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Corp Bank: Profits continue to erode
Feb 21, 2014

Corporation Bank declared its results for the third quarter of the financial year 2013-2014 (3QFY14). The bank has reported 13.4% YoY growth in net interest income and 58.2% YoY decline in net profits. Profits for 9mFY14 declined by 51.8% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 13.4% YoY in 3QFY14, on the back of healthy 18.3% YoY growth in advances.
  • Net interest margin (NIM) moved upwards to 2.4% levels during 3QFY14 as against 2.2% same quarter a year ago.
  • Net NPA (non-performing assets) to advances spiked to 2.15% in 3QFY14 from 1.63% in 3QFY13.
  • Other income declines 12.5% YoY in 3QFY14 on account of huge 44% YoY fall in non-core income during 3QFY14.
  • However; net profits report a sharp fall of 58.2% YoY for 3QFY14 on account of higher provisions and higher operating costs.
  • Capital adequacy ratio currently stands at 11.9% at the end of 3QFY14 as per Basel III norms.

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 38,709 46,087 19.1% 112,660 133,142 18.2%
Interest expense 29,875 36,071 20.7% 87,709 104,380 19.0%
Net Interest Income 8,834 10,016 13.4% 24,951 28,762 15.3%
Net interest margin (%)       2.3% 2.2%  
Other Income 3,870 3,386 -12.5% 10,405 12,595 21.0%
Other Expense 5,114 5,967 16.7% 14,211 17,328 21.9%
Provisions and contingencies 4,061 8,263 103.5% 8,915 19,732 121.3%
Profit before tax 3,529 -828 -123.5% 12,231 4,297 -64.9%
Tax 497 -2,095 -521.5% 1,439 -905 -162.9%
Effective tax rate 14.1% 253.0%   11.8% -21.1%  
Profit after tax/ (loss) 3,031.7 1,267 -58.2% 10,791 5,201 -51.8%
Net profit margin (%) 7.8% 2.7%   9.6% 3.9%  
No. of shares (m)         167.5  
Book value per share (Rs)*         607.1  
P/BV (x)         0.5  
* (Book value as on 31st December 2013)

What has driven performance in 3QFY14?
  • The earnings profile for the bank continues to weaken with the profits eroding again this quarter that too more than 55% YoY. With no surprises, the higher provisioning costs (on account of higher NPAs) have marred the profitability of the company. While the business growth has remained steady, the income performance did not stand up to the mark.

  • The advances for the quarter grew healthy 18.3% YoY on the back of robust growth in SME, agri and retail segment. The large corporate segment remained relatively laggard; albeit it forms almost 45% of the total net bank credit of Corporation Bank. The retail lending was primarily driven by housing finance.

    SME, agri and retail advances see robust growth, CASA share moderates
    (Rs m) 3QFY13 % of total 3QFY14 % of total Change
    Advances 1,044,430   1,235,300   18.3%
    SME 176,370 16.9% 230,690 18.7% 30.8%
    Agri 94,660 9.1% 113,770 9.2% 20.2%
    Retail 251,480 24.1% 292,300 23.7% 16.2%
    Deposits 1,403,840   1,778,450   26.7%
    CASA 287,220 20.5% 353,710 19.9% 23.1%
    Term 1,116,620 79.5% 1,424,740 80.1% 27.6%
    Credit deposit ratio 74.4%   69.5%    

  • The deposits growth outpaced the credit growth for Corporation Bank during 3QFY14. The deposits for the quarter grew strong 26.7% YoY. While the CASA share as a percentage of total moderated, marginally, the CASA base grew by healthy 23.1% YoY. However, the continued increase in term deposit share is a matter of concern for the bank.

  • With yields going down and costs looking up, the net interest margins (NIMs) for the bank contracted on YoY basis. The NIM for 3QFY14 stood at 2.18% as against 2.35% same quarter a year ago. Therefore, net interest income grew modestly by 13.4% YoY during 3QFY14. Going forward, CASA mobilization and quality credit growth will decide the margin expansion for the bank. However, given the subdued economic climate, margin pressures stand imminent.

  • The non-interest income growth disappointed during 3QFY14 and fell 12.5% YoY primarily on account of huge 44.2% decline in non-core segments.

  • 3QFY14 also witnessed higher operating costs that rose 16.7% YoY on account of increase in both employee and administrative expenses. Consequently, the cost-income ratio jumped to 45% during 3QFY14 as against 40% same quarter a year ago.

  • More than 100% increase in provisioning costs dragged the profitability of Corporation bank during 3QFY14. With exposure to beleaguered sectors of the economy, asset quality pressures continue to plague earnings performance of Corporation Bank. Higher exposure to infrastructure (power and telecom), textiles, gems and jewellery and iron and steel, the delinquencies have gone up.

    The gross NPAs spiked to 3.08% levels during 3QFY14 as against 2.18% same quarter a year ago. The net NPAs too were seen up at 2.15% levels in 3QFY14 from 1.63% same quarter a year ago. The provision coverage ratio too has dropped to 53.6% levels in 3QFY14 from 58.0% same quarter a year ago. The stock of restructured assets has risen and the total restructuring stood at Rs 18.7 b as at the end of December 2013. Therefore, higher bad loans and delinquencies, reduced provision coverage and increased exposure to stressed sectors have taken a toll on the credit quality.

  • The profits for the bank have shrunk by 58.2% YoY during 3QFY14 and 51.8% YoY during 9mFY14 on account of higher provisioning costs and poor income performance. Consequently, the return ratios have declined for the bank during the quarter and stand one of the lowest in the industry.

  • As per BASEL III norms the capital adequacy for the bank stood at 11.9% and BASEL II at 12.6% during 3QFY14.
What to expect?
At the current price of Rs 265, the stock is valued at 0.4 times its FY16 estimated adjusted months book value.

As mentioned in our previous quarterly review the loan exposure to vulnerable sectors of the economy would pressurize the earnings performance of the bank. Therefore the profitability has weakened by higher percentage for the second consecutive quarter. Besides, failure in cost metrics of Corporation bank has added to the pain. The consistent reduction in provision coverage and higher bulk deposits in the balance sheet are matters of concern too.

At current levels, the stock is trading well below the book value. But with the rising concerns over asset quality, profitability and costs, we recommend investors to hold on to the stock from a long term perspective, provided exposure to it is less than 3% of one's overall portfolio. The fact that the bank is a good dividend payer makes it worthy of being held in the portfolio. However, we would recommend investors to not buy more of the stock despite attractive valuations.

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