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Corporation Bank: Treasury takes toll!
Jan 31, 2006

Performance Summary
Corporation Bank has reported a fall in its bottomline during the third quarter ended December 2005. This has been despite a good growth in net interest income. The dip in profits can be justified by the fact that the bank, in 3QFY06, remained devoid of the treasury income enjoyed by it in the corresponding quarter of FY05. For the nine months period, however, the bottomline has been cushioned by lower provisioning. We also attended the bank’s analyst meet and our result analysis includes excerpts from the same.

Rs (m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Income from operations 5,563 6,770 21.7% 16,732 19,211 14.8%
Other Income 2,162 1,065 -50.7% 4,379 4,140 -5.5%
Interest Expense 2,804 3,485 24.3% 8,304 10,052 21.1%
Net Interest Income 2,759 3,285 19.1% 8,428 9,159 8.7%
Net interest margin (%)       4.0% 3.6%  
Other Expense 1,635 1,934 18.3% 4,836 5,476 13.2%
Provisions and contingencies 762 908 19.2% 3,587 2,681 -25.3%
Profit before tax 2,524 1,508 -40.3% 4,384 5,142 17.3%
Tax 906 356 -60.7% 1,438 1,701 18.3%
Profit after tax / (loss) 1,618 1,152 -28.8% 2,946 3,441 16.8%
Net profit margin (%) 29.1% 17.0%   17.6% 17.9%  
No. of shares (m)       143.5 143.5  
Diluted earnings per share (Rs)*         32.0  
P/E (x)         10.6  
* (annualised)            

The ‘cherry’ amongst PSUs
One of the few PSU banks in India with a clean balance sheet and impressive track record, Corporation Bank has a well-established franchise of 782 branches and 83% of its business (504 branches) is on a core banking solution. The bank also has a network of over 814 ATMs covering nearly 80 cities and towns throughout the country. The bank has tie-ups with the LIC and New India Assurance for cross selling products and services. It has also entered into an agreement with the LIC (the latter has taken a 26% stake in Corporation Bank) for offering cash management services and has agreements with Oriental Bank and Karnataka Bank for ATM sharing.

What has driven performance in 3QFY06?
Growth – Corporate skewed: While Corporation Bank has managed to outperform the industry in terms of asset growth during 3QFY06, what is surprising to note is that the same has been at a higher cost and is skewed towards low yielding assets. The bank witnessed a stellar 34.9% YoY growth in its advance book during 3QFY06, largely supported by growth in the corporate credit portfolio (grew 44% YoY). The share of retail credit has fallen further from 31% in 3QFY05 to 26% in 3QFY06. Also, the bank has taken a cautious stance with respect to exposure to housing loans (that have witnessed higher delinquency rates of late), although the mortgage loans comprised 62% of the advance book in 3QFY06 against 58% in the corresponding quarter of FY05.

Credit deposit ratio improves…
(Rs m) 9mFY05 % of total 9mFY06 % of total Change
Advances 163,660   220,840   34.9%
Retail 50,220 30.7% 58,090 26.3% 15.7%
Corporate 113,440 69.3% 162,750 73.7% 43.5%
Deposits 241,745   297,024   22.9%
CASA 84,255 34.9% 99,804 33.6% 18.5%
Term deposits 157,490 65.1% 197,220 66.4% 25.2%
Credit deposit ratio 67.7%   74.4%    

The bank, nevertheless, saw an uptick in asset yields faster than the rise in cost of funds, which has helped it stabilise its net interest margins at 3.6%. The same have, however fallen from 4% levels in 3QFY05. The lower borrowing cost is also due to the fact that the bank went in for external commercial borrowings (ECBs) to the tune of Rs 13 bn in 1HFY06 that were at lower costs than the domestic interest rates.

Retail delinquency - a concern: Although the overall delinquency rate for the bank has declined to 0.8% in 9mFY06, it is very uninspiring to note that the delinquency rate in home loans is as high as 5% (industry average of retail NPAs is 1%). While the bank has taken a pre-emptive step by taking a cautious stance on mortgage loans going forward, high slippages remain a concern.

Efficiency – not flattering: The bank‘s efficiency ratios have also flattened over the past two quarters in terms of profitability. Despite higher automation of branches, lower other income has pared the ratio on the profitability side.

Productivity flattens…
(Rs m) 3QFY05 4QFY05 2QFY06 3QFY06
Business per employee 37.9 36.4 44.1 45.0
Profit per employee* 0.4 0.3 0.5 0.4
Business per branch 497.1 489.4 581.4 585.7
Profit per branch* 13.6 12.4 13.8 13.0
*Annualised profit

Fee laggard: While the adjacent chart seems to suggest that the rising contribution of fee income to other income is complementing the fall in treasury income for the bank, the facts do not support this notion. The bank, in fact, has witnessed a 25% YoY fall in its fee income during 3QFY06. The same certainly is a cause of worry given the fact that the treasury portfolio remains exposed to interest rate risks going forward also.

What to expect?
At the current price of Rs 339, the stock is trading at 1.2 times our estimated FY08 adjusted book value. Although the bank is well capitalised to capture the growth opportunities in the sector (through both organic and inorganic routes), it has historically been the laggard in terms of asset growth. The high capitalisation (capital adequacy ratio) has had a negative impact on return ratios that are lower as compared to its peers. Also, investors need to factor in the upcoming margin pressure. We therefore, believe that the current valuations fully factor in the potential upsides and the appreciation hereon will be very limited.

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