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Corporation Bank: Margin blip - Views on News from Equitymaster
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Corporation Bank: Margin blip
Jan 29, 2009

Performance summary
  • Interest income grows by 33% YoY in 9mFY09 on the back of 30% YoY growth in advances.
  • Net interest margin (NIM) drops by 0.3% from 2.8% in 9mFY08 to 2.5% in 9mFY09.
  • Higher other income offsets higher tax incidence.
  • Net NPA to advances drop to 0.3% in 9mFY09 from 0.4% in 1HFY09.
  • Capital adequacy ratio at 12.8% at the end of December 2008.


Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 11,134 16,234 45.8% 32,917 43,609 32.5%
Interest Expense 7,652 11,455 49.7% 22,223 30,982 39.4%
Net Interest Income 3,482 4,779 37.2% 10,694 12,627 18.1%
Net interest margin (%)       2.8% 2.5%  
Other Income 1,524 2,820 85.0% 4,598 6,139 33.5%
Other Expense 2,231 3,106 39.2% 6,817 7,547 10.7%
Provisions and contingencies 102 208 103.9% 883 1,564 77.1%
Profit before tax 2,673 4,285 60.3% 7,592 9,655 27.2%
Tax 764 1,721 125.3% 2,299 3,332 44.9%
Profit after tax / (loss) 1,909 2,564 34.3% 5,293 6,323 19.5%
Net profit margin (%) 17.1% 15.8%   16.1% 14.5%  
No. of shares (m)       143.5 143.5  
Book value per share (Rs)*         339.0  
Price to book value (x)         0.5  
* Book value as on 31st December 2008

What has driven performance in 3QFY09?
  • Corporation Bank managed to grow its advance book by nearly 30% YoY, well above the sector average, largely relying on the incremental offtakes to the large corporates. The higher cost of funds, nevertheless, pressurised its NIM which dropped by 0.3%. The bank has attributed the drop in NIM over the corresponding quarter of FY08 partly to the write-off of interest charged on agricultural loans that are subject to waiver. A fall in the proportion of CASA has also pressurised the NIMs. We have estimated the NIMs at 2.3% by the end of FY09.

    Leaning towards lower-risk assets…
    (Rs m) 9mFY08 9mFY09 Change
    Advances 344,579 449,369 30.4%
    Retail 86,145 103,355 20.0%
    % of total advances 25% 23%  
    SME 37,904 49,431 30.4%
    % of total advances 11% 11%  
    Corporate 220,531 346,014 56.9%
    % of total advances 64% 77%  
           
    Deposits 491,754 618,944 25.9%
    CASA 123,120 143,690 16.7%
    % of total 25% 23%  
    Term deposits 368,634 475,254 28.9%
    % of total 75% 77%  
    Credit deposit ratio 70.1% 72.6%  

  • During 3QFY09, Corporation Bank witnessed 85% growth in its non-interest income while the same grew by 34% YoY in 9mFY09. The bank has not divulged the growth in fee income in this quarter. Nevertheless, fee income contributed 17% to the bank’s total other income in 1HFY08 and a large part of credit for the buoyancy in other income can be attributed to gains on the treasury portfolio.

  • Corporation Bank’s cost to income ratio has fallen from 45% in 9mFY08 to 40% in 9mFY09. 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 and added 87 branches to its franchise in the past 12 months. Going forward, over the next 3-4 years, the bank is planning to add 100 braches a year that may entail higher costs.

  • Corporation Bank has pioneered the effort in setting up branchless banking units in 251 villages as at the end of December 2008 and has issued smart cards to all account holders at these villages to enable them to operate their accounts through the business correspondents from their villages. It has plans to extend the same to 400 villages by the end of this financial year.

  • Corporation Bank’s gross NPA has been brought down to 1.2% compared to 1.7% in 9mFY09 while its net NPA came down to 0.3% during this period. The bank could affect a cash recovery and upgradation of NPAs of Rs 1.9 bn in 9mFY09, which also helped in keeping the NPA level under control.

What to expect?
At the current price of Rs 183, the stock is attractively valued at 0.5 times our estimated FY11 adjusted book value. The bank’s annualised return on equity stands at a healthy 17.3%. However, the current CAR of 12.8% at the end of December 2008 may require further equity dilution. Corporation Bank had set a target of asset growth of 20% to 25% in FY09 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). While the former is likely to be achieved, we see sustenance of margins and asset quality to be an issue in the coming quarters. Having said that, at the current valuations, most of the risks seem to be factored in.

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