Central Bank of India – Disappointing

Central Bank’s profits declined 15% yoy (6% below estimates) due to a sharp drop in margins, higher loan loss provisions and taxes. Operationally the quarter was weak; cost control the only positive. We believe, given its large corporate loan book; it will be structurally difficult for CBI to co-manage high growth and profitability.

Central Bank’s NIMs dropped over 140bps yoy to 219bps for 4Q08. The drop in margins was significantly more than estimated with aggressive loan growth (+26% qoq) and decline in CASA ratio necessitating a rollover of high cost funds. With its top-line focus and large corporate loan portfolio, we believe margins will remain under pressure.

Costs have remained under check with a 4% decline yoy. After adjusting for pension arrears, CBI’s Tier1 capital has fallen to 5.4% (10.4% overall) as against the required 6% under Basle II (effective Mar09 for CBI);.

Expect CBI to report an EPS of Rs 15.24 for FY2009.