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Corporation Bank: A curtain raiser - Views on News from Equitymaster
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  • May 9, 2001

    Corporation Bank: A curtain raiser

    Corporation Bank, the premier nationalised bank had reported an encouraging performance in the first nine months of FY01. The bank improved its operating margins sharply to 33%, a rise of over 590 basis points.

    The interest-spread management of the bank is one of the best in the industry. The spread has gone up to 3.5% during the first nine months from 2.9% in the corresponding previous period. Low cost saving account deposits contributed over 14% to total deposits with 2 m saving accounts. In the scenario of softer interest rate regime the bank stands to gain the most with short-term nature of fixed deposits. Over 56% of its deposits have a maturity period of less than one year.

    Apart from the benefits in interest spread, the bank will also gain in terms of an appreciation in its investment portfolio (as bond price increase with a decline in interest rates). Investment income contributes about 40% to its topline. However, its overall exposure to capital markets (investments and advances) was less than 2% as on December ‘00. This is likely to protect the bank from making higher provisions for this segment due to sharp fall in the equity markets.

    Financial snapshot
    (Rs m) FY00 FY01E Change
    Interest Income 16,044 17,983 12.1%
    Other Income 2,708 2,925 8.0%
    Interest Expenses 11,461 12,043 5.1%
    Operating Profit 7,291 8,865 21.6%
    Other Expenses 2,822 3,185 12.9%
    Depreciation 218 230 5.7%
    Profits before Tax 4,251 5,449 28.2%
    Tax 1,054 1,423 35.0%
    Profits after Tax 3,197 4,026 25.9%
    Provisions & contingencies 873 1,232 41.2%
    Net Profit 2,324 2,794 20.2%
    Equity shares (m) 120 120  

    Performance ratios
    Particulars FY00 FY01E
    OPM (excl. Other Inc.) 28.6% 33.0%
    Tax / PBT 24.8% 26.1%
    NPM 17.1% 19.3%
    EPS (Rs) 19.4 23.3

    Corporation Bank is expected to continue its growth trajectory for the year ended March ’01. The bank’s topline is projected to show a double-digit growth with over 20% growth in net profits (after provisions). We have conservatively estimated a rise of 41% in the provisions and contingencies amount. Low cost of funds will drive the operating margins of the bank higher resulting in astounding profit figures.

    The bank also enjoys a premier position in the asset management. Its NPA ratio of 1.8% as on December ’00 is comparable to the best in the industry.

    However, in terms of technology implementation Corporation Bank is lagging behind the leaders in the banking sector. This is partly due to its public sector tag. Nevertheless, the bank has drawn up a long-term plan to invest Rs 2.5 bn over the next six years. It has computerized 80% of its business and plans to launch 500 ATMs by FY02 (currently it has only 11 ATMs). It has introduced ‘Anywhere Branch Banking’ in Chennai and web enabled its cash management services (CMS) business. Although, the bank’s plans will take time to get implemented, it has atleast drawn up the right road map.

    At the current market price of Rs 123 Corporation Bank is trading at a P/E of 5 times its FY01 projected earnings. The bank’s price to book value ratio of 1x is amongst the lowest in the sector. Its public sector status is partly responsible for its low valuations. Looking at the strong performance of the bank, a re-rating in the stock could come only with the announcement of a strategic disinvestment.



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