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Corporation Bank: A revival in sight?

Feb 9, 2005

Performance Summary
Corporation Bank announced its 3QFY05 results sometime back. The same are indicative of the fact that the worst is not yet over for the bank. Although the healthy bottomline growth figure (43% YoY) paints a turnaround picture as compared to that of the previous quarter (in which bottomline dipped by 81% YoY), the bank's negative topline growth is in stark distinction to the performance of all its peers. The bottomline growth is heavily influenced by the extraordinary growth in other income (93% YoY) and a marginal growth in provisioning.

Rs (m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Income from operations 5,615 5,563 -0.9% 16,479 16,732 1.5%
Other Income 1,121 2,162 92.9% 4,215 4,379 3.9%
Interest Expense 2,937 2,804 -4.5% 9,299 8,304 -10.7%
Net Interest Income 2,678 2,759 3.0% 7,180 8,428 17.4%
Other Expense 1,443 1,635 13.3% 4,133 4,836 17.0%
Operating profit / (loss) 1,235 1,124 -9.0% 3,047 3,592 17.9%
Operating profit margin (%) 22.0% 20.2% 18.5% 21.5%
Provisions and contingencies 722.0 762.0 5.5% 1,554.0 3,587.0 130.8%
Profit before tax 1,634 2,524 54.5% 5,708 4,384 -23.2%
Tax 501 906 80.8% 1,863 1,437 -22.9%
Profit after tax/ (loss) 1,133 1,618 42.8% 3,845 2,947 -23.4%
Net profit margin (%) 20.2% 29.1% 23.3% 17.6%
No. of shares (m) 143.0 143.0 143.0 143.0
Diluted earnings per share (Rs)* 31.7 45.3 35.9 27.5
P/E (x) 12.3
*(annulised)

Standing out amongst PSUs
Corporation Bank is one of the few PSU bank's in India with a clean balance sheet and impressive track record. The bank has a well-established network of 742 branches out of which 431branches and 62 extension counters are fully automated. The bank also has a network of over 700 ATMs covering nearly 80 cities and towns throughout the country. In 2001, LIC acquired 27% stake in Corporation Bank. The bank has tie-ups with LIC, New India Assurance for cross selling products and services. It has recently entered into agreements with Oriental Bank and Karnataka Bank for sharing ATMs.

What has driven performance in 3QFY05?
Shrinking margins: Although Corporation Bank has posted a negative growth in topline (-0.9% YoY) for 3QFY05, the same is not very surprising considering the bank's stagnant topline performance over the last few quarters. The bank has not divulged the figures for growth in advances and deposits for the third quarter. However, we expect the same to have improved over the previous quarters on the back of the credit revival in the sector. Despite a continuing decline in the cost of funds, a steady decline in yields on advances and investments seems to have taken a toll in the bank's interest spread (net interest income).

Other income - The revenue booster: The only cause for the bank posting a positive bottomline growth figure in 3QFY05 was the extraordinary jump in treasury profits. Besides this, in light of its strong relationship with LIC (one of the promoters), the bank has been focusing on increasing revenues from cash management services, which could have helped matters. After witnessing a sharp dip in FY04, the bank's other income growth has once again picked up momentum. Also, the fact that the bank has already transferred assets from ‘available for sale' to ‘held to maturity‘ category (and booked losses on the same) is an assurance that any further slippage on the other income side is unlikely.

Consistent on asset quality: Unlike its competitors Corporation Bank has shown a considerable amount of consistency in maintaining its asset quality over the years. The bank's NPA coverage ratio of 71% and NPA to advances ratio of 1.5% is amongst the best in the PSU banking sector. Although the incremental provisioning for 9mFY05 has grown 130% YoY over 9mFY04, the same has been kept very marginal for the third quarter to save an impact on the bottomline.

What to expect?
At the current price of Rs 338 the stock is trading 12x its FY05 annualised earnings and 1.8x its 9mFY05 book value. Despite one of the highest capital adequacy ratios in the banking sector, the bank's inability to grow its assets remains an area of concern. Considering the uncertainty in the bank's future earnings growth, valuations have to be assigned accordingly. The bank has announced an interim dividend of 30% amounting to an appropriation of Rs 486 m. Although Corporation bank is one of our preferred plays in the PSU banking sector (for its clean balance sheet and comfortable CAR position), inconsistency will continue to be a drag on valuations and to that extent, the risk profile is on the higher side.

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