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Central Bank of India Downgraded

October 1, 2007

Citigroup Research has downgraded Central Bank of India [CBI] and set a target price of Rs 130. It has initiated coverage with a SELL rating on the stock.

The Citi report says that the banking industry is well poised to grow in India. However, it is skeptical about CBI’s performance. Central Bank appears well positioned to capitalize on this growth through its strong pan-India distribution, above-industry deposit franchise and large corporate lending portfolio. Citi estimates pre-provision profits, earnings and loan growth of 16%, 13% and 18% over FY07-10E. This is well below the PSU Banking industry expectation of 20%.

Expect profitability to remain structurally challenged amid competitive margins, low fees and higher NPLs and delinquencies relative to peers. Though management has taken corrective steps, we see only a gradual recovery.

Central Bank is valued at Rs130 per share based on EVA model, which better captures the long-term value of the business and is a standard valuation measure for Indian banking coverage. At a price-to-book (P/BV) of 1.2x FY09E, which is at a slight discount to target multiples for peer government banks, a value of Rs127 per share of Central Bank is arrived at.

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