Corporation Bank: Losing steam

Corporation Bank, continuing with its dull performance in the last quarter has reported its FY04 results. The bank has reported a 5% topline growth and a 21% bottomline growth for the full year. While it has managed to improve further upon its net interest margins and consequently its operating margins, the bottomline growth seems to have been mainly effected by a strong fall in provisioning for NPAs. Infact, if the provisioning were to be kept at the FY03 levels, the bottomline growth would have been stagnant. For the March quarter, while the topline has risen by 4%, the bottomline improvement stood at 153% on a YoY basis.

For FY04, the bank has seen a 16% rise in its advances. However, we would like to point out that this growth rate is only marginally higher than the period ending December number of 15%. This is relevant as the March quarter is the period in which credit offtake normally picks up for the banking sector. Corporation Bank's growth rate indicates that it has still not got its act together as far as asset growth is concerned. The concern regarding the bank's slowdown in this aspect has been highlighted since the last few quarters. While banks like OBC and SBI (despite being larger) have reported better growth in advances, Corporation Bank seems to be lagging behind. Even private sector banks like IDBI Bank and UTI Bank have reported a much larger growth in advances till the period ending December. The only noteworthy aspect of the growth has been the expansion in the retail assets. However, this is nothing out of the ordinary, as almost all the banks are witnessing similar growth rates.

The marginal growth in topline may be due to the relatively slower growth in advances, as well as falling yields. The bank however, has significantly offset the slow growth in topline with a significant fall in interest expenses. This has been brought about by leveraging upon low cost retail deposits. The table below indicates the growth in the same. The fall in interest expenses has led to further improvement in the net interest margins (NIM) and consequently the operating margins of the bank. The NIM has improved to 3.8% from 3.6% last year. Operating margins have further improved due to control over operating expenses (up 240 basis points).

There has been a fall in other income in FY04. This may be on account of a fall in treasury profits (G-Sec portfolio) especially in the December quarter. For most public sector banks the bottomline growth over the years has been driven by strong treasury gains. For Corporation Bank these treasury gains seem to be slowly falling and consequently they are impacting the bottomline of the bank. Also in FY04, there has been a strong fall in provisioning and this has helped shore up the bottomline. Infact, due to lower provisioning and converting to the 90-day overdue norm, the net NPA to advances ratio has risen to 1.8% from 1.6% last year.

At the current market price of Rs 338, Corporation Bank is trading at a price to book ratio of 1.8x. Corporation Bank does not seem to be coping well with competition and this is reflected in the bank's inability to improve credit offtake from the corporate segment. Investors need to concentrate on the performance of the bank with respect to its ability to deploy capital at a healthy yield. The bank has fallen short of all our expectations in FY04, and considering its performance we will have to revise all our estimates downward for FY05. Unless Corporation Bank gets its act together it may fail to capitalise on the opportunities in the highly competitive and evolving banking sector.