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Corporation Bank: Write backs save the day - Views on News from Equitymaster

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Corporation Bank: Write backs save the day
Jan 24, 2008

Performance summary
  • Interest income grows by 27% YoY in 3QFY08 on the back of 19% YoY growth in advances.
  • Other income shows a marginal growth rate of 4.8% YoY.

  • Net interest margins lower at 2.7%, from 2.9% in 9mFY07 due to write off of investment amortisation premia.

  • Cost to income ratio moves up from 42% to 45%.

  • Return on equity improves to 16.4% (14.6% in 9mFY07) in 9mFY08.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 8,683 10,988 26.5% 23,935 32,630 36.3%
Interest Expense 5,535 7,651 38.2% 14,746 22,223 50.7%
Net Interest Income 3,148 3,337 6.0% 9,189 10,407 13.3%
Net interest margin (%)       2.9% 2.7%  
Other Income 1,592 1,669 4.8% 4,598 4,885 6.2%
Other Expense 1,995 2,231 11.8% 5,818 6,817 17.2%
Provisions and contingencies 646 97 -85.0% 1,722 838 -51.3%
Profit before tax 2,099 2,678 27.6% 6,247 7,637 22.3%
Tax 635 769 21.1% 2,069 2,344 13.3%
Profit after tax / (loss) 1,464 1,909 30.4% 4,178 5,293 26.7%
Net profit margin (%) 16.9% 17.4%   17.5% 16.2%  
No. of shares (m)         143.5  
Book value per share (Rs)*         299.4  
Price to book value (x)         1.2  
* Book value as on 31st December 2007

What has driven performance in 3QFY08?
  • Advances – No surprises: Corporation Bank clocked 16.6% YoY growth in advances in 9mFY08, almost in line with its peers in the PSU banking segment. What is however worrying is that despite a comfortable capital adequacy (CAR) position, the bank has not been able to sustain its net interest margins above the industry average. The faster growth in term deposits have pressurised the NIMs. The same have also been impacted by the write-off of amortisation of investment premia against net interest income. The bank has further reduced its exposure to the retail asset segment and home loans in particular in this quarter.

    Leaning towards lower-risk assets…
    (Rs m) 9mFY07 9mFY08 Change
    Advances 288,550 344,580 19.4%
    Retail 76,610 81,130 5.9%
    % of total advances 27% 24%  
    Home loans 1,503 1,343 -10.6%
    % of retail advances 2% 2%  
    Corporate 211,940 263,450 24.3%
    % of total advances 73% 76%  
           
    Deposits 396,490 491,750 24.0%
    CASA 105,870 123,120 16.3%
    % of total 27% 25%  
    Term deposits 290,620 368,630 26.8%
    % of total 73% 75%  
    Credit deposit ratio 72.8% 70.1%  

  • No signs of fees: During 3QFY08, Corporation Bank witnessed a very marginal growth in its non-interest income while the growth in fee income was restricted to 3% YoY. Fee income contributed 49% of the bank’s total other income. Despite the formation of the alliance with OBC and Indian Bank, which gives it access to customers in the northern regions of the country and enables it to leverage the delivery channels of the other two banks, Corporation Bank does not seem to have made any headway on the fee income front.

  • Costs scale up:Corporation Bank’s cost to income ratio has risen marginally from 42% in 9mFY07 to 45% in 9mFY08. The same is nearly 5% lower than its peers in the PSU banking space and is one of the best (lowest) in the sector. This is also despite the fact that the bank had increased its employee base by nearly 25% in FY07 and brought 100% of its branches on the CBS (core banking solution) platform. Going forward, over the next 3-4 years, the bank is planning to add 100 braches a year that may entail higher costs.

  • Provisioning relief: Corporation Bank’s loan loss provisions stood at 821% of loans in 9mFY08. However post the recoveries, the ratio is much lower. Nonetheless, the fact that the bank is relying on the write back of the excess provision for shoring up its bottomline is worrying as going forward, the possibility of slippages remains high. The overall delinquency rate for the bank has improved with net NPAs having declined to 0.3% in 9mFY08 from 0.5% in 9mFY07.

What to expect?
At the current price of Rs 371, the stock is attractively valued at 1.0 time our estimated FY10 adjusted book value. The bank’s annualised return on equity stands at a healthy 16.4%. However, the current CAR of 12% at the end of December 2007 may require further equity dilution. Corporation Bank is targeting asset growth of 20% to 25% in FY08 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). We, however, retain our conservative estimates on this front. Also, investors need to factor in the margin pressure and provisioning requirements. Having said that, investors should not discount the fact the bank continues to enjoy one of the best operating and capital adequacy ratios (amongst PSU banks) and prospects of the synergies due to the MOUs.

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