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Corporation Bank: In slow motion…

Mar 16, 2005

Revered for being one of the oldest and fundamentally strong PSU banks, in terms of operational and efficiency parameters, Corporation Bank has historically enjoyed a better valuation as compared to its PSU peers.

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 742 branches out of which 431 branches 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. The bank has tie-ups with LIC, New India Assurance for cross selling products and services. It has also entered into an agreement with LIC (LIC has taken a 26% stake in Corporation Bank) for offering cash management services to the latter and has agreements with Oriental Bank and Karnataka Bank for ATM sharing.

But what is pertinent to note here is that, while its peers are making the most of the benign credit demand (aided by economic buoyancy), Corporation Bank seems to be struggling to catch up. After plunging in FY02, the bank has had a reasonable recovery over the past few years. Although, it would not be fair to say that the bank has not benefited from the sectoral uptrend, let us accept the fact that it has been one of the 'under performers'.

It may also be brought to one's notice here, that while Corporation Bank (standalone) has remained consistent in its performance, its subsidiaries have played the 'spoil sports'.

In recent times…
The bank has posted a very stagnant growth in consolidated topline during 9mFY05. 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).However, on the other income side, extraordinary treasury gains in 3QFY05 (93% YoY growth) and higher fee based income from cash management services continue to aid the bank's bottomline. 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.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.

A capital adequacy ratio of 20% is however not a sign of 'comfort'. While other banks are contemplating fresh issues to fulfill their CAR requirements, given the burgeoning incremental credit demand, Corporation Bank seems to be unable to optimize on its existing capacities.

Our view
At the current price of Rs 365 the bank is trading 1.9 times its 9mFY05 book value, putting it higher than our valuation band of 1x to 1.5x. While it is not feasible for the bank to 'depend' on its other income revenues, Corporation Bank needs to concentrate on its 'core business' to sustain growth in the longer term. With foreign banks setting their eyes on Indian shores and private banks consolidating their operations, smaller PSU Banks like Corporation will have quicken their pace to counter the competition. Else, it would not take much on the part of the larger entities to cannibalize their market share. Therefore, based on the current scenario, we are un-enthused by the bank's progress so far and therefore, it is not among our top picks from the PSU banking space. However, should Corporation Bank grow its size by participating in the government's M&A activity, the view could change.


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