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Corporation Bank: Lending slows down

Jan 15, 2004

Corporation Bank reported dismal and unexpected results for the December quarter. While the topline has risen by a marginal 4%, the bottomline has fallen by a steep 25% in 3QFY04. The fall in bottomline seems to be mainly on account of a fall in other income as well as a significant rise in provisioning. Operating margins have, however, shown an improvement in the December quarter. At the analyst meet yesterday, the bank indicated that the drop in bottomline for 3QFY04 was primarily due to higher provisioning (due to imposition of the 90-day norm) as well as due to a significant fall in other income (fall in treasury profits). As far as the core lending business is concerned, the bank reported a 15% rise in its advances in the period ending December 2003 compared to the same period last year. However, retail lending has been mainly responsible for this growth in advances indicating that the wholesale lending operations continue to remain lackluster.

Particulars Dec-02 Dec-03 Growth
Advances 10,210 11,746 15.0%
Yield on advances 10.5% 9.1%  
Retail advances 2,134 3,600 68.7%
% of total 20.9% 30.6%  
Deposits 20,459 22,077 7.9%
Cost of deposits 6.7% 5.5%  
Demand deposits 4,993 6,442 29.0%
% of total 24.4% 29.2%  

The bank has, however, managed to reduce its cost of funds further by leveraging on higher quantum of demand deposits as well as its alliance with LIC (access to free float). Net interest margin as a consequence has improved to 3.75% in December 2003 (3.60%). Demand deposits have grown by 29% in this period and have contributed to the overall reduction in cost of funds. NPAs, on the other hand, have more or less remained constant on account of implementation of the 90-day norm for recognition of NPAs. Net NPA to advances ratio stood at 1.7% compared to 1.6% in the same period last year. This has been mainly achieved by higher provisioning in the December quarter.

At the current market price of Rs 265, Corporation Bank is trading at a P/E ratio of 8.4x its annualised 3QFY04 earnings. While the bank continues to succeed in its endeavour to reduce its interest expenses, it seems to be slipping as far as core-lending operations are concerned. The bank's retail lending operations have been the only redeeming factor, while its wholesale lending operations seem to be languishing. Investors need to wait and watch the bank's strategies in the next few quarters to counter the slow growth in the corporate lending sphere.

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