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Corporation bank: Restructuring overhang in FY15 - Views on News from Equitymaster

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Corporation bank: Restructuring overhang in FY15
Jun 3, 2015

Corporation Bank declared its results for the fourth quarter of the financial year 2014-2015 (4QFY15). The bank has reported a growth of 22.8% YoY in net interest income and 8.7% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by decent 22.8% YoY in 4QFY15 on the back of healthy growth in credit. Over and above non-interest income witnessed healthy growth of 29.7% YoY.
  • Net profit increases by 8.7% YoY in 4QFY15, on account of higher provisions and higher tax reversal in 4QFY14.
  • Net interest margin improved to 2.3% during FY15 from 1.9% a year ago.
  • Cost to income ratio moved up from 44.1% during FY14 to 45.5% in FY15.
  • Net NPA (non-performing assets) to advances increased to 3.08% in 4QFY14 from 2.32% in 4QFY14.
  • Capital adequacy ratio currently stands at 11.09% at the end of 4QFY15 as per BASEL III norms.

Standalone Financial Performance Snapshot
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income 46,444 48,816 5.1% 179,586 195,564 8.9%
Interest expense 37,369 37,677 0.8% 141,749 154,853 9.2%
Net Interest Income 9,075 11,140 22.8% 37,837 40,712 7.6%
Net interest margin (%)       1.9% 2.3%  
Other Income 3,882 5,036 29.7% 16,477 14,741 -10.5%
Other Expense 6,592 6,523 -1.1% 23,920 25,261 5.6%
Provisions and contingencies 8,245 9,265 12.4% 27,977 25,520 -8.8%
Profit before tax -1,881 389   2,417 4,671 93.3%
Tax -2,295 -62   -3,200 -1,058  
Effective tax rate 122.0% -15.9%   -132.4% -22.6%  
Profit after tax/ (loss) 415 451 8.7% 5,617 5,729 2.0%
Net profit margin (%) 0.9% 0.9%   3.1% 2.9%  
No. of shares (m)         837.7  
Book value per share (Rs)*         125.6  
P/BV (x)         0.4  
* (Book value as on 31st March 2015)

What has driven performance in 4QFY15?
  • The fourth quarter of FY15 has been better than the company's previous quarters. The company has reported net profits for the quarter. While the interest income has witnessed good improvement, the provisions of the bank too have increased which in turn have impacted the profits.

  • While the CASA ratio remained stable at 17.3% on YoY basis, the NIMs showed improvement due to lower deposit costs.

  • Corporation Bank has initiated multi pronged strategy for the purpose of close and effective monitoring of the stressed assets and for recovery of NPAs by forming 4 separate verticals for monitoring of stressed accounts and recovery and upgradation of NPA accounts. While the company is making attempts to control the NPA levels, the gross NPAs as share of advances stood at 4.8% during 4QFY15 versus 3.4% in 4QFY14.

  • CASA share to total deposits stood at 19.7% for the quarter, this indicates weaker liability profile.

  • The restructured loans accounted for 7.3% of the bank's loan book as on March 2015, while the provision coverage ratio was about 55%. The profits therefore remain heavily subjected to risk of write offs.

  • The bank's return on equity barely stood at 5.6% in FY15.
What to expect?
At the current price, the stock is valued at 0.66 times the FY17 estimated adjusted book value.

While at the current levels the stock is trading much below the 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. Hence, we would prefer to wait and watch the shaping up of asset quality of the bank and its ability to control slippages. Until then we would recommend you to not buy the stock despite the attractiveness of valuations.

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