Corporation bank had announced its 3QFY03 results during the week and following that had an analyst meet. By the looks of it, the bank has performed at par with its private sector peers, if not better. The bank has reported an 8% YoY increase in its interest income, while its net profit has jumped by 66% YoY in 3QFY03. The performance in this quarter has been better than those reported in the last two quarters. Following are the key observations from the analyst meet.
The bank management stated that the advances of the bank have increased by 5% YoY to Rs 102 bn for 9mFY03 on the back of greater emphasis on retail loans. This segment now contributes 20.9% of the total advances and has registered a growth of 49% since Dec 2001. Home loans, as expected, is one of the key focus areas for Corporation Bank. Out of the total advances, home loans now contribute nearly 12%. While the growth in advances seems to be lower than most of its private sector peers, it must be kept in mind that the growth is on a higher base. What is concerning however, is the fact that the growth has been mainly led by the retail segment, with the contribution of the non-retail category actually contracting.
Just to put things in perspective, in quantitative terms, while retail segment advances have grown by nearly Rs 7 bn in 9mFY03, total advances growth was only Rs 5 bn. This indicates that the advances to the non-retail segment have actually fallen. Compared to March 2002, the advances have declined by nearly 8% in Dec 2002. In contrast, private sector banks like HDFC Bank and IDBI Bank have seen a significant increase in both its retail as well as non retail advances.
But the main highlight of the bank's performance in the December quarter was the improvement in the net interest margins, which has in turn led to a 45% growth in the net interest income. Net interest margin stood at 3.6% in 3QFY03 compared to 3.4% in 3QFY02, which is one of the highest in the industry. Improvement in net interest margins was mainly due to lower deposit costs. The bank's average cost of funds stood at 6% in 3QFY03 compared to 6.9% in 3QFY02. Average yields on funds on the other hand have fallen to 9.6% (10.3% in 3QFY02).
Despite the fall in yields, the bank has managed to lower its cost of funds by leveraging effectively its relationship with LIC (Life Insurance Corporation of India). As per the agreement with LIC, the bank will offer cash management services to the insurance major. As against the general view of higher fee based income from this agreement, Corporation Bank benefits from access to lower cost funds. We have pointed out this in our 2QFY03 analysis as well. The bank's emphasis on low cost deposits like current and savings deposits has further helped reduce the cost of funds.
What does FY04 hold for the bank? As is evident, non-retail advances have slowed down in the last few quarters in light of a weaker economy. Given the possibility of a poor monsoon in FY03 having a lag effect on demand in FY04, growth in non-retail advances remain a area of concern. Hence, this could affect the interest income of the bank.
While net interest margins have shown a marked improvement in 9mFY03, further improvement in spreads may not be sustainable. That said, the bank's alliance with LIC could help Corporation Bank to maintain its net interest margins in the near term. Ample liquidity and low credit off take is likely to keep interest rates depressed. The concern however, is competition in the retail segment and slowdown in advances. At Rs 156, the stock is trading at an adjusted price to book ratio of 1.3x. Valuations of this bank is the highest among its public sector peers.
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