X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Corporation Bank: Squeezed margins - Views on News from Equitymaster
StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Corporation Bank: Squeezed margins
Apr 26, 2008

Performance summary
  • Interest income grows by 31.7% YoY in FY08 on the back of 31% YoY growth in advances.
  • Net profit margin improves by 70 basis points to 16.3% in FY08 due to lower provisioning.

  • Capital adequacy ratio at 12.1%.

  • Net NPA to advances drop from 0.4% in FY07 to 0.3% in FY08.

  • Cost to income ratio moves up from 41% to 42%.

  • Declares final dividend of Rs 6 per share over the interim dividend of Rs 4 per share (dividend yield 3.3%)

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 9,807 12,535 27.8% 34,302 45,165 31.7%
Interest Expense 5,777 8,509 47.3% 20,523 30,732 49.7%
Net Interest Income 4,030 4,026 -0.1% 13,779 14,433 4.7%
Net interest margin (%)       3.2% 2.7%  
Other Income 1,619 2,112 30.5% 5,658 6,998 23.7%
Other Expense 2,217 2,103 -5.1% 8,036 8,920 11.0%
Provisions and contingencies 1,512 1,019 -32.6% 3,234 1,857 -42.6%
Profit before tax 1,920 3,016 57.1% 8,167 10,654 30.5%
Tax 735 960 30.6% 2,805 3,304 17.8%
Profit after tax / (loss) 1,185 2,056 73.5% 5,362 7,350 37.1%
Net profit margin (%) 12.1% 16.4%   15.6% 16.3%  
No. of shares (m)       143.5 143.5  
Book value per share (Rs)*         294.8  
Price to book value (x)         1.1  
* Book value as on 31st March 2008

What has driven performance in FY08?
  • Advances – Sustaining momentum: At a time when most banks in the public as well as private sector are facing the impact of slowdown, Corporation Bank has been able to sustain its momentum in terms of advance growth, outperforming the sector average. The bank’s advance growth of 31% YoY is higher than our FY08 estimate of 18% YoY. What is however worrying is that due to inadequate capital adequacy (CAR) position, the bank has not been able to sustain its net interest margins. The faster growth in term deposits have pressurised the NIMs. The same have also been impacted by the write-off of amortisation of investment premia against net interest income. The bank has further reduced its exposure to the retail asset segment and home loans in particular in this fiscal.

    Leaning towards lower-risk assets…
    (Rs m) FY07 FY08 Change
    Advances 299,500 391,860 30.8%
    Retail 76,613 88,131 15.0%
    % of total advances 26% 22%  
    SME 32,100 40,250 25.4%
    % of total advances 11% 10%  
    Corporate 190,788 303,729 59.2%
    % of total advances 64% 78%  
           
    Deposits 423,568 554,244 30.9%
    CASA 108,730 127,630 17.4%
    % of total 26% 23%  
    Term deposits 314,838 426,614 35.5%
    % of total 74% 77%  
    Credit deposit ratio 70.7% 70.7%  

  • No signs of fees: During FY08, Corporation Bank witnessed a very marginal growth in its non-interest income while the growth in fee income was restricted to 13% YoY. Fee income contributed 43% of the bank’s total other income and 14% to the bank’s total income. Despite the formation of the alliance with OBC and Indian Bank, which gives it access to customers in the northern regions of the country and enables it to leverage the delivery channels of the other two banks, Corporation Bank does not seem to have made any headway on the fee income front.

  • Costs scale up: Corporation Bank’s cost to income ratio has risen marginally from 41% in FY07 to 42% in FY08. The same is nearly 7% 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 brought 100% of its branches on the CBS (core banking solution) platform. Going forward, over the next 3-4 years, the bank is planning to add 100 braches a year that may entail higher costs.

  • Provisioning relief: Corporation Bank’s provision coverage for NPAs has moved to 78.3% as at in FY08 compared to 77.3% in FY07. However post the recoveries (Rs 3.1 bn), the ratio is much lower. Nonetheless, the fact that the bank is relying on the write back of the excess provision for shoring up its bottomline is worrying as going forward, the possibility of slippages remains high. The overall delinquency rate for the bank has improved from 1.1% in FY07 to 0.6% in FY08 with net NPAs having declined to 0.3% in FY08 from 0.5% in FY07.

What to expect?
At the current price of Rs 337, the stock is attractively valued at 0.9 times our estimated FY10 adjusted book value. The bank’s annualised return on equity stands at a healthy 17.4%. However, the current CAR of 12% at the end of March 2008 may require further equity dilution. Corporation Bank is targeting asset growth of 20% to 25% in FY09 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). We, however, retain our conservative estimates on this front. Also, investors need to factor in the margin pressure and provisioning requirements. Having said that, investors should not discount the fact the bank continues to enjoy one of the best operating and return ratios (amongst PSU banks) and prospects of the synergies due to the MOU.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

CORPORATION BANK SHARE PRICE


Feb 23, 2018 (Close)

TRACK CORPORATION BANK

  • Track your investment in CORPORATION BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MORE ON CORPORATION BANK

CORPORATION BANK 5-YR ANALYSIS

COMPARE CORPORATION BANK WITH

MARKET STATS