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Corporation Bank: A curtain raiser

May 9, 2001

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)FY00FY01EChange
Interest Income16,044 17,983 12.1%
Other Income2,708 2,925 8.0%
Interest Expenses11,461 12,043 5.1%
Operating Profit7,2918,86521.6%
Other Expenses2,8223,18512.9%
Profits before Tax4,2515,44928.2%
Profits after Tax3,1974,02625.9%
Provisions & contingencies8731,23241.2%
Net Profit2,3242,79420.2%
Equity shares (m) 120 120  

Performance ratios
OPM (excl. Other Inc.)28.6%33.0%
Tax / PBT24.8%26.1%
EPS (Rs)19.423.3

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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