State run banks in general have been viewed as slow moving, overstaffed and less efficient financial entities in India. Corporation Bank (Corp. Bank) has however, changed this perception by establishing itself as a premium bank. This is due to its proactive business strategies that resulted in superior asset quality and strong financial track record.
Over the last few years Corp. Bank is continuously taking strides to stand parallel to its private sector peers. This includes its technology plans, retail focus and recent alliances to fuel the total income growth. The bank has been able to outperform the industry in the last five years. Its advances have grown at a CAGR of 30%, as against industry growth rate of 17%. Earnings have also displayed a strong CAGR of 20% during the same period. The bankís new business strategies are expected to help it in maintaining similar performance in the next five years. Its capital adequacy ratio at 17.5% consequent to fund infusion from LIC is likely to supplement the growth.
The bankís commendable asset quality is an outcome of its diversified loan portfolio. It has relatively low exposure to the economy sensitive sectors (capital market, real estate and commodity) at 2% of total advances as on March 2001. This is much lower compared to 9% for Bank of India and 5% for HDFC Bank. The bank lends to top rated corporates through competitive loan pricing and cautious lending policies. Over the last three years, it has successfully maintained the ratio of net non-performing assets (NPAs) to total loans assets below 2%, which is one of the lowest in the banking industry. Its aggressive foray into the retail segment (7% of total advances in FY01) would further de-risk its loan portfolio.
Corp. Bank has ventured into the housing finance market through its wholly owned subsidiary, Corpbank Homes. The bankís loan disbursements in the first nine months of FY02 grew significantly by 89% to Rs 1.6 bn. The company is a relatively small player in the segment with a 2% share. It is pricing its products competitively to gain market share in the highly challenging and fragmented housing finance market.
Corp. Homes: Aiming to step up
9m FY02 (Rs bn)
Corp. Bank has a strong foothold in the debt market through its 100% arm, Corp. Securities that operates as a primary dealer. The company recorded profits of Rs 451 m in the first nine months of FY02, which would fuel Corp. Bankís profits by 16% if consolidated. Increase in profitability of Corp. Securities was due to the companyís active trading in the debt market. During the same period the companyís turnover in the debt market increased to Rs 204 bn, as against Rs 90 bn recorded in the entire 2001. Corp. Securities business will get strengthened further with LICís plan to acquire a stake (expected investments of Rs 500 m) in the company. Alliance with LIC is likely to help Corp. Securities to widen its presence in the gilt market, as volume of transactions from LIC is likely to increase. The recent volatility in the debt market could however, impact earnings of this gilt subsidiary in the near term.
Credit growth of the banking sector has tapered down in the last nine months. Consequently, to maintain the healthy earnings growth, Corp. Bank is focusing on fee-based income. This revenue stream accounted for 16% of the bankís total income in the first nine months of FY02 with a YoY growth of 43%. The bank is an active player in the government securities and forex market, which accounted for over 50% of its non-interest income. However, its cash management services (CMS) business, which formed 18% of fee based income is under constant pressure with rising competition from private sector banks. Corp. Bank aims to leverage its recent alliance with LIC, to compensate a 9% decline in CMS revenues in the first nine months of FY02. The bank will not only distribute LICís policies but will also manage its collection and payment services business. It plans to open 100 ATMs, 100 extension counters and 25 branches in the premises of LIC for the purpose. With good amount of float funds from LIC, access to its physical infrastructure at low capex and LICís large number of clients, Corp. Bankís non-interest income is expected to rise at a CAGR of 29% in the next five years. Fee based income is expected to form 22% of its total income by the end of next five years.
The point against Corp. Bank is its technology upgradation plans, which are moving at a snailís pace compared to private sector banks. Although, it has automated 87% of its branches, they are not yet networked. Currently the bank has only 35 ATMs, but aims to increase the number by 250 before the end of calendar year 2002 (investment of Rs 500 m for ATMs excluding premises cost). Nevertheless, at present, absence of a complete delivery channel is restraining the bankís topline growth.
Also, compared to new generation private sector banks, the geographical reach of Corp. Bank is very limited. 61% of the bankís branches are located in the southern region. To outgrow this handicap, the bank will have to grow aggressively. This would entail higher capex. It also depends on the ability of the bank to widen its network to profitable centers and also to areas, which are yet to be tapped by its peers in the industry. The bankís current tie-ups with LIC and NIC (New India Assurance) would help it in widening its reach into North and East India where it has limited presence (currently, 20% of total branches of the bank are in these regions).
The bank has fared well in terms of financial performance but it needs to catch up with its private sector peers in terms of efficiency level to get premium valuations in the markets. The bankís business would grow at a strong rate once the technology is fully integrated. It would not be difficult for the bank then, to achieve its targeted CAGR of 23% in advances and deposits in the next five years. Its market valuations would also be re-rated reflecting its business performance.
Valuations at a glanceÖ
|Mkt. Price (Rs)
|P/e - FY01 (x)
|PBR - FY01 (x)
|NPA to advances (%)
|Business/employee (Rs m)
|Business / branch (Rs m)
|Profits/employee (Rs m)
|Cost to income (%)
|Div. Yield (%)