>CORPORATION BANK (CITI)

Buy: Among One of the Better Operating Performances

■ One of the better operating shows in 1Q — Corp Bank's 1Q10 earnings were up 42% YoY, with core operating profits (ex-trading gains) up 22% YoY (among the highest in the government bank sector). This was largely driven by a slight pick-up in net interest margins and continued healthy fee income growth. Key challenges for Corp Bank include higher dependence on wholesale funding and slightly higher asset risks.

■ P&L: NIMs recover, fees healthy and trading gains boost earnings — Corp Bank's NIMs showed signs of stability during 1Q10 (although a tough quarter for the industry), mainly due to stable loan yields (management confident of further uptick in NIMs in 2Q/3Q10). Fee growth remained healthy at 13% YoY and was a key focus area for management. Trading gains provided the earnings buoyancy, although management has reduced interest rate sensitivity of the investment portfolio and it could be less exposed to a rising rate environment.

■ BS: Wholesale funding and asset deterioration the key risks — In our view, Corp Bank's balance sheet is a little vulnerable to rising rates and asset quality deterioration. A low CASA ratio (1Q10: 23%) and higher wholesale funding could lead to NIM pressures in a rising interest rate environment. It is also vulnerable to asset risks, given its relatively higher (geographic and industry) concentration, which can be seen in its higher loan restructurings (5.1%).

■ Cheap valuations discount the risk, maintain Buy — Corp Bank remains among the more attractive mid-cap banks with its superior P&L profile, better management and strong capital cushion (1Q10: 9.6% Tier 1). We believe its relatively cheaper valuations do not adequately reflect these. Maintain Buy (1H).

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