Net Profit / Total Funds	0.36	0.6	0.51	0.43	0.65
Balance Sheet Ratios
Capital Adequacy Ratio	11.03	10.4	10.42	13.12	12.23
Advances / Loans Funds (%)	58.71	68.9	75.13	70.4	69.9
Debt Coverage Ratios
Credit Deposit Ratio (%)	50.9	59.81	64.63	65.6	65.06
Investment Deposit Ratio	46.74	37.77	30.66	30.84	31.91
Cash Deposit Ratio	7.04	5.93	8.81	9.34	9.56
Other Data
Gross NPA				2.67%	2.29%
Net NPA				1.29%	0.69%
CASA Ratio					35.00%
Growth Data & Multiples
Growth in Net Interest Income (CAGR)	1.69%	PB Ratio	1.39
Growth in Net Profit (CAGR)	42.39%	PE Ratio	6.03
Growth in deposits (CAGR)	24.96%
Growth in advances (CAGR)	29.49%

Let’s analyse the positives and negatives of the bank.

Positive points;

• Return on equity is excellent at 23% and has gone from 9% to this level in last 4 years. This is phenomenal growth.
• CASA ratio is good at 35%. This is bigger than ICICI bank’s CASA ratio. High ratio provides banks’ leverage to lend at higher cost and thus earn higher revenue. The bank has launched campaign to mobilize deposits that will further increase the CASA ratio.
• Credit deposit ratio is fine at 65%. However, the bank can afford to increase it. SBI has CDR of 74%.
• Growth in deposit, credit, and net profit has shown excellent growth in last 4 years. The CAGR of net profit, deposit, and advances are 42%, 25%, and 29% respectively
• PB ratio of 1.5 is reasonable.
• The company is paying good dividend consistently.
• CAR is fine as this is a regulatory requirement and most banks meet this requirement (at least 9%).

 

Concern Areas:

• Interest spread is less at 2.8%. This value is not as bad as IDBI but there is much scope for improvement. SBI has interest spread of 3.8%.
• Net profit margin is average at 7.7%. Usually well run banks have NPM greater than this value. Bank of Baroda has 15% while SBI is at 11%.
• ROA is bad at 0.58%. Banks normally have around 1% as ROA.
• Non-interest income is increasing every year, albeit slowly.
• NPAs look manageable.
• The net interest margin is 1.86%, reduced from 1.97% in 2009. The same for Bank of Baroda is 2.74%. The NIM, however, has come down from 2009 because of increased cost of deposits.

 

The central bank of India is valued at lower PE than its counterparts. This valuation is justified because of its asset quality, NIM, and other factors. The bank however is working to get some of its operational metrics in order. Hope to see the changes reflect in the numbers by next year. At a PE close to 6 is certainly tempting but if we look at the fundamentals, central bank of India is trading at a PE which is well justified.

The quarterly results in FY2011 look promising. If we look at the EPS for the last 3 quarters of FY2011, it is 27.7 already. This has crossed the EPS for the year 2010. FY2011 EPS can be in the range of 30-35 and this makes central bank of India’s forward PE at 4-5. This is a good proposition. However, the growth of bank and appreciation of share price depends a lot on how central bank of India plans to improve NIM, de-risk growing credit deposit ratio, and improve ROA.

Disclaimer: This site gives opinions on companies that trade on BSE and NSE. This doesn’t give any suggestion on whether to buy and sell. Investors are requested to go by their own judgment.

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