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Corporation Bank: Expensive quarter!
Feb 15, 2007

Performance summary
Corporation Bank had recently declared results for the third quarter and nine months ended December 2006. On the back of a relatively higher CAR availability, the bank seems to have done well in terms of growing its asset book. Also, ability to contain operating costs and lower provisioning requirement has kept the bottomline growth buoyant. Having said that, the fact that higher deposit growth has dented the bank’s net interest margins and its inability to maintain the traction in fee income are palpable. The benign impact of the bank’s MoU with OBC and Indian Bank is expected to be visible in its numbers by the next fiscal.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Income from operations 6,770 8,868 31.0% 19,210 24,494 27.5%
Other Income 1,065 1,593 49.6% 4,140 4,598 11.1%
Interest Expense 3,485 5,536 58.8% 10,052 14,747 46.7%
Net Interest Income 3,285 3,333 1.5% 9,158 9,748 6.4%
Net interest margin (%)       3.6% 3.2%  
Other Expense 1,935 1,995 3.1% 5,475 5,819 6.3%
Provisions and contingencies 908 832 -8.4% 2,681 2,281 -14.9%
Profit before tax 1,507 2,099 39.3% 5,143 6,246 21.5%
Tax 356 635 78.3% 1,701 2,070 21.7%
Profit after tax / (loss) 1,151 1,464 27.2% 3,442 4,177 21.3%
Net profit margin (%) 17.0% 16.5%   17.9% 17.1%  
No. of shares (m) 143.5 143.5   143.5 143.5  
Diluted earnings per share (Rs)* 32.1 40.8   32.0 38.8  
P/E (x)         7.1  
* (12 months trailing)            

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) runs 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 of Commerce and Karnataka Bank for ATM sharing.

What has driven performance in 3QFY07?
Sacrificing margins: The dent in net profit margins as seen in the results of most banks this quarter is visible even in the case of Corporation Bank. After several quarters of restricted growth until FY06, the bank picked up pace in the latter part of the fiscal and has been steadily growing its asset book thereon. Backed by a comfortable CAR position, the bank was also able to sustain its net interest margins above the industry average so far. However, the steady growth in deposits seems to have taken a toll on the margins this quarter, with NIMs dropping by 45 basis points over that of the corresponding quarter of FY06 and 5 basis points QoQ.

Recovering from the negative surprises of high delinquencies in its incremental mortgage advances encountered by the bank in FY06, Corporation Bank has grown this portfolio steadily in 9mFY07. Although the percentage growth in mortgage loans in this period has not been divulged, we estimate that the same continues to comprise about 56% of the bank’s retail portfolio and 14% of total advances in 9mFY07. While the deposit growth of nearly 34% YoY is significantly higher than the industry average of 23% YoY, the decline in the proportion of low cost deposits (CASA) to total deposits is a concern. More so, in a rising interest rate scenario. The bank, however, had earlier explained that the high cost deposits were garnered to cater to the maturity of a couple of big-ticket low yielding advances in 3QFY07, the re-pricing of which will relieve some pressure from the NIMs. In the meanwhile, the bank’s NIMs have shrunk to 3.2% from 3.6% in 9mFY06. We have estimated FY07E NIMs at 3.0%.

Balanced performance
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Advances 220,773   288,550   30.7%
Retail 62,920 28.5% 72,138 25.0% 14.6%
Corporate 157,853 71.5% 216,413 75.0% 37.1%
Deposits 296,996   396,490   33.5%
CASA 98,603 33.2% 113,396 28.6% 15.0%
Term deposits 198,393 66.8% 283,094 71.4% 42.7%
Credit deposit ratio 74.3%   72.8%    

Other income – offering little comfort: The bank continued to witness a very negligible growth in its fee income during 9mFY07. The same has, however, shown some signs of stability as a percentage of total income. The bank’s MOU with OBC and Indian Bank that will give it access to customers in the northern regions of the country and enable it to leverage the delivery channels of the other two banks is expected to enhance its revenue growth on the fee income side. This will, however, materialise over the next 6 to 9 months and will reflect in the bank’s numbers by FY08.

Callous provisioning: In the nine-month period, the bank has made an additional provision of Rs 168 m towards the non-performing assets of its erstwhile wholly owned subsidiary Corp Bank Homes, which was merged with the bank this fiscal. This has caused the bank to compromise on provisioning for delinquencies. The bank’s loan loss provisions (ex-recoveries) stand at merely 0.1% of loans in this quarter (0.8% in 9mFY07). Although the overall coverage ratio (provision to gross NPAs) is above 70%, given the past experiences, with an aggressive stance on mortgage loans going forward, the possibility of high slippages remains a concern. The overall delinquency rate for the bank has improved with net NPAs having declined to 0.5% in 3QFY07 from 0.8% in 3QFY06. However, the NPAs in the retail book (3.1%) and mortgage loans (3.8%) are amongst the highest in the sector.

What to expect?
At the current price of Rs 275, the stock is attractively valued at 0.9 times our estimated FY09 adjusted book value. The bank’s annualised return on assets stands at a healthy 1.4% and CAR at 13.7% at the end of December 2006 and is estimated to be 11.7% as per Basel-II accord. Nevertheless, investors need to factor in the margin pressure and provisioning requirements. Aggressive growth at the cost of margins and little support from fee income is unlikely to stand the bank in good stead going forward. Having said that, investors should not discount the fact the bank continues to enjoy one of the best margins and capital adequacy ratios (amongst PSU banks) and prospects of the synergies due to the MOU.

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