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Corp. Bank: Squeeze in margins

Jan 23, 2002

Corporation Bank has maintained its double digit growth in interest income for the third quarter. However, squeeze in its operating margins and higher operating cost depressed its earnings growth. Compared to a 31% rise recorded in second quarter, the profits growth is reduced to 10% in 3QFY02.

(Rs m) 3QFY01 3QFY02 Change
Income from operations 4,520 5,001 10.6%
Other Income 691 1,020 47.6%
Interest expense 2,954 3,370 14.1%
Operating Profit 769 659 -14.4%
Operating Profit Margin (%) 17.0% 13.2%  
Other expenses 797 973 22.1%
Provisions and contingencies 304 387 27.3%
Profit before Tax 1,156 1,291 11.7%
Tax 327 377 15.4%
Profit after Tax/(Loss) 830 915 10.2%
Net profit margin (%) 18.4% 18.3%  
No. of Shares (m) 120.0 143.4  
Diluted Earnings per share* 23.1 25.5  
P/E Ratio   4.7  

The bank has started lending at sub PLR rates (at 10.5%), which seems to have pressurized its interest margins. Also a rise in cost to income ratio to 37% from 35% in 3QFY01 has resulted in over 380 basis points fall in operating margins. Increase in provisions for non-performing assets further trimmed Corporation Bank's bottomline growth.

Although the bank's core business income grew at a slower rate, other income (from cash management services, forex and gains on G-Sec) continued to grow at a healthy rates. The contribution of other income to total income increased to 17% from 13% in 3QFY01. This revenue stream would help the bank to post full year earnings growth of about 18%.

At the current market price of Rs 119, Corporation Bank is trading at a P/E of 5x and Price/Book value ratio of 0.9x FY02 projected earnings. The bank's core business income is likely to slowdown in the coming quarters with increasing competition from private banks and less lending opportunities available in the market. As a result, profit growth in the fourth quarter is expected to be on the lower side.

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