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Corp Bank: Margins see a contraction
May 8, 2012

Corporation Bank declared its results for the financial year 2011-2012 (FY12). The bank has reported 43% YoY and 7% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by only 7% YoY in FY12 due to higher costs, this was despite a 16% YoY growth in advances.
  • Capital adequacy ratio currently stands at 13.1% at the end of FY12 from 14.3% at the end of FY11 as per Basel II norms.
  • Net interest margin (NIM) sees deterioration to 2.5% from 2.9% in FY11.
  • Net NPA (non-performing assets) to advances comes in higher at 0.87% in FY12 from 0.46% in FY11.
  • Other income improves by 19% YoY in FY12; but falls by 11% for the 4QFY12.
  • The board has recommended a dividend of Rs 20.5 per share for FY12, working out to a dividend yield of 5%.


Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 25,554 35,859 40.3% 91,350 130,178 42.5%
Interest expense 17,936 27,519 53.4% 61,949 98,706 59.3%
Net Interest Income 7,618 8,339 9.5% 29,402 31,472 7.0%
Net interest margin (%)       2.9% 2.5%  
Other Income 4,739 4,233 -10.7% 12,655 15,068 19.1%
Other Expense 5,056 4,430 -12.4% 16,420 17,839 8.6%
Provisions and contingencies 2,529 3,377 33.5% 6,203 9,505 53.2%
Profit before tax 4,771 4,765 -0.1% 19,434 19,196 -1.2%
Tax 1,318 1,253 -4.9% 5,233 4,012 -23.3%
Effective tax rate 27.6% 26.3%   26.9% 20.9%  
Profit after tax/ (loss) 3,453 3,513 1.7% 14,201 15,184 6.9%
Net profit margin (%) 13.5% 9.8%   15.5% 11.7%  
No. of shares (m)         148.1  
Book value per share (Rs)*         558.7  
P/BV (x)         0.7  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • Corporation Bank managed to grow its advance book by 16% YoY in FY12 in line with the sector average growth rate. This was largely relying on the incremental demand from large corporate, retail and SME segment. Upward repricing of loans helped increase the lending yields from last year. However, the bank could not effectively manage costs. Going forward the bank plans to focus more on higher yielding SME and retail advances versus low yield big-ticket advances.

  • Corporation Bank's NIM moved down to 2.5% in FY12 with CASA (current account, and savings bank accounts) funding being 22% of total deposits, versus 26% last year. The bank's NIMs came in slightly higher than our conservative estimates. Corporation Bank's NIM moved down from 2.9% to 2.5% in 9mFY12 with CASA (current account, and savings bank accounts) funding being only 21% of total deposits. The bank expects to increase its CASA base to around 30% by giving more focus on increasing the same. On account of higher interest costs due to its large bulk deposit base, the growth in the NII was muted at 7% YoY for FY12. The bank hopes to increase its NIMs going forward. The RBI's monetary easing should help matters going forward. Post the RBI's 0.5% cash reserve ratio cut, the bank reduced its base rate by 15 basis points to 10.5%.

    Healthy advance on SME and Retail front
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 868,500   1,004,690   15.7%
    Agri 55,130 6.3% 71,400 7.1% 29.5%
    Retail 156,710 18.0% 202,890 20.2% 29.5%
    Large corporate 337,190 38.8% 449,210 44.7% 33.2%
    SME 116,200 13.4% 143,400 14.3% 23.4%
    Deposits 1,167,480   1,361,420   16.6%
    CASA 302,970 26.0% 301,130 22.1% -0.6%
    Tem deposits 864,510 74.0% 1,060,290 77.9% 22.6%
    Credit deposit ratio 74.4%   73.8%    

  • During FY12, Corporation Bank witnessed lower share of non-interest income while the growth in fee income was restricted to only 9.5% YoY. The fact that the bank has made 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 74% jump in FY12 on account of redemption of mutual funds, sales of shares in the MCX IPO, etc.

  • Corporation Bank's cost to income ratio was maintained at around 38% in FY12 from 39% in FY11. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector. Expenses increased by less than 9% for the 12 month period but declined by over 12% in 4QFY12.

  • The bank is now sufficiently capitalized, with a capital adequacy ratio (CAR) of 13.1% as per Basel II norms, with 8.3% Tier 1 ratio. The company hasn't opted for any capital infusion so far this year, but may have to go in for one next year to maintain its capital base.

  • Corporation Bank's gross NPA increased to 1.3% in FY12 from 0.9% in FY11 and at the net level NPAs came in higher at 0.9% as against 0.5% in FY11. The bank's provision coverage ratio was also drawn down from 74.7% at the end of FY11 to 65.3% currently. However CRBK has coverage of 89% of the Gross NPA coverage as per the RBI mandate in September 2010, has to be in excess of 70%. Large industries and SME accounts saw a spike in slippages.

  • The bank's restructuring has also increased with restructured accounts coming at 4.6% of advances. Irrespective the bank's 15.5% exposure to the infra space, out of which 9.3% is to the power sector is some cause of concern. Most of the restructuring came in from large industries including Air India and some State Electricity Boards (SEBs). There may be further pain expected from the UP SEB in FY13.

What to expect?
At the current price of Rs 385, the stock is valued at 0.6 times our estimated FY14 adjusted book value. The bank's annualised return on equity stands at a healthy 18.2% and return on assets at over 1%. While asset quality is expected to be somewhat of an issue in the coming quarters the bank should be able to improve its NIMs going forward in light of the RBI's monetary easing as well as its strategy of reduction of bulk deposits and focusing more on higher yielding advances. The bank has not been able to adequately contain its cost of funds, and CASA expansion is part of its plan. The bank plans to open 300 more branches mainly in states like Gujarat, Rajasthan, Punjab, West Bengal, etc to increase its penetration in areas besides its mainstay in South India. It also plans to open branches in rural areas to be able to meet its priority sector lending targets which is still below mandated levels. The bank also plans to increase its focus on recovery efforts, which should help improve asset quality going forward. Irrespective, the current valuations leave significant upside for investors from 2 to 3 year perspective.

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