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Corporation Bank: Slow and steady

May 7, 2007

Performance Summary
Corporation Bank had recently declared results for the fourth quarter and fiscal ended March 2007. While the bank has marginally outperformed our advance growth estimations, the efficient containment of NPAs and provision write backs come as a welcome surprise. Also, ability to pare operating costs and improvement in fee income stream has kept the bottomline growth buoyant. Having said that, the fact that higher deposit growth has dented the bank’s net interest margins is in line with our expectations. The benign impact of the bank’s MoU with OBC and Indian Bank (OIC alliance) has started filtering into the numbers.

Rs (m) 4QFY06 4QFY07 Change FY06 FY07 Change
Income from operations 7,054 9,807 39.0% 26,265 34,302 30.6%
Interest Expense 3,945 5,777 46.4% 13,996 20,523 46.6%
Net Interest Income 3,109 4,030 29.6% 12,269 13,779 12.3%
Net interest margin (%)       3.6% 3.2%  
Other Income 1,330 1,619 21.7% 4,736 5,658 19.5%
Other Expense 1,992 2,217 11.3% 7,467 8,036 7.6%
Provisions and contingencies 845 1,512 78.9% 2,791 3,234 15.9%
Profit before tax 1,602 1,920 19.9% 6,747 8,167 21.0%
Tax 599 735 22.7% 2,300 2,805 22.0%
Profit after tax / (loss) 1,003 1,185 18.1% 4,447 5,362 20.6%
Net profit margin (%) 14.2% 12.1%   16.9% 15.6%  
No. of shares (m) 143.5 143.5   143.5 143.5  
Diluted earnings per share (Rs)* 28.0 33.0   31.0 37.4  
P/E (x)         8.5  
* (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 901 branches and 100% of its business runs on a core banking solution. The bank also has a network of over 929 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 of Commerce and Karnataka Bank for ATM sharing.

What has driven performance in 4QFY07?
The worst is over? Not throwing up too many surprises, Corporation Bank clocked a healthy 25% YoY growth in advances in FY07, marginally outperforming our estimations. The same were, however, lower than most of its peers and the sector average. The reason as to why we had a conservative stance on the bank’s asset growth estimates was due to its non-aggressive approach and slow start to the year after a bad experience on the home loan delinquency front in FY06 (gross NPAs in home loans were 5% when the sector average was 1%). Mortgage loans continue to comprise about 56% of the bank’s retail portfolio and 14% of total advances in 4QFY07 (gross NPAs in home loan at 3.5% in FY07 in line with the sector).

After several quarters of restricted growth, the bank picked up pace in the latter part of FY07 and has been steadily growing its asset book thereon. Backed by a comfortable CAR position, the bank was also able to sustain its net interest margins above the industry average so far. While the steady growth in deposits have pressurised the NIMs by 30 basis points over that of last year, the same has actually improved by 10 basis points QoQ due to higher yields. It must also be noted that the bank has nearly 90% of its loans on a floating rate basis thus giving it re-pricing power with the up-move in interest rates.

While the deposit growth of nearly 28% YoY is higher than the industry average of 23% YoY, the marginal decline in the proportion of low cost deposits (CASA) to total deposits is a concern. More so, in a rising interest rate scenario. The bank, however, had earlier explained that the high cost deposits were garnered to cater to the maturity of a couple of big-ticket low yielding advances in 3QFY07, the re-pricing of which will relieve some pressure from the NIMs. In the meanwhile, the bank’s NIMs have shrunk to 3.2% from 3.6% in 4QFY07. We had estimated FY07 NIMs at 3.0%.

Balanced performance
(Rs m) FY06 % of total FY07 % of total Change
Advances 239,600   299,500   25.0%
Retail 60,834 25.4% 74,875 25.0% 23.1%
Corporate 178,790 74.6% 224,625 75.0% 25.6%
Deposits 328,757   423,570   28.8%
CASA 112,875 34.3% 144,310 34.1% 27.9%
Term deposits 215,882 65.7% 279,133 65.9% 29.3%
Credit deposit ratio 72.9%   70.7%    

Other income – Buoyed by write-backs: Corporation Bank witnessed 10% YoY growth in its fee income during FY07 after very negligible growth in the past. The same has also shown some signs of stability as a percentage of total income. The bank’s MOU with OBC and Indian Bank that gave it access to customers in the northern regions of the country and enabled it to leverage the delivery channels of the other two banks has enhanced its revenue growth on the fee income side. Growth in commission income (28% YoY) and provision write backs (58% YoY) were the main causes of improvement in other income stream this fiscal. The bank has sold its stake in NSE, the income from which has not been booked in FY07. As per the management, the same is likely to be to the tune of Rs 550 m.

In FY07, the bank has made an additional provision of Rs 168 m towards the non-performing assets of its erstwhile wholly owned subsidiary Corp Bank Homes, which was merged with the bank this fiscal. This has caused the bank to compromise on provisioning for delinquencies. The bank’s loan loss provisions (ex-recoveries) stand at merely 0.6% of loans in this fiscal. Although the overall coverage ratio (provision to gross NPAs) is above 77%, given the past experiences, with an aggressive stance on mortgage loans going forward, the possibility of high slippages remains a concern. The overall delinquency rate for the bank has improved with net NPAs having declined to 0.5% in 4QFY07 from 0.6% in 4QFY06.

Prudent cost management: Corporation Bank has pared its cost to income ratio from 44% in FY06 to 41% in FY07. The same is nearly 5% to 8% lower than its peers in the PSU banking space and one of the best in the sector. This is also despite the fact that the bank has increased its employee base by nearly 25% in this fiscal and brought 100% of its branches on the CBS (core banking solution) platform.

What to expect?
At the current price of Rs 317, the stock is attractively valued at 1.1 times our estimated FY09 adjusted book value. The bank’s annualised return on equity stands at a healthy 14.2% and CAR at 12.7% at the end of March 2007 and is estimated to be 11.7% as per Basel-II accord. It is targeting asset growth of 20% to 25% in FY08 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). Nevertheless, investors need to factor in the margin pressure and provisioning requirements. Aggressive growth at the cost of margins and little support from fee income is unlikely to stand the bank in good stead going forward. Having said that, investors should not discount the fact the bank continues to enjoy one of the best margins and capital adequacy ratios (amongst PSU banks) and prospects of the synergies due to the MOUs. We withhold our positive view on the stock from a long-term perspective.

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