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Corp Bank: Loses the treasury upside
Apr 23, 2010

Corporation Bank declared its FY10 results. The bank has reported a 20% YoY and 31% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 13% YoY and 20% YoY in 4QFY10 and FY10 respectively.
  • Other income falls during 4QFY10 due to lower treasury gains.
  • Net profit margin improves by 1.3% to 16% in FY10 thanks to lower operating costs.
  • Capital adequacy ratio at 15% at the end of FY10.
  • Net NPA to advances marginally higher at 0.3% in FY10.
  • Declared a dividend of Rs 16.5 per share (dividend yield 3.3%).


Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Interest income 17,064 19,222 12.6% 60,674 72,946 20.2%
Interest Expense 12,781 12,824 0.3% 43,764 50,843 16.2%
Net Interest Income 4,283 6,398 49.4% 16,910 22,103 30.7%
Net interest margin (%)       2.4% 2.4%  
Other Income 4,933 2,727 -44.7% 11,072 11,864 7.2%
Other Expense 2,918 3,474 19.1% 10,465 12,599 20.4%
Provisions and contingencies 1,657 1,852 11.8% 3,409 4,744 39.2%
Profit before tax 4,641 3,799 -18.1% 14,108 16,624 17.8%
Tax 2,035 676 -66.8% 5,179 4,921 -5.0%
Profit after tax / (loss) 2,606 3,123 19.8% 8,929 11,703 31.1%
Net profit margin (%) 15.3% 16.2%   14.7% 16.0%  
No. of shares (m)       143.5 143.5  
Book value per share (Rs)*         401.1  
Price to book value (x)         1.2  
* Book value as on 31st March 2010

What has driven performance in FY10?
  • Despite relatively lower demand for credit, Corporation Bank managed to grow its advance book by nearly 30% YoY in FY10, largely relying on the incremental offtakes to the large corporates. However, the fact that nearly 80% of the bank’s loans were priced below PLR rates took a toll on its margins. The downward re-pricing of loans also capped the upside to Corporation Bank’s NIMs that remained stagnant at 2.4% despite lower cost of funds. The CASA proportion falling from 31% of deposits to 29% also resulted in lower margin accretion.

    Slipping on CASA
    (Rs m) FY09 FY10 Change
    Advances 485,121 632,025 30.3%
    Retail 93,390 116,960 25.2%
    % of total advances 19% 19%  
    SME 52,050 64,350 23.6%
    % of total advances 11% 10%  
    Large corporate 153,020 234,470 53.2%
    % of total advances 32% 37%  
    Deposits 739,838 927,336 25.3%
    CASA 232,636 264,782 13.8%
    % of total 31% 29%  
    Term deposits 507,202 662,554 30.6%
    % of total 69% 71%  
    Credit deposit ratio 65.6% 68.2%  

  • During FY10, Corporation Bank’s other income grew at a tepid 7% YoY due to lower profit on sale of investments. The growth in fee income was however 44% YoY. Nevertheless, fee income contributed 26% to the bank’s total income in FY10, as against 24% in FY09. Although Corporation Bank has made very marginal headway on the fee income front, the fact that its investments are well hedged against interest rates risks (79% of investments are in held-to-maturity basket) makes it a safer play.

  • Corporation Bank’s cost to income ratio has fallen from 40% in FY09 to 33% in FY10. The same is nearly 5% lower than its peers in the PSU banking space and is one of the best (lowest) in the sector. This is also despite the fact that the bank had increased its employee base and added 101 branches to its franchise in the past 12 months. Going forward, over the next 2 years, the bank is planning to add 150 braches a year that may entail higher costs.

  • Corporation Bank’s gross NPA has been brought down to 1.0% compared to 1.1% in FY09 while its net NPA remained at 0.3% during this period. The bank’s provision coverage ratio of 81% is also above the RBI’s mandated limit of 70%. The restructured assets of Rs 27 bn at the end of FY10 comprised 4.3% of the bank’s total advances at the end of the period.75% of the fresh NPAs were from the priority sector.

  • Corporation Bank has been a pioneer in branchless banking in the rural areas and had 1,200 such units at the end of March 2010 with 5.5 lac accounts and deposits of Rs 265 m. Further 18% of the bank’s branches were in the rural areas of Andhra Pradesh and Karnataka. The bank plans to open 1,000 more branchless banking by December 2010.

What to expect?
At the current price of Rs 522, the stock is attractively valued at 1.1 times our estimated FY12 adjusted book value. The bank’s annualised return on equity stands at a healthy 20.3%. Further, with CAR of 15.4% at the end of March 2012, the bank will not require further equity dilution. While we have been slightly more conservative in terms of balance sheet growth, we see sustenance of margins and asset quality to be an issue in the coming quarters. Having said that, at the current valuations, most of the risks seem to be factored in.

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