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Corp. Bank: Provisioning impacts profits - Views on News from Equitymaster
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Corp. Bank: Provisioning impacts profits
Apr 24, 2009

Performance summary
  • Interest income grows by 34% YoY in FY09 on the back of 24% YoY growth in advances.
  • Net interest margin (NIM) drops marginally to 2.6% in FY09 from 2.8% in FY08.
  • Higher other income offsets rise in provisioning costs and tax incidence.
  • Net NPA to advances remain at 0.3% at the end of 4QFY09.
  • Capital adequacy ratio at 13.7% at the end of March 2009.


Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 12,248 17,064 39.3% 45,166 60,674 34.3%
Interest Expense 8,509 12,781 50.2% 30,732 43,764 42.4%
Net Interest Income 3,739 4,283 14.5% 14,434 16,910 17.2%
Net interest margin (%)       2.8% 2.6%  
Other Income 2,399 4,933 105.6% 6,998 11,072 58.2%
Other Expense 2,102 2,468 17.4% 8,920 10,016 12.3%
Provisions and contingencies 1,019 2,107 106.8% 1,857 3,856 107.6%
Profit before tax 3,017 4,641 53.8% 10,655 14,110 32.4%
Tax 960 2,035 112.0% 3,304 5,180 56.8%
Profit after tax / (loss) 2,057 2,606 26.7% 7,351 8,930 21.5%
Net profit margin (%) 16.8% 15.3%   16.3% 14.7%  
No. of shares (m)       143.5 143.5  
Book value per share (Rs)*         341.3  
Price to book value (x)         0.7  
* Book value as on 31st March 2009

What has driven performance in 4QFY09?
  • Shy of possible slippages in the retail segment, particularly mortgages that the bank had encountered earlier, Corporation Bank grow its advance book by 24% YoY, largely relying on the incremental offtakes to the large corporates. The bank has outperformed our estimates for advance growth by approximately 5% in FY09. The growth of 34% YoY in deposits was, however, nearly 15% higher than our estimates as we expected the bank to be more cautious about sustaining its CASA proportion. Although the higher cost of funds has marginally pressurised the bank’s NIM, the same are well within our estimates. The bank has attributed the drop in NIM over that of FY08 partly to the write-off of interest charged on agricultural loans that are subject to waiver.

    Leaning towards lower-risk assets…
    (Rs m) FY08 FY09 Change
    Advances 391,860 485,120 23.8%
    Retail 97,965 111,578 13.9%
    % of total advances 25% 23%  
    SME 43,105 53,363 23.8%
    % of total advances 11% 11%  
    Corporate 250,790 373,542 48.9%
    % of total advances 64% 77%  
           
    Deposits 554,240 739,840 33.5%
    CASA 194,050 232,640 19.9%
    % of total 35% 31%  
    Term deposits 360,190 507,200 40.8%
    % of total 65% 69%  
    Credit deposit ratio 70.7% 65.6%  

  • During 4QFY09, Corporation Bank witnessed 106% YoY growth in its non-interest income while the same grew by 58% YoY in FY09. The bank has not divulged the growth in fee income in this quarter. Nevertheless, the same contributed nearly 20% to the bank’s total other income in FY09 and a large part of credit for the buoyancy in other income can be attributed to gains on the treasury portfolio.

  • Corporation Bank’s cost to income ratio has fallen from 42% in 4QFY08 to 36% in 4QFY09. We had estimated the same at 39% for FY09. The bank’s cost to income ratio is nearly 5% lower than its peers in the public sector 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 73 branches to its franchise in the past 12 months. Going forward, over the next 5 years, the bank is planning to add 700 braches a year that may entail higher costs.

    A large part of the cost curtailment is due to the bank’s financial inclusion initiative in the rural areas through use of biometric cards. Corporation Bank has pioneered the effort in setting up branchless banking units and introduced the same in 411 villages until the end of March 2009 as against the target of 400 villages.

  • Corporation Bank’s gross NPA has been brought down to 1.1% compared to 1.5% in FY08 while its net NPA came down to 0.3% during this period. The bank could affect a cash recovery and upgradation of NPAs of Rs 2.8 bn in FY09, which also helped in keeping the NPA level under control.

What to expect?
At the current price of Rs 227, the stock is attractively valued at 0.6 times our estimated FY11 adjusted book value. The bank’s annualised return on equity stands at a healthy 18.2%. While the bank stands reasonably capitalised and has outperformed our growth estimates erosion of margins due to the higher cost of deposits remain a concern. Also, despite the higher provisioning (due to AS-15) and higher tax incidence the bank’s bottomline performance is also marginally better than our estimates. We retain our positive outlook on the bank from a long term perspective.

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