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Corp Bank: No signs of improvement - Views on News from Equitymaster
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Corp Bank: No signs of improvement
May 14, 2014

Corporation Bank declared its results for the fourth quarter (4QFY14) and the financial year 2012-2014. The bank has reported a de-growth of 2.5% YoY in net interest income and a significant 88.3% YoY fall in net profits. On similar lines, the bank reported 60.8% fall in profits for FY14. Here is our analysis of the results.

Performance summary
  • Interest income grows by decent 14.2% YoY in 4QFY14, on the back of healthy 15.5% YoY growth in advances. Net Interest Income (NII), however, declines by 2.5% YoY for 4QFY14. For full year, the NII was up by modest 10.4% YoY.
  • Net interest margins (NIMs) trend down to 1.9% in FY14 from 2.3% in FY13.
  • Net NPA (non-performing assets) to advances spiked to 2.3% in FY14 from 1.2% in FY13. Provisions shoot up by 79.3% YoY during 4QFY14.
  • Other income disappoints and de-grows 31.6% YoY in 4QFY14, for full year FY14 it barely grows by 2.5% YoY.
  • Consequently, net profits report significant 88.3% YoY fall for 4QFY14 on account of poor performance across all parameters. For FY14, profits slide 60.8% YoY.
  • Capital adequacy ratio currently stands at 11.6 % at the end of FY14 as per Basel III norms.
  • The board has recommended a final dividend of Rs 2.25 per share for the year ended March 2014 (dividend yield 0.8 %).

Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 40,681 46,444 14.2% 153,341 179,586 17.1%
Interest expense 31,373 37,369 19.1% 119,082 141,749 19.0%
Net Interest Income 9,308 9,075 -2.5% 34,258 37,837 10.4%
Net interest margin (%)       2.3% 1.9%  
Other Income 5,674 3,883 -31.6% 16,079 16,477 2.5%
Other Expense 5,757 6,592 14.5% 19,968 23,920 19.8%
Provisions and contingencies 4,599 8,245 79.3% 13,514 27,977 107.0%
Profit before tax 4,625 -1,880 -140.6% 16,856 2,417 -85.7%
Tax 1,070 -2,295 -314.5% 2,509 -3,200 -227.5%
Effective tax rate 23.1% 122.1%   14.9% -132.4%  
Profit after tax/ (loss) 3,555 416 -88.3% 14,347 5,617 -60.8%
Net profit margin (%) 8.7% 0.9%   9.4% 3.1%  
No. of shares (m)         167.5  
Book value per share (Rs)*         602.0  
P/BV (x)         0.5  
* (Book value as on 31st March 2014)

What has driven performance in FY14?
  • Continuing with the weak quarterly earnings, 4QFY14 proved to be the toughest quarter for Corporation Bank. The weak earnings profile has dragged the return ratios to dismal levels (return on equity at 1.7% in March 2014). The asset quality woes also seem far from over as the provisions continue to soar. Lower NIMs and higher provisions led the bank to miss our estimated FY14 profits by almost 35%. On the balance sheet growth front, the bank continues to put up a good show. The advances have reported a healthy 15.5% YoY growth backed by sturdy growth in corporate and retail loan book. While the deposits have grown by strong 16.5% YoY, the CASA base has shrunk for the full year FY14.

    Corporate, Retail book grew strong, CASA base shrinks
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 1,187,167   1,370,863   15.5%
    Large Industries 541,350 45.6% 602,950 44.0% 11.4%
    Retail 251,480 21.2% 290,260 21.2% 15.4%
    Agriculture 94,660 8.0% 131,440 9.6% 38.9%
    Deposits 1,660,055   1,933,930   16.5%
    CASA 359,960 22% 393,150 20% 9.2%
    Term Deposits 1,300,095   1,540,780   18.5%
    Credit deposit ratio 71.5%   70.9%    

  • But has the credit growth translated into healthy income stream? Unfortunately the answer is no. And therefore, the net interest income (NII) for the bank has declined 2.5% YoY during 4QFY14. The higher interest costs too were responsible for contraction of income spreads during the quarter. For full year, the NII has grown modestly by 10.4% YoY. Net interest margins (NIMs) have trended down to 1.9% in FY14 from 2.3% in FY13.

  • The other income performance too has been disappointing during the March quarter of FY14. It has declined by as high as 31.6% YoY during 4QFY14. For FY14 the bank has reported a meager 2.5% rise in other income.

  • The operating expenses for the quarter have also shot up by 14.5% YoY during 4QFY14. For full year, the expenses have reported a 19.8% YoY increase. Therefore, the cost-income ratio has jumped to 51% during 4QFY14 from 38% same quarter a year ago.

  • The asset quality pressures stand looming for the bank. And that's rightly reflected in the spike in provisions too. For full year FY14, the provisions for the bank have zoomed more than 100% YoY. Even for the quarter ended March 2014, the provisions were up by staggering 79.3% YoY. The gross NPAs for the bank have gone up to 3.4% in FY14 from 1.7% a year ago. Net NPAs too were seen heading upwards to 2.3% in FY14 from 1.2% in FY13.

  • Higher provisions and weak interest income have dragged the profitability for the bank during 4QFY14. The profits have tumbled and were seen down by 88.3% YoY during 4QFY14. Even for full year FY14, the profitability has declined by 60.8% YoY.

  • The capital adequacy ratio of the bank stood at 11.6 % at the end of FY14 as per Basel III norms.

  • The bank's branch network boasts of 2,021 branches and 2,264 ATMs as the end of March, 2014. The bank has opened 314 branches during FY14.

What to expect?
At the current price of Rs 287, the stock is valued at 0.6 times our estimated FY16 estimated adjusted book value. Corporation Bank is amongst the PSU banking entities that have been the worst affected by the steep rise in bad loans from restructured assets. Add to that lower other income and higher operating costs that have dealt a heavy blow to the bank's profitability. We believe that the current discounted valuations of the bank factor in most of the downside risks. However, it will be extremely risky for investors to buy more of the stock. The management of the bank has failed to showcase any attempts of improving the performance on the NPA front. It will therefore be a while before Corporation Bank shows any signs of sustainable recovery.

At the current valuations, the dividend yield of Corporation Bank does not look very attractive. Hence investors looking for attractive dividend returns etc in the medium term can Sell the stock.

Our estimates for the stock, however, do warrant a revision…in terms of credit growth, provision estimates etc. Therefore investors who are comfortable holding on to the stock for the longer term can continue to do so. We will shortly update the FY17 target price of the stock.

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