Indian Banks (both private and public sector) are betting on their retail presence to drive future growth. As urban markets are becoming more competitive, banks are tapping rural and semi urban areas for low cost of funds.
Corporation Bank, one of the premier public sector banks, has successfully improved its interest spread by increasing the proportion of retail deposits and retail assets. Saving account deposits account for 14% of total deposits and retail advances form 10% of total advances. This has improved the interest spread of the bank to 3.5% during the nine months ended December ’00 from 2.9% in the corresponding previous period.
The bank is slated to announce its annual results tomorrow. We have projected a growth in the range of 20% for its net profits and 12% for topline in FY01. (In the first 9 months, the bank had reported a 13% growth in interest income and 22% rise in profits). Its margins are expected to rise by over 200 basis points in FY01.
In the past few years, Corporation Bank has consistently improved its return ratios. Its returns are comparable to the best in the industry. The bank’s non-performing asset (NPA) to advances ratio of 1.9% is also on the lower side. Corporation Bank’s retail initiatives are expected to yield good returns in terms of higher profitability and will also help bring down the NPA ratio.
At the current market price of Rs 134 Corporation Bank is trading at a P/E multiple of 6x FY01 projected earnings and Price/Book value ratio of 1.2x. The bank’s valuations are one of the lowest amongst its peers. This is largely due to Corporation Bank being a relatively slow in adopting new technologies. However, the bank plans to invest around 2.5 bn in the next 5 years and has also drawn up an IT road map for the purpose. Its public sector status is also responsible for its lacklustre valuations.
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