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Corp Bank: Pension provisioning reduces profits - Views on News from Equitymaster

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Corp Bank: Pension provisioning reduces profits

Apr 30, 2011

Corporation Bank declared its results for the financial year 2010-2011 (FY11). The bank has reported 31% YoY and 21% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 55% YoY in FY11, on the back of a 37% YoY growth in advances.
  • Capital adequacy ratio currently stands at 14.1% at the end of FY11 from 15.7% at the end of FY10 as per Basel II norms.
  • Net interest margin sees an improvement to 2.5% from 2.1% in FY10.
  • Net NPA (non-performing assets) to advances comes in higher at 0.46% in FY11 from 0.31% in FY10.
  • Other income improves by 52% YoY in 4QFY11; but falls by 11% for the full year FY11.
  • The board recommended a dividend of Rs 20 per share for FY11, working out to a dividend yield of 3%.

Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 18,719 25,554 36.5% 69,877 91,352 30.7%
Interest expense 12,824 17,936 39.9% 50,843 61,955 21.9%
Net Interest Income 5,894 7,618 29.2% 19,033 29,397 54.5%
Net Interest margin (%)       2.1% 2.5%  
Other Income 3,230 4,904 51.8% 14,933 13,244 -11.3%
Other Expense 3,674 5,056 37.6% 12,600 16,417 30.3%
Provisions and contingencies 1,651 2,695 63.2% 4,744 6,888 45.2%
Profit before tax 3,799 4,771 25.6% 16,623 19,336 16.3%
Tax 676 1,318 95.0% 4,921 5,204 5.8%
Effective tax rate 17.8% 27.6%   29.6% 26.9%  
Profit after tax/ (loss) 3,123 3,453 10.6% 11,703 14,133 20.8%
Net profit margin (%) 16.7% 13.5%   16.7% 15.5%  
No. of shares (m)         148.1  
Book value per share (Rs)*         497.6  
P/BV (x)         1.2  

What has driven performance in FY11?
  • Corporation Bank managed to grow its advance book by nearly 37% YoY in FY11 at 1.8 times the sector average growth rate. This was largely relying on the incremental demand from the large corporate and SME ( small & medium enterprises) segment. Also, the upward re-pricing of loans with base rate implementation helped increase lending yields. Corporation Bank's NIMs moved up to 2.5% in FY11 with CASA (current account, and savings bank accounts) funding being 26% of total deposits. The bank's NIMs for the full year are in line with our estimates.

  • The bank's exposure to commercial real estate grew by 4% YoY in FY11 and stood at 3.4% of total advances. Although the loan growth came in higher than our estimates; the overall growth in interest income is in line with our estimates.

    Healthy advance growth overall
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 632,026   868,504   37.4%
    Retail 116,960 18.5% 156,710 18.0% 34.0%
    Large corporate 234,470 37.1% 337,190 38.8% 43.8%
    SME 64,350 10.2% 116,200 13.4% 80.6%
    Deposits 927,337   1,167,475   25.9%
    CASA 264,783 28.6% 302,969 26.0% 14.4%
    Tem deposits 662,554 71.4% 864,506 74.0% 30.5%
    Credit deposit ratio 68.2%   74.4%    

  • During FY11, Corporation Bank witnessed lower share of non-interest income while the growth in fee income was restricted to 17.6% YoY. The fact that Corporation Bank has made very marginal headway on the fee income front continues to make it vulnerable to losses on the treasury side. Profits on sale of investments saw a huge 66% decline, and income from cash-management also saw a 7.5% fall.

  • Corporation Bank's cost to income ratio increased to 39% in FY11 from 37% in FY10. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector. Salary costs saw a 42% increase this year on account of payment of arrears as well as provisioning. Pension provisioning for employees (retired and current) was taken as Rs 3.4 bn for the year. This provision was made in full for all retired employees as per RBI guidelines. A further amortization of Rs 1.1 bn per year however, will need to be adjusted over the next four years for the bank's existing employees.

  • The bank is now adequately capitalized, with a capital adequacy ratio (CAR) of 14.1% as per Basel II norms, with 8.7% Tier 1 ratio. During the quarter (4QFY11), the bank issued 4.7 m equity shares to the Government on preferential basis at Rs 658.5 per share.

  • Corporation Bank's gross NPA decreased to 0.9% in FY11, from 1% in FY10, however, at the net level NPAs came in higher at 0.5% as against 0.3% in FY10. The bank's provision coverage ratio of 74.7% is also above the RBI's mandated limit of 70%. The bank has around Rs 7 bn in exposure to the microfinance sector; however it is looking various proposals with other banks on how to restructure this debt.

What to expect?
At the current price of Rs 589, the stock is valued at 0.9 times our estimated FY13 adjusted book value. Research Pro subscribers can view latest updates here. The bank's annualised return on equity stands at a healthy 21%. We see sustaining margins and asset quality to be an issue in the coming quarters. This is especially with proposals for savings bank rate deregulation as well as RBI's tight monetary policy. Having said that, current valuations, do leave significant upside for investors from 2 to 3 year perspective.

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Mar 22, 2019 (Close)


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