Corporation Bank is one of the most efficient banks in the country with sound asset quality. The bank announced its results last week and reported robust growth (35%) in its bottomline for FY03. Topline growth (8%) was, however, subdued in the same period. We take an in depth look at the performance of the bank and the key takeaways of the analyst meet held by the same.
While the bank has reported a slow growth in topline, significant improvement in net interest income and other income has been the main driver for bottomline growth. Net interest income has shown a growth of 27% in FY03, mainly fueled by a fall in interest expenses. Interest expenses have fallen primarily on account of lower cost of deposits (from 7.6% to 6.7% in FY03). As a consequence, net interest margins have improved to 3.6% from 3.2% last year.
On the other income front, the bank has shown a 39% rise. Out of the total other income of Rs 5.3 bn, nearly half, or Rs 2.6 bn, came from profits earned from sale of investments. This indicates the extent to which Corporation Bank’s other income has been helped by falling interest rates. This also indicates that such levels of other income are not sustainable in the long run, especially when interest rates stop falling and start to stabilize.
Having enumerated the primary reasons for the robust performance of Corporation Bank, we would like to concentrate now on the performance of the core business of the bank. One disturbing aspect of the bank’s core business is the fact that the bank has seen its net advances grow by just over 9%. Considering that the growth in net bank credit for FY03 was close to 12%, this performance has been disappointing. While the bank has been consistent in its topline growth for all the quarters in FY03 the indications are that it has not been able to grow its assets as much as it would have wanted to.
This indicates that competitive pressure is eating into the market share of the bank. We believe that the new generation private sector banks are growing their assets at a blistering pace and they seem to be eating in to the market share of public sector banks. Also the growth in advances of Corporation Bank has been mainly brought about by the strong growth in retail assets. To put things in perspective retail assets have grown by Rs 8.0 bn (52.0%), whereas non-retail assets have recorded a marginal growth by Rs 2.3 bn (2.3%). While the size of the new private sector banks are not comparable to their public sector counter parts, one thing seems clear, public sector banks seem to be facing the heat.
However, all is not gloomy for Corporation Bank on this front. The bank has added 51 new branches in FY03, apart from being aggressive on the ATM front. These moves are likely to ensure that the bank is able to attract a higher quantum of business going forward. However, the key challenge of staving off competition still remains. On the asset quality front, the bank continues to exhibit its strengths. The bank has brought down its net NPA levels to 1.6% compared to 2.3% in FY02. The coverage ratio has also improved to 69% compared to 56% in FY02.
Public sector banks have exhibited strong growth rates in their bottomline mainly due to falling interest rates. The challenge from hereon for Corporation Bank and other public sector banks is to manage competition. Also the challenge will be to integrate technology in their business processes in order to increase efficiencies. The bank’s valuation from hereon will be a factor of how it will be able to meet these challenges.
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