Corporation Bank reported healthy business growth in FY02 with 27% rise in advances and 15% increase in deposits. However, the bank’s interest income inched up marginally by 8% with sharp decline in yield on advances (a drop of 110 basis points to 11.3%) and increasing sub PLR lending. The bank’s net interest margins declined to 3.2% as proportionate reduction in cost of deposits by 50 basis points to 7.6% was less than fall in yield on advances.
During the year, the bank focused aggressively into the retail finance market (specially housing finance) to diversify its loan portfolio. Retail assets of the bank accounted for 14% of total advances (from 8% in FY01) recording a growth 138%. The bank aims to expand its operations substantially in housing finance in FY03 with target to add a portfolio of Rs 5 bn.
Industrial downtrend impacted the bank’s asset quality, which is reflected from increase in net NPA ratio to 2.3% in FY02 (2% in FY01). During the year, the bank’s gross NPAs increased by 21% to Rs 5.9 bn. Engineering, chemical and food processing industries accounted for major portion of bad loans. Consequently, provisions for doubtful debts increased by over 40% in FY02 and coverage ratio stood at 57%. The bank will have to monitor its advances in order to maintain its asset quality.
The bank’s fee based income, which contributed 16% to total income, witnessed a marginal growth of 10% excluding gains from sale of investments. Due to favourable interest rate environment, Corp. Bank doubled its profits from sale on investment portfolio (contributing 35% to other income). The bank’s commission and exchange revenues are facing stiff pressure from private banks with a 9% decline witnessed in FY02. The bank is betting on its tie up with LIC and New India Assurance to generate higher transaction business. However, there is no clarity from the management on the amount of business that these tie-ups may generate.
On the technology integration front, the bank has installed 125-networked ATMs across the country and aims to increase this number to 250 by the end of current fiscal. It has computerized 439 branches, covering 88% of its total business. The bank has targeted to spend Rs 880 m in FY03 on IT, which could be for computerization, online banking, setting up ATMs and branch expansion.
At the current market price of Rs 125, Corp. Bank trades at a P/E multiple of 6x and adjusted price to book value ratio of 1x. The bank’s CAR at 17.9% is relatively on the higher side and will allow it to expand its business operations. However, with increasing competition from private banks and low demand for credit, it will be a challenging task for the bank to increase its loan growth while maintaining profit margins. We have projected a CAGR of 20% in the bank’s profits over the next three years, assuming that the bank is able to leverage on its tie up with the two insurance companies and revival in the economic activity.
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