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Corporation Bank: Just another quarter!

Apr 27, 2006

Performance Summary
Corporation Bank has registered a fall in its bottomline for the second consecutive quarter in 4QFY06. In fact, excluding the impact of income tax refunds received during the quarter, the profits for FY06 have declined by 2% YoY. While margins continue to remain under pressure, the bank’s asset growth has been satisfactory.

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 5,767 7,054 22.3% 22,498 26,264 16.7%
Other Income 1,266 1,574 24.3% 5,646 5,715 1.2%
Interest Expense 2,900 3,945 36.0% 11,204 13,996 24.9%
Net Interest Income 2,867 3,109 8.5% 11,294 12,268 8.6%
Net interest margin (%) 3.9% 3.6%
Other Expense 1,683 1,992 18.3% 6,670 7,467 12.0%
Provisions and contingencies 787 1,089 38.5% 4,224 3,770 -10.7%
Profit before tax 1,663 1,602 -3.7% 6,046 6,745 11.6%
Tax 587 600 2.2% 2,024 2,300 13.6%
Profit after tax / (loss) 1,076 1,002 -6.8% 4,022 4,445 10.5%
Net profit margin (%) 18.7% 14.2% 17.9% 16.9%
No. of shares (m) 143.5 143.5
Diluted earnings per share (Rs)* 31.0
P/E (x) 10.9
* (12 months trailing)

The ‘cherry’ amongst PSUs
One of the few PSU banks in India with a clean balance sheet and impressive track record, Corporation Bank has a well-established franchise of 782 branches and 83% of its business (504 branches) runs on a core banking solution. The bank also has a network of over 814 ATMs covering nearly 80 cities and towns throughout the country. The bank has tie-ups with the LIC and New India Assurance for cross selling products and services. It has also entered into an agreement with the LIC (the latter has taken a 26% stake in Corporation Bank) for offering cash management services and has agreements with Oriental Bank and Karnataka Bank for ATM sharing.

What has driven performance in 4QFY06?
Stunted retail segment: While an asset growth of 29% YoY seems reasonable for Corporation Bank in comparison to its peers in the PSU banking sector, the bank appears to be incompetent in tapping the retail lending market. This is also a fallout of the higher delinquencies witnessed by the bank in the home loan segment in the past few quarters. Nevertheless, the exposure to mortgage loans increased to 60% of the retail book in 4QFY06 against 52% in the corresponding quarter of FY05. It is also surprising to note that while the home loan segment has expanded by 23% YoY during FY06, the rest of the retail portfolio has grown by a mere 6% YoY. The share of retail credit has fallen further from 31% in 4QFY05 to 25% in 4QFY06. More importantly, it should be noted that the bank has 62% to 65% of its advances in the sub-PLR segment.

Credit growth…corporate skewed
(Rs m) FY05 % of total FY06 % of total Change
Advances 185,460 239,620 29.2%
Retail 57,500 31.0% 60,830 25.4% 5.8%
Corporate 127,960 69.0% 178,790 74.6% 39.7%
Deposits 272,332 328,765 20.7%
CASA 94,129 34.6% 112,766 34.3% 19.8%
Term deposits 178,203 65.4% 215,999 65.7% 21.2%
Credit deposit ratio 68.1% 72.9%

The bank has witnessed an uptick in cost of funds faster than the yield on its assets, which has resulted in its net interest margins (3.6% in 4QFY06 vis-à-vis 3.9% in 4QFY05) being pressurised. The borrowing costs have risen due to the additional Tier II borrowings and rise in overseas borrowing rates that are linked to the LIBOR. The bank is, however, expected to take a call on raising its lending rates (especially the sub-PLR ones) in a meeting later this month.

Delinquencies – taken care of: The overall delinquency rate for the bank has improved with net NPAs having declined to 0.6% in FY06 from 1.1% in FY05, bringing it to the best amongst PSU banks. Also the provision coverage ratio stands at a comfortable 75%. However, given the past experiences, with an aggressive stance on mortgage loans going forward, the possibility of high slippages remains a concern.

Efficiency – not flattering: The bank‘s efficiency ratios have also flattened over the past two quarters in terms of profitability. Despite higher automation of branches, lower other income has pared the ratio on the profitability side. The per employee parameter has fallen due to recruitment of 500 employees in this quarter.

Productivity flattens…
(Rs m) 4QFY05 2QFY06 3QFY06 4QFY06
Business per employee 36.4 44.1 45.0 52.7
Profit per employee 0.3 0.5 0.4 0.4
Business per branch 489.4 581.4 585.7 578.6
Profit per branch 12.4 13.8 13.0 5.3

Fee to little rescue: While the adjacent chart seems to suggest that the rising contribution of fee income to other income is complementing the fall in treasury income for the bank, the facts do not support this notion. The bank, in fact, has witnessed a very negligible growth in its fee income during 4QFY06. The MoU with LIC for cash management services is also proving to be of no avail as there continue to remain pricing pressures.

Provisions taking toll: The bank had to make a provisioning of Rs 470 m in the fourth quarter due to the increase in general provisioning on standard assets to 0.4% from 0.25%, which has further dragged its bottomline. This is, however, a phenomenon being witnessed across the sector.

What to expect?
At the current price of Rs 339, the stock is trading at 1.2 times our estimated FY08 adjusted book value. Although the bank is well capitalised (CAR 13.9% in FY06) to capture the growth opportunities in the sector (through both organic and inorganic routes), it has historically been a laggard in terms of asset growth. The high capitalisation (capital adequacy ratio) has had a negative impact on return ratios that are lower as compared to its peers. Also, investors need to factor in the upcoming margin pressure. Lack of planning for future growth and initiatives for capturing the retail potential (for both fund and non-fund income growth) remain a major disappointment.

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