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Conference call excerpts: Corporation Bank - Views on News from Equitymaster
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Conference call excerpts: Corporation Bank
Jun 6, 2005

Post the 4QFY05 results we recently had a one to one conference call with the Corporation Bank management in order to get a better insight into the bank’s long-term strategy and the initiatives being taken for the same.

About Corporation Bank
One of the few PSU banks in India with a clean balance sheet and impressive track record, Corporation Bank has a well-established franchise of 742 branches out of which 431 branches and 62 extension counters are fully automated. The bank also has a network of over 700 ATMs covering nearly 80 cities and towns throughout the country. Its agreement with LIC (LIC has taken a 26% stake in Corporation Bank) for offering cash management services to the latter has been a step towards bolstering its fee-based income. In recent times however, while its peers in the banking industry have made the most of the benign credit demand (aided by economic buoyancy), Corporation Bank has struggled to catch up.

Following are some key excerpts of the conference call.

Industry view
The bank does not anticipate the government’s G Sec borrowings to cause a disturbing liquidity crunch in the economy. Following this, the view on interest rates also continues to be stable in the medium term. While the bank did not deny pressure on cost of deposits, it does not see the level of net interest margins (NIMs) in the industry witnessing a significant downturn.

Corporation Bank
Asset growth: Retail assets, which account for 31% of the bank’s total credit portfolio, have clocked a growth rate of 45% during FY05. On the other hand, the corporate advances also grew by 29% during the same period, bringing the credit deposit (C/D) ratio to 68% as against 60% in FY04. Having registered a 17% growth in deposits, the bank reduced its cost of deposits to 4.5% from 5.5% in FY04. Thus, despite a fall in yields from 9% (in FY04) to 8.4%, the bank’s NIM improved to 3.9% (3.7% in FY04). The bank is looking at a credit growth of 25% during FY06.

ECB issue: Corporation Bank had raised a one-year syndicated yen loan equivalent of US$ 100 m at an all inclusive cost of about 4.1% in 3QFY05. The funds have been raised to provide foreign currency loans to exporters as well as to meet the domestic credit demand at a relatively lower cost. The loan was arranged at Libor (3.7%) plus 32.5 basis points. The issue was initially of a size of (yen equivalent of) US$ 50 m with a green shoe option of US$ 50 m. The foreign currency loan (14% of Tier I capital) has been raised under RBI’s guidelines for banks to raise funds overseas up to 25% of their Tier I capital. The diversified borrowing is expected to aid the bank’s asset growth. The capital adequacy ratio stood at 16.2% at the end of FY05.

Treasury portfolio – Well hedged: Corporation Bank made a provisioning of Rs 2.8 bn in 4QFY05 as it rejigged its investment portfolio (i.e. transferred assets from AFS to HTM category). This is in addition to it having made a similar provisioning of Rs 2.1 bn in 3QFY05. With this, 60% of the investments are in the HTM category and the incremental provisioning makes the bank well poised to counter a 100 basis points rise in interest rates.

Fee income: Fee income of the bank (20% of its other income) has grown by 24% YoY in FY05. Of this, 45% is garnered from the cash management services provided to LIC. This growth has also come on the back of increase in distribution of third party products and from the increasing network of branches set up in the LIC premises. Given the fact that fee income is yet not a substantial portion of the bank’s revenues and is not showing very impressive growth rates, the bank needs to work on this front to bolster its other income growth.

Performance of subsidiaries: The bank has two subsidiaries: Corp Bank Homes (a housing finance company) and Corp Bank Securities (into trading of money market instruments). The two entities posted profit of Rs 49.7 m and loss of Rs 690 m respectively in FY05. Also, since Corp Bank Homes was cannibalizing into Corporation Bank’s market share in home loans, the entity has been merged with Corporation Bank with effect from 1st April 2005. This is expected to reduce the bank’s operating overheads and improve its return ratios besides giving it better leverage in the mortgage loans market.

Our view
At the current price of Rs 346, Corporation Bank is trading 1.7 times its FY05 adjusted book value. With sufficient CAR (16% in FY05), the bank is well positioned to take advantage of the buoyancy in credit growth in future. Although Corporation Bank is one of our preferred stories in the PSU banking sector (for its clean balance sheet and comfortable CAR position), inconsistency in its bottomline performance during FY05 has been a drag on valuations and to that extent, the risk profile is on the higher side in the medium term. We believe that there will be a pick up in the bank’s growth in FY07 and FY08. Those who are invested in the stock can remain invested with a 2-year perspective.

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Feb 23, 2018 (Close)


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