Central Bank of India CBOI
February 20, 2011 - 9:41am EST by
ladera838
2011 2012
Price: 155.75 EPS $26.20 $34.20
Shares Out. (in M): 404 P/E 6.0x 4.6x
Market Cap (in $M): 1,400 P/FCF 6.0x 4.6x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

 

Central Bank of India (CBI) represents compelling value at its current price of Rs. 156.  The stock is down by almost 40% from its high of Rs. 249 in November, and is trading at 4.6x earnings for the fiscal year ending next month, and just 1.1x book value.  ROE is about 24%, and earnings should grow at perhaps 15%-20% annually for the next few years (though EPS growth in the fiscal year which will begin in April will be stunted by a rights issue which is imminent; more on this later).  It is also trading well below its public sector bank peers.  I believe the stock has the potential to provide a return of 150% to 325% over the next three to five years.  Importantly, at the current valuation I think that the downside risk is very limited.

 

Background

CBI is a "public sector" Indian bank; the government owns 80.2% of the shares in the company.  The remaining shares are publicly traded on the Indian stock exchanges.  The bank was founded in 1911 and has over 3,600 branches throughout India.  It is among the top ten public sector banks in the country.  (To celebrate its centennial year, the government issued a CBI postage stamp.  Try imagining Citibank on a U.S. postage stamp.)

 

Financial Performance

 

 

 

 Fiscal Year Ended March 31

 

2011 (E)

2010

2009

2008

 

 

 (Rs. Billion)

 

 

 

 

 

 

Interest Income

    146.00

    120.64

    104.55

      78.84

Interest Expense

   (103.00)

     (95.19)

     (82.27)

     (57.72)

Net Interest Income

      43.00

      25.45

      22.28

      21.12

Other Income

      13.00

      17.36

      10.70

       9.34

 

      56.00

      42.81

      32.98

      30.46

Operating Expenses

     (27.50)

     (20.06)

     (16.98)

     (15.75)

Loan Losses & Provisions

      (9.00)

      (7.26)

      (6.76)

      (6.19)

Profit Before Taxes

      19.50

      15.49

       9.24

       8.52

Taxes

      (5.68)

      (4.91)

      (3.54)

      (3.02)

Net Income

      13.82

      10.58

       5.70

       5.50

 

 

 

 

 

 Shares Outstanding (MM)

        404

        404

        404

        404

 EPS (Rs.)

       34.2

       26.2

       14.1

       13.6

 

 

 

 

 

 Book Value per share (Rs.)

        140

        108

          86

          77

 

A new CEO took over CBI three years ago, and has aggressively pushed since then to improve the profitability of the bank.  The results have been dramatic, as can be seen from the table above.  One example: return on assets (ROA) increased from 0.43% three years ago to 0.89% in the most recent quarter, and the CEO has publicly pledged to increase ROA to at least 1%, which alone will boost net profits by another 12%.

 

One component of the reason for the growth in profits in recent years has been the improvement in asset quality at the bank.  Gross NPAs declined from 7.16% at the end of FY 2006 to 2.33% at the end of FY 2010, while Net NPAs dropped from 2.59% to 0.69% over the same four-year period.  Another reason is the improvement in the net interest margin (NIM) in recent years.  Large amounts of high cost bulk deposits raised a few years ago were not renewed by management, in order to bring down the bank's cost of funds.  In addition, the bank has gradually shifted its loan portfolio mix by increasing the share of higher-yielding retail loans.  This should continue to improve the NIM over the next few years.

 

Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

FY10

FY09

FY08

FY07

FY06

Gross NPA

2.33%

2.71%

3.22%

4.97%

7.16%

Net NPA

0.69%

1.24%

1.45%

1.70%

2.59%

 

 

Valuation Comparison with other Public Sector Banks

The table below compares Central Bank of India with its largest public sector bank competitors.  It is clearly the cheapest stock in the group based on earnings multiple, and is the second cheapest based on price to BV; the only cheaper stock by that measure is Indian Overseas Bank, which earns a far lower ROE than CBI.

 

 

 Stock

 

 Mkt

 EPS

 

 

 Mkt

 

 Price

 Shares

 Cap

 TTM

 

 

 Cap

 

 (Rs.)

 (MM)

 (Rs. Bn)

 Rs.

 P/E

 P/BV

 ($ Bn)

 

 

 

 

 

 

 

 

Central Bank of India

    155.75

  404.14

       62.9

   29.50

   5.3

   1.1

    1.40

 

 

 

 

 

 

 

       -  

State Bank of India

 2,761.05

  634.99

  1,753.2

 159.30

 17.3

   2.4

  38.87

Punjab National Bank

 1,095.05

  315.30

     345.3

 135.30

   8.1

   1.7

    7.66

Bank of Baroda

    900.40

  367.00

     330.4

 103.50

   8.7

   1.8

    7.33

Canara Bank

    583.25

  410.00

     239.1

   87.20

   6.7

   1.6

    5.30

Bank of India

    442.85

  525.17

     232.6

   46.10

   9.6

   1.6

    5.16

Union Bank

    338.75

  505.12

     171.1

   41.20

   8.2

   1.7

    3.79

Indian Overseas Bank

    133.35

  544.80

       72.6

   15.20

   8.8

   1.0

    1.61

 

Punjab National Bank was recommended on VIC by sunny329 in March 2004 when the price was Rs. 250.  PNB is a larger competitor of CBI.  The thesis of that recommendation had similarities to this write-up: PNB was trading at 6x earnings (compared with 4.6x for CBI today), and was at a modest premium to BV.  The ROE in both cases was in the low-to-mid 20s.  Expected earnings growth in both banks was similar, perhaps 15-20% EPS growth annually.  PNB's market cap was $1.5 billion seven years ago; CBI is at $1.4 billion today.  PNB has worked out well: it is trading at Rs. 1,100 today (4.4x the price at which it was recommended), having hit a high of almost Rs. 1,400 (5.6x) less than four months ago.

 

If you find my CBI recommendation interesting, I encourage you to read sunny329's PNB writeup.  He provides good background information on the Indian banking sector, which, for the most part, is as relevant today as it was seven years ago.

 

Dividends

CBI pays out less than 10% of its profits as dividends, and the dividend yield is modest at about 1.5%.  Because it has tremendous growth opportunities, it chooses to retain the vast majority of its profits.

 

Rights Issue

In order to strengthen its balance sheet and capital ratios and to provide capital for future growth, CBI is planning a rights issue to raise about Rs. 25 billion in equity.  This is expected to happen very soon, likely within the next month.  The rights issue price has not been determined, but is likely to be at a modest discount to the stock price.  I estimate that the number of shares outstanding could increase from 404 million now to perhaps 580 million after the rights issue is completed.  The good news is that any shareholder who subscribes for his portion of the rights issue will not be diluted; he will continue to own the same percentage of the company as he did pre-rights.  The bad news is that the number of shares will increase meaningfully, and this will affect EPS growth in the coming year.  Given the bank's ability to invest the additional capital rapidly and to deploy it fully over time by growing the balance sheet, I estimate that EPS will be roughly flat or down a little in the coming year before resuming growth of maybe 15% to 20% annually.

 

 

 

Fiscal Year Ended March 31

 

 

 

 

 

 

2011 (E)

2012(E)

 

2015(E)

 

 

2015(E)

 

 

 

 

 

 

(Assume 15%

 

(Assume 20%

 

 

 

 

 

 Net Inc growth)

 

 Net Inc growth)

 

 Net Income (Rs. Billion)

    13.82

     18.50

 

          28.14

 

 

         31.97

 

 

 Shares Outstanding (MM)

404

580

 

580

 

 

580

 

 

 EPS (Rs.)

    34.21

     31.90

 

          48.51

 

 

         55.12

 

 

 

 

 

 

 

 

 

 

 

 

Current Price:

156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appreciation

 

 

Appreciation

 

P/E Multiple:

 

 

 

Price

Potential

 

Price

Potential

 

 8x

 

 

 

             388

149%

 

            441

183%

 

 12x

 

 

 

             582

273%

 

            661

324%

 

 

Looking out four years to fiscal 2015, EPS should increase to perhaps Rs. 48 to 55.  With a multiple of between 8x and 12x EPS, this translates into gains of 150% to 325% over the four years.

 

To supplement my research, I have had extensive discussions with two of India's most highly regarded value investors about the company.  They are very bullish on the company's prospects and consider the stock to be ridiculously cheap at the current price.  My belief is that the Indian stock market's recent decline, combined with the impending rights issue, have created a rare opportunity to purchase a decent company at a very attractive price.

 

 

Catalyst

Continued earnings growth over the next few quarters subsequent to the upcoming rights offering.
    sort by    

    Description

     

    Central Bank of India (CBI) represents compelling value at its current price of Rs. 156.  The stock is down by almost 40% from its high of Rs. 249 in November, and is trading at 4.6x earnings for the fiscal year ending next month, and just 1.1x book value.  ROE is about 24%, and earnings should grow at perhaps 15%-20% annually for the next few years (though EPS growth in the fiscal year which will begin in April will be stunted by a rights issue which is imminent; more on this later).  It is also trading well below its public sector bank peers.  I believe the stock has the potential to provide a return of 150% to 325% over the next three to five years.  Importantly, at the current valuation I think that the downside risk is very limited.

     

    Background

    CBI is a "public sector" Indian bank; the government owns 80.2% of the shares in the company.  The remaining shares are publicly traded on the Indian stock exchanges.  The bank was founded in 1911 and has over 3,600 branches throughout India.  It is among the top ten public sector banks in the country.  (To celebrate its centennial year, the government issued a CBI postage stamp.  Try imagining Citibank on a U.S. postage stamp.)

     

    Financial Performance

     

     

     

     Fiscal Year Ended March 31

     

    2011 (E)

    2010

    2009

    2008

     

     

     (Rs. Billion)

     

     

     

     

     

     

    Interest Income

        146.00

        120.64

        104.55

          78.84

    Interest Expense

       (103.00)

         (95.19)

         (82.27)

         (57.72)

    Net Interest Income

          43.00

          25.45

          22.28

          21.12

    Other Income

          13.00

          17.36

          10.70

           9.34

     

          56.00

          42.81

          32.98

          30.46

    Operating Expenses

         (27.50)

         (20.06)

         (16.98)

         (15.75)

    Loan Losses & Provisions

          (9.00)

          (7.26)

          (6.76)

          (6.19)

    Profit Before Taxes

          19.50

          15.49

           9.24

           8.52

    Taxes

          (5.68)

          (4.91)

          (3.54)

          (3.02)

    Net Income

          13.82

          10.58

           5.70

           5.50

     

     

     

     

     

     Shares Outstanding (MM)

            404

            404

            404

            404

     EPS (Rs.)

           34.2

           26.2

           14.1

           13.6

     

     

     

     

     

     Book Value per share (Rs.)

            140

            108

              86

              77

     

    A new CEO took over CBI three years ago, and has aggressively pushed since then to improve the profitability of the bank.  The results have been dramatic, as can be seen from the table above.  One example: return on assets (ROA) increased from 0.43% three years ago to 0.89% in the most recent quarter, and the CEO has publicly pledged to increase ROA to at least 1%, which alone will boost net profits by another 12%.

     

    One component of the reason for the growth in profits in recent years has been the improvement in asset quality at the bank.  Gross NPAs declined from 7.16% at the end of FY 2006 to 2.33% at the end of FY 2010, while Net NPAs dropped from 2.59% to 0.69% over the same four-year period.  Another reason is the improvement in the net interest margin (NIM) in recent years.  Large amounts of high cost bulk deposits raised a few years ago were not renewed by management, in order to bring down the bank's cost of funds.  In addition, the bank has gradually shifted its loan portfolio mix by increasing the share of higher-yielding retail loans.  This should continue to improve the NIM over the next few years.

     

    Non-Performing Assets

     

     

     

     

     

     

     

     

     

     

    FY10

    FY09

    FY08

    FY07

    FY06

    Gross NPA

    2.33%

    2.71%

    3.22%

    4.97%

    7.16%

    Net NPA

    0.69%

    1.24%

    1.45%

    1.70%

    2.59%

     

     

    Valuation Comparison with other Public Sector Banks

    The table below compares Central Bank of India with its largest public sector bank competitors.  It is clearly the cheapest stock in the group based on earnings multiple, and is the second cheapest based on price to BV; the only cheaper stock by that measure is Indian Overseas Bank, which earns a far lower ROE than CBI.

     

     

     Stock

     

     Mkt

     EPS

     

     

     Mkt

     

     Price

     Shares

     Cap

     TTM

     

     

     Cap

     

     (Rs.)

     (MM)

     (Rs. Bn)

     Rs.

     P/E

     P/BV

     ($ Bn)

     

     

     

     

     

     

     

     

    Central Bank of India

        155.75

      404.14

           62.9

       29.50

       5.3

       1.1

        1.40

     

     

     

     

     

     

     

           -  

    State Bank of India

     2,761.05

      634.99

      1,753.2

     159.30

     17.3

       2.4

      38.87

    Punjab National Bank

     1,095.05

      315.30

         345.3

     135.30

       8.1

       1.7

        7.66

    Bank of Baroda

        900.40

      367.00

         330.4

     103.50

       8.7

       1.8

        7.33

    Canara Bank

        583.25

      410.00

         239.1

       87.20

       6.7

       1.6

        5.30

    Bank of India

        442.85

      525.17

         232.6

       46.10

       9.6

       1.6

        5.16

    Union Bank

        338.75

      505.12

         171.1

       41.20

       8.2

       1.7

        3.79

    Indian Overseas Bank

        133.35

      544.80

           72.6

       15.20

       8.8

       1.0

        1.61

     

    Punjab National Bank was recommended on VIC by sunny329 in March 2004 when the price was Rs. 250.  PNB is a larger competitor of CBI.  The thesis of that recommendation had similarities to this write-up: PNB was trading at 6x earnings (compared with 4.6x for CBI today), and was at a modest premium to BV.  The ROE in both cases was in the low-to-mid 20s.  Expected earnings growth in both banks was similar, perhaps 15-20% EPS growth annually.  PNB's market cap was $1.5 billion seven years ago; CBI is at $1.4 billion today.  PNB has worked out well: it is trading at Rs. 1,100 today (4.4x the price at which it was recommended), having hit a high of almost Rs. 1,400 (5.6x) less than four months ago.

     

    If you find my CBI recommendation interesting, I encourage you to read sunny329's PNB writeup.  He provides good background information on the Indian banking sector, which, for the most part, is as relevant today as it was seven years ago.

     

    Dividends

    CBI pays out less than 10% of its profits as dividends, and the dividend yield is modest at about 1.5%.  Because it has tremendous growth opportunities, it chooses to retain the vast majority of its profits.

     

    Rights Issue

    In order to strengthen its balance sheet and capital ratios and to provide capital for future growth, CBI is planning a rights issue to raise about Rs. 25 billion in equity.  This is expected to happen very soon, likely within the next month.  The rights issue price has not been determined, but is likely to be at a modest discount to the stock price.  I estimate that the number of shares outstanding could increase from 404 million now to perhaps 580 million after the rights issue is completed.  The good news is that any shareholder who subscribes for his portion of the rights issue will not be diluted; he will continue to own the same percentage of the company as he did pre-rights.  The bad news is that the number of shares will increase meaningfully, and this will affect EPS growth in the coming year.  Given the bank's ability to invest the additional capital rapidly and to deploy it fully over time by growing the balance sheet, I estimate that EPS will be roughly flat or down a little in the coming year before resuming growth of maybe 15% to 20% annually.

     

     

     

    Fiscal Year Ended March 31

     

     

     

     

     

     

    2011 (E)

    2012(E)

     

    2015(E)

     

     

    2015(E)

     

     

     

     

     

     

    (Assume 15%

     

    (Assume 20%

     

     

     

     

     

     Net Inc growth)

     

     Net Inc growth)

     

     Net Income (Rs. Billion)

        13.82

         18.50

     

              28.14

     

     

             31.97

     

     

     Shares Outstanding (MM)

    404

    580

     

    580

     

     

    580

     

     

     EPS (Rs.)

        34.21

         31.90

     

              48.51

     

     

             55.12

     

     

     

     

     

     

     

     

     

     

     

     

    Current Price:

    156

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Appreciation

     

     

    Appreciation

     

    P/E Multiple:

     

     

     

    Price

    Potential

     

    Price

    Potential

     

     8x

     

     

     

                 388

    149%

     

                441

    183%

     

     12x

     

     

     

                 582

    273%

     

                661

    324%

     

     

    Looking out four years to fiscal 2015, EPS should increase to perhaps Rs. 48 to 55.  With a multiple of between 8x and 12x EPS, this translates into gains of 150% to 325% over the four years.

     

    To supplement my research, I have had extensive discussions with two of India's most highly regarded value investors about the company.  They are very bullish on the company's prospects and consider the stock to be ridiculously cheap at the current price.  My belief is that the Indian stock market's recent decline, combined with the impending rights issue, have created a rare opportunity to purchase a decent company at a very attractive price.

     

     

    Catalyst

    Continued earnings growth over the next few quarters subsequent to the upcoming rights offering.

    Messages


    SubjectAsset Quality
    Entry02/22/2011 08:27 PM
    MemberValueGuy
    If non-performing loans have been decreasing over time, then why is the rights issue necessary to strengthen the bank's capital position?

    SubjectRE: Asset Quality
    Entry02/25/2011 07:59 AM
    Memberladera838
    ValueGuy--Two reasons for the rights issue: (1) The bank sees huge growth opportunities, larger than it can support with retained earnings alone, and wants to ensure that it is well-capitalized to manage this growth, and (2) The bank wants to ensure that it is comfortably in compliance with the Basel capital adequacy rules as it grows its balance sheet.  I would be more concerned if the bank were issuing new shares in a public secondary offering at the current price, but a rights issue lets current owners maintain their ownership stake.  Interestingly, the Indian government, which owns 80.2% of the bank, will have to invest an additional Rs. 20 billion (about $440 million), and is supportive of the offering.  As I wrote in the report, the rights offering will hurt EPS in the short term, but I think the stock is very interesting in spite of this.

    SubjectRights issue
    Entry04/04/2011 06:02 PM
    Memberladera838
    Central Bank of India stock is now trading ex-rights.  The company is issuing rights to existing shareholders in the ratio of 3 shares for every 5 shares owned as of the record date, at a rights price of Rs. 103 per share.  With the stock closing at just under Rs. 146 today, subscribing to the rights is a no-brainer.  The rights issue expires April 7th.  Also, if you bought the shares at Rs. 156 (the price at the time the idea was posted on VIC), your average cost (including the rights) will now be reduced to about Rs. 136.
      Back to top