Hold Centurion BoP with target of Rs 29: Citigroup

Citigroup report on Centurion Bank of Punjab:

Purchase price – marginally ahead of expectations:

"The swap ratio at 1.4:1 is upper end of end of expectations; 1.2-1.4 band. Translates into a PBV multiple of over 2x FY06 (partly driven by 20% stock performance post-deal strike). While deposit franchise is what Centurion has tried to price (9% dilution for 45%+ branches and 24% deposits), expect some capital markdown, as asset costs crystallize."

Aggressive capital to support transaction, and growth:

"As expected, management is raising capital – but the size of capital raising -Rs 4.2 billion, is ahead of expectations. After this, the third round of capital raising over 8 months – management suggests capital cushion for 3 years. Capital raising has been tied up – strategic investor (Bank Muscat), and a private equity player at current market price."

This purchase is more modest, likely harder to execute, and with lower upside than previous buy:

"CBOP has the track record to execute acquisitions – but this is a more modest acquisition in scale, potential upside, and has trickier execution issues (read Labor Unions). In effect, this does not have the risk, or return, profile of the previous acquisition."

Franchise value versus returns trade off, probably fairly valued for now:

"Centurion has through acquisitions, ambition and accelerated capital support, been able to create a valuable distribution platform and franchise. But ROEs have remained modest; low teens at best, in FY08. We believe the stock is overvalued relative to returns; probably fairly valued relative to its strategic and acquisition potential.

We are transferring coverage of Centurion Bank of Punjab to Aditya Narain:

"Maintain Hold, Medium Risk (2M) rating with a target price of Rs 29."