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Corp Bank: Additional provisions weigh on profits
Feb 8, 2013

Corporation Bank declared its results for the third quarter of the financial year 2012-2013 (3QFY13). The bank has reported 15% YoY growth in interest income and a 25% YoY fall net profits. Here is our analysis of the results.

Performance summary
  • Interest income grows by 15% YoY in 3QFY13, on the back of a 13% YoY growth in advances. However, Net Interest Income (NII) however grew by a muted 2.5% on higher costs.
  • Net interest margin (NIM) sees a decrease to 2.3% from 2.5% in 9mFY12.
  • Net NPA (non-performing assets) to advances comes in higher at 1.63% in 9mFY13 from 0.96% in 9mFY12.
  • Other income falls 6% YoY in 3QFY13 on lower profit on sale of investments, cash management and forex income. The bank however saw growth in core fee income.
  • Net profits fall by 25% during the quarter on account of lower NII growth and higher provisions.
  • Capital adequacy ratio currently stands at 12.7% at the end of 9mFY13 as per Basel II norms.

Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 33,628 38,709 15.1% 94,319 112,660 19.4%
Interest expense 25,010 29,875 19.5% 71,189 87,709 23.2%
Net Interest Income 8,618 8,834 2.5% 23,130 24,951 7.9%
Net interest margin (%)       2.5% 2.3%  
Other Income 4,135 3,870 -6.4% 10,693 10,405 -2.7%
Other Expense 4,775 5,114 7.1% 13,406 14,211 6.0%
Provisions and contingencies 2,733 4,061 48.6% 6,127 8,915 45.5%
Profit before tax 5,244 3,529 -32.7% 14,290 12,231 -14.4%
Tax 1,222 497 -59.3% 2,742 1,439 -47.5%
Effective tax rate 23.3% 14.1%   19.2% 11.8%  
Profit after tax/ (loss) 4,022 3,032 -24.6% 11,548 10,791 -6.5%
Net profit margin (%) 12.0% 7.8%   12.2% 9.6%  
No. of shares (m)         148.1  
Book value per share (Rs)*         631.5  
P/BV (x)         0.7  
* (Book value as on 31st December 2012)

What has driven performance in 9mFY13?
  • Corporation Bank managed to grow its advance book by a muted 13% YoY in 9mFY13, lower than the sector average. The RBI's credit growth target for FY13 has been revised to 16%. Corporation Bank's growth was largely relying on the incremental demand from the SME segment. Its retail segment also saw very good growth versus other banks, albeit on a lower base. The bank was able to increase its retail book from 16.2% of net banking credit (NBC) in December 2011 to 22% now. The bank however saw muted growth on the corporate front which comprises 46% of the loan book. The bank however saw a 4% increase in its loan book in the nine month period from April-December 2012 on account of a weak credit environment.

  • Corporation Bank's NIM moved down from 2.5% to 2.3% in 9mFY12 with CASA (current account, and savings bank accounts) funding being only 20.5% of total deposits. The bank expects to increase its CASA base to around 30% by giving more focus on increasing the same. The bank has been trying to rationalize interest costs by reducing its bulk deposit base, but this still accounts for around 25% of deposits. On account of higher interest costs the NII growth was muted at 2.5% YoY in 3QFY13 and 8% higher YoY in % in 9mFY13.The bank plans to increase its CASA base by opening branches in rural and semi-urban areas. It plans to open 200 new branches during the financial year in order to increase its presence.

    SME, agri and retail advances see robust growth, CASA disappoints
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 923,770   1,044,430   13.1%
    SME 132,760 14.4% 176,370 16.9% 32.8%
    Agri 64,890 7.0% 87,300 8.4% 34.5%
    Retail 149,390 16.2% 228,770 21.9% 53.1%
    Deposits 1,266,070   1,403,840   10.9%
    CASA 267,560 21.1% 287,220 20.5% 7.3%
    Term 998,510 78.9% 1,116,620 79.5% 11.8%
    Credit deposit ratio 73.0%   74.4%    

  • Corporation Bank's cost to income ratio was maintained at similar levels rising to 40.2% in 9mFY13 from 39.6% in 9mFY12. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector.

  • The bank has a capital adequacy ratio (CAR) of 12.7% as per Basel II norms, with 8.1% Tier 1 ratio. The bank expects a capital infusion of Rs 2 bn from the government this fiscal.

  • Corporation Bank's gross NPA increased to around 2.18% in 9mFY13, from 1.35% previously, and at the net level NPAs came in higher at 1.63% as against 0.96% in 9mFY12. The bank's provisioning coverage ratio was whittled down to 58.06% from 62.88% in 9mFY12. Net NPA's constituted 18.15% of the bank's net worth at the end of December 2012. Segments such as large industries, agriculture, wholesale trade etc saw increased slippages. Overall during the quarter, the bank saw incremental slippages of Rs 7 bn at the gross level. The bank is focusing on recovery efforts, and intends to maintain its gross NPA levels below 2% going forward.

  • The bank's restructuring has also seen some deterioration coming in at 7.8% of the net banking credit. The cumulative restructuring now amounts to Rs 88.95 bn. The bank's restructuring during the current quarter however was moderate at Rs 2.5 bn. But, this doesn't mean that all slippage concerns have been addressed. Of the bank's 16.3% exposure to the infra space, 10% exposure to the power sector is some cause of serious concern. Around 8% of the bank's restructured assets slipped into the NPA category.

What to expect?
At the current price of Rs 392, the stock is valued at 0.6 times its FY15 estimated adjusted months book value. The bank's annualised return on equity stands at a healthy 16.3% and return on assets at over 0.9%. 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, shedding of bulk deposits and CASA accretion.

Corporation Bank has not been able to adequately contain its cost of funds, and needs to expand its CASA base substantially. It has been shedding its costly bulk deposits; however this still remains at elevated levels. Going forward it plans to focus on increasing its CASA base by adding branches and also focus on NPA recovery efforts and keeping gross NPAs below 2%. It also plans to open branches in rural areas to be able to meet its priority sector lending targets which are still below mandated levels. Irrespective, the current valuations (the stock is trading well below book value) leaves significant upside for investors from 2 to 3 year perspective. We reiterate our Buy view on the bank from a long term perspective, provided exposure to it is less than 2 to 3% of one's overall portfolio. Also one needs keep track of the bank's quarterly performance on the asset quality front.

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