Thursday, January 18, 2018

Central Bank of India: Buy
CMP: Rs.74.15
Target: Rs.83-87
Introduction: Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself as the people's own bank'.
During the past 106 years of history the Bank has weathered many storms and faced many challenges. The Bank could successfully transform every threat into business opportunity and excelled over its peers in the Banking industry.

In line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth.

Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank, due to distribution of its large network in all 29 States as also in 6 out of 7 Union Territories in India. Central Bank of India holds a very prominent place among the Public Sector Banks on account of its network of 4715 Branches, 1 Extension counters, along with 10 Satellite Offices (as on November 2017) at various centres throughout the length and breadth of the country

Customers' confidence in Central Bank of India's wide ranging services can very well be judged from the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also almost all major corporate houses in the country.

Shareholding Pattern: The promoters hold 81.91%, while the general public holds 18.09%. Among the general category, the Financial Institutions/Banks hold 13.38% while the Life Insurance Corporation Of India  holds 13.36% of the shares of the company.

In addition to this the other insurance companies hold 0.33%, while Foreign Portfolio Investors hold 0.32%% of the shares of the company. Apart from this the Corporate Bodies hold 2.17% while India Infoline Ltd holds 1.47% of the shares of the company, leaving very little on the plate of the retail investors. This increases the valuation of the share price of the company for the obvious reasons.

Triggers:
#Themarket cap of the Central Bank of India is only Rs.14,590.86 crore as against H1FY18 revenues of Rs.13767.04 crore, making it one of the best bets among the PSBs. It has a book value of Rs.89.59, as compared to the CMP of Rs.74.15.

#The Central Bank of India holds 2.39% in SIDBI, whose valuation could be around Rs.300 crore considering that Nabard bought 7% stake in Sidbi from IDBI Bank for Rs.900 crore, in last October.

#The company will hold an EGM on 2nd February, '18,  to consider allotment of 3,88,45,460 equity shares of face value of Rs.10 each to the President of India on preferential basis for cash at an issue price of Rs.83.15 per equity shares including premium of Rs.73.15 per equity share, aggregating to upto Rs.323 crores.

#The government last October announced Rs.2.1 lakh crore capital infusion for state-owned banks – Rs 1.35 lakh crore from bonds, Rs.18,000 crore from budgetary support and the remaining Rs.58,000 crore through share sales.
On the face of it, the move will ease PSU banks’ capital deficiency (especially following asset quality pressure and the impending transition to Basel III norms) and marginally encourage lending. However, to start with, it will largely address asset quality stress and act as precursor to consolidation.b

#RBI has stepped has accelerated the NPA resolution issue, by taking errant companies to the Insolvency and Bankruptcy Code (IBC). This will make the balance sheets of banks look much healthier in the coming months, albeit with large hair cuts in place.

#Most Indian banks are flush with liquidity, post the demonetization exercise and lack of appetite for credit in the system. This has resulted in banks ending up investing most of this liquidity in government securities, driving the Statutory Liquidity Ratio (SLR) bond holdings of banks above the minimum requirement by up to 700 basis points. Now, as the economy picks up steam, the banks are likely to push credit with more ease and systematic manner under the eagle eyes of the RBI.

#Ownership pattern of PSBs banks are likely to change dramatically in the coming days. Approximately 27% of the new equity will be issued to the public, the remaining 73% being brought in by the government (58:153). The government holding of all PSBs will move up and this will technically be the unintended third nationalisation drive. This is likely to increase the confidence of not only the shareholders, but also the customers, who use banks for everyday transactions.

#The bank's gross non-performing assets (NPAs) were at 17.27% of gross loans by September 30, 2017. The gross NPAs were 13.70% of the gross loans at the end of the same quarter a year earlier.
Likewise, net NPAs or bad loans jumped to 9.53% as on September 30, 2017 from 8.17% a year ago, it said in a regulatory filing. However, these things have happened and the stock corrected. Now with the amended IBC in code, in future the share price is likely to get a forward kick.

Conclusion:  The government is likely to incentivise the efficiently managed PSBs and create larger size banking entities to avoid a repeat of the current problems. Hence, we need to be a little choosy, while picking up names from the PSB basket.

Moreover, according to the the latest information available on internet, 37% of the portfolio of Berkshire Hathaway's is made up of banking stocks; many of which are believed to have been selected by CEO Warren Buffett himself.  Buffett initially purchased shares of American Express during a banking panic in the 1960s. Additionally, M&T Bank was purchased in the wake of the Savings and Loan Crisis in 1991.
Following this trend, when the government of India is making all-round efforts to do away with the NPA crisis, I believe, it is the best time to invest in PSB counters especially when they are trading at a fraction of their future valuations, apart from the being reasonably safe bets; albeit with government patronage.

Meanwhile, though the RBI has placed Central Bank of India under the Prompt Corrective Action (PCA) Framework, the former said that placing banks under this system will not affect their normal operations. The Reserve Bank of India statement comes in the wake of media reports about the closure of some public sector banks, post their being placed under the PCA framework.

Terming the PCA as one among the various “measures/tools to maintain sound financial health of banks,” the RBI said that the framework involves “monitoring of certain performance indicators of banks as an early warning exercise and is initiated once such thresholds as relating to capital, asset quality, etc., are breached.”

The PCA is intended to help banks take timely corrective measures, including those prescribed by the RBI. The PCA framework also keeps the RBI focussed on such banks by engaging with their managements in ‘trouble areas’. It encourages banks to avoid risky activities and focus on conserving capital to strengthen their balance-sheet. So, the worst seems to be over in case of Central Bank of India.

On the daily candlestick chart, after a long fall, a hammer pattern has been formed. The RSI has taken a support around 41 and oscillators are in the oversold region. Therefore, buy the scrip of Central Bank of India Ltd at around Rs.74-74.50, for short term targets of Rs.83-87. SL: Rs.71.
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