Buy Central Bank of India; target of Rs 37: LKP Research

LKP Research's research report on Central Bank of India

After incurring losses for six consecutive years (FY16-FY21), Central Bnak returned to profitability in FY22. Furthermore, the bank has been reporting consistent growth in net profit since last six quarters. A bulky provision (Rs30.8bn) made in 4QFY21, continued to safeguard the balance sheet with PCR (calculated) of 72% and PCR (including TWO) of 89%. The bank’s margin (3.4% in the 2QFY23) is in upward trajectory with continuous improvement in CD ratio. On the business front, the bank has been reporting stable credit growth (18.1% YoY and 6.3% sequential jump seen in previous quarter) across segments. The bank’s recoveries are in line with the guidance and we expect the credit cost to be below 1.5% for FY23E. Moreover, the bank has raised capital in FY22 which resulted in the CET -1 of 11.6% (at par). We believe the asset quality hurdles are behind and the bank shall witness gradual improvement in profitability with FY23E ROA/ROE of 0.5%/6.6%. With inexpensive valuation (0.8x PBVPS) we recommend BUY.

Outlook

On the back of digital lending platform, we expect the bank’s loan book to fatten cautiously at CAGR of 18% over FY22-24E, led by RAM growth. In our opinion, the bank’s credit cost will normalise (1.4%) by FY23E and estimate return ratio ROA/ROE of 0.5% and 6.6% in FY23E. We value Central Bank at 1xFY24E BVPS to arrive at a target price of Rs37. We recommend BUY with a potential upside of 42%.

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