Corporation Bank has reported a profit growth of 22% for the nine months ended December ’00. The bank’s operating margins improved sharply to 33%, an increase of around 580 basis points.
The remarkable performance of the bank is attributed to its impressive interest spread management and a healthy growth in both advances and deposits. In the first nine months, Corporation Bank’s advances grew by 14% while deposits grew at a slower rate of 5%. Nevertheless, its credit to deposit ratio increased to 51% (from 47.3%) during the period. Its interest spread has gone up to 3.5% (from 2.9%). This was due to lower cost of deposits (8.7%) and high yield on advances (12.5%).
Saving account deposits contribute around 14% to total deposits with over 2 million saving accounts. Further, 56% of the bank’s deposits have a maturity period of one year. As a result, if the RBI announces a rate cut, the bank stands to gain by re-pricing its deposits. It may not simultaneously increase the lending rate, which in turn could sharply improve its interest spread from the current 3.5%. Apart from the benefits in interest spread, the bank will also gain in terms of an appreciation in its investment portfolio (as bond price increase with a decline in interest rates).
On the liability side also, retail advances now account for around 10% of total advances. Out of the total retail lending of Rs 7.5 bn, housing loans contributed more than 30%. The bank is aggressively tapping the retail market by launching several new products. These include ‘Corp Dial’, a tele-banking facility introduced in 59 branches (total 651 branches), ‘Corp Access’ introduced at12 branches in Chennai, ‘Corp Fast’ a novel fast cheque collection product and retail products such as housing loans, auto loans and personal loans under the brand ‘Corp’. The bank claims to have a competitive interest rates comparable with its peers in the industry.
The banks’ retail initiatives are expected to yield good returns in terms of higher profitability and a lower NPA ratio.
Corporation Bank has also maintained its premier position in NPA management. The NPA ratio is a critical measure in evaluating the performance of the bank. Corporation Bank’s non-performing assets to advances stood at 1.75% as on December ’00 compared to 1.92% as on March ’00. The bank has recovered a sum of Rs 438 m in the first nine months out of the total NPA of Rs 2,429 m. It has plans to recover over Rs 220 m in the fourth quarter of the current year. The bank has amongst the lowest NPA level in the banking sector.
At the current market price of Rs 100, Corporation Bank is trading at a P/E multiple of 4 times its 9 months FY01 annualised earnings and Price/Book value ratio of 1 time. The bank’s lower valuations are due to a relatively slower adoption of technology. It plans to invest around 2.5 bn in the next 5 years and has also drawn up an IT road map for the purpose. Further, its public sector status is partly responsible for the bank’s lacklustre valuations. The trigger for the stock could come only with the announcement of a disinvestment or a takeover plan.
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