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Corp Bank: Sees margin contraction
Feb 8, 2012

Corporation Bank declared its results for the third quarter of the financial year 2011-2012 (3QFY12). The bank has reported 37% YoY and 14% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 37% YoY in 3QFY12, on the back of a 28% YoY growth in advances. However, Net Interest Income (NII) grew by a muted 4.5% due to higher costs.
  • Capital adequacy ratio currently stands strong at 12.8% at the end of 9mFY12 from 14.3% at the end of 9mFY11 as per Basel II norms.
  • Net interest margin (NIM) sees a decrease to 2.5% from 2.9% in 9mFY11.
  • Net NPA (non-performing assets) to advances comes in higher at 0.96% in 9mFY12 from 0.58% in 9mFY11.
  • Other income increases 36% YoY in 9mFY12 on higher profit on sale of investments, dividends and forex income. The bank also saw growth in fee income.
  • Net profits increase by a muted 5% during the quarter on account of lower NII growth and higher provisions.


Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 24,536 33,628 37.1% 65,799 94,319 43.3%
Interest expense 16,289 25,010 53.5% 44,019 71,189 61.7%
Net Interest Income 8,248 8,618 4.5% 21,780 23,130 6.2%
Net interest margin (%)       2.9% 2.5%  
Other Income 2,821 4,417 56.6% 8,340 11,301 35.5%
Other Expense 4,249 4,775 12.4% 11,361 13,406 18.0%
Provisions and contingencies 1,950 3,015 54.6% 4,193 6,735 60.6%
Profit before tax 4,869 5,244 7.7% 14,566 14,290 -1.9%
Tax 1,045 1,222 17.0% 3,886 2,742 -29.4%
Effective tax rate 21.5% 23.3%   26.7% 19.2%  
Profit after tax/ (loss) 3,824 4,022 5.2% 10,679 11,548 8.1%
Net profit margin (%) 15.6% 12.0%   16.2% 12.2%  
No. of shares (m)         148.1  
Book value per share (Rs)*         559.8  
P/BV (x)         0.8  
* (Book value as on 31st December 2011)

What has driven performance in 3QFY12?
  • Corporation Bank managed to grow its advance book by 28% YoY in 9mFY12, much higher than the sector average. The RBI's credit growth target for FY12 has been revised to 16%. This was largely relying on the incremental demand from the SME segment. Its retail segment also saw good growth versus other banks. Upward re-pricing of loans helped increase lending yields. The bank however saw a 6% increase in its loan book in the nine month period from April-December 2011 on account of a weak credit environment.

  • Corporation Bank's NIM moved down from 2.9% to 2.5% in 9mFY12 with CASA (current account, and savings bank accounts) funding being only 21% of total deposits. The bank expects to increase its CASA base to around 30% by giving more focus on increasing the same. On account of higher interest costs due to its large bulk deposit base, the growth in the NII was muted at 6% YoY for the nine month period. The bank however, hopes to increase its NIM to 3% at the end of FY12, however we have believe that it will sustain at less than 2.5% going forwards. However the RBI's monetary easing should help matters going forward.

    SME advances see robust growth, CASA disappoints
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 719,342   923,775   28.4%
    SME 82,930 11.5% 132,760 14.4% 60.1%
    Agri 55,900 7.8% 64,890 7.0% 16.1%
    Retail 139,930 19.5% 171,410 18.6% 22.5%
    Deposits 985,260   1,266,070   28.5%
    CASA 239,740 24.3% 267,560 21.1% 11.6%
    Term 745,520 75.7% 998,510 78.9% 33.9%
    Credit deposit ratio 73.0%   73.0%    

  • Corporation Bank's cost to income ratio was maintained at similar levels rising to 38.9% in 9mFY12 from 37.7% in 9mFY11. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector.

  • The bank had a capital adequacy ratio (CAR) of 12.8% as per Basel II norms in December 2011, with 7.9% Tier 1 ratio.

  • Corporation Bank's gross NPA increased to around 1.35% in 9mFY12, however, at the net level NPAs came in higher at 0.96% as against 0.58% in 9mFY11. The bank's asset quality has deteriorated to some extent on account of system migration to the core banking technology. However the Kingfisher account was classified as an NPA increasing bad loans by Rs 1.6 bn. However the comforting part is that the bank is increasingly focusing on its recovery efforts. The bank's provisioning coverage ratio was whittled down to 62.9% from 72.8% in 9mFY11.

  • The bank's restructuring has also increased with restructured accounts coming at 4.9% of advances. Irrespective the bank's 16% exposure to the infra space, out of which 8.5% is to the power sector is some cause of concern. Most of the restructuring came in from large industries and fresh restructuring came in mainly from the GTL group, an account in the telecom space.

What to expect?
At the current price of Rs 472, the stock is valued at 0.7 times our estimated FY14 adjusted book value. The bank's annualised return on equity stands at a healthy 19.4% and return on assets at over 1%. While asset quality is expected to be somewhat of an issue in the coming quarters the bank should be able to improve its NIMs going forward in light of the RBI's monetary easing. The bank has not been able to adequately contain its cost of funds, and needs to expand its CASA base substantially. It has been however shedding its costly bulk deposits. Going forward it plans to focus on increasing its CASA base by adding new branches and also focus on recovery. It also plans to open branches in rural areas to be able to meet its priority sector lending targets which is still below mandated levels. Irrespective, the current valuations leave significant upside for investors from 2 to 3 year perspective.

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