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Price Analysis

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.

Gazing the core

Asset quality improvement continues: The absolute GNPA is decreasing gradually with lower slippages and higher recoveries. In previous quarter, slippages dropped sharply to Rs7.7bn (v/s Rs20.4b in 1QFY23) while higher recoveries and upgrades along with robust loan growth aided 520bp/90bp decline in the GNPA/NNPA ratios, respectively. PCR (Inc. TWO) improved 260bps sequentially to 89.2%. Total SMA overdue (1/2) are improving and dipped to 3.3% from 4.9% in 2QFY22. Further, the bank’s restructured book (4%) is at par with peers and declining gradually. Factoring higher recoveries, we estimate the GNPA/ NNPA ratio at 8.9%/2.5% at the end of FY23 with a stable PCR (calculated) of 74%.

Business growth on track; margin improving: On the business front, the bank has been reporting consistent credit growth with improving CD ratio. Recent quarter reported a sharp 18% YoY and 6.2% sequential growth in loan book driven by the RAM segment (67.5% of loan book) and guided for double-digit advances growth. The surplus SLR (30% of deposit) against the regulatory requirement of 18% may provide additional resources for lending.We have incorporated a loan CAGR of 18% for FY22-24E. Improving CD ratio and higher CASA base (50% of deposit) will keep the NIMs in a range of 3.2% - 3.4%. The operating expenses are not likely to witness a sharp jump as the bank has up-fronted the entire pension-related provision in 4QFY22 instead of amortizing over the five years as permitted by the RBI. Thus we estimate a healthy PAT growth with lower provision expenses and ROA/ROE of 0.5%/6.6% for FY23E.

Outlook and Valuation

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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