Corporation Bank’s FY01 results were rather disappointing. Its profits dropped by 18% in the fourth quarter of the year. Although, the bank’s topline is growing in double digits, its other income has grown at a marginal 8% during the year. The bank’s non-interest income revenue stream, the cash management services, is facing strong competition from the new private sector banks.
Income from cash management services (CMS) contributed 3.3% to total income in FY01 (3.6% in FY00). The ratio has remained more or less same throughout the year. Also, the contribution of other income to total income at 14% is comparable to its peers in the banking sector. The bank’s turnover from cash management services at Rs 700 bn is one of the largest in the banking sector. Corporation Bank’s CMS business will get further strengthened after the strategic alliance with LIC. Currently LIC has a turnover of over Rs 760 bn, which can be tapped by the bank. However, in the medium term it will be a challenge for the bank to develop new non-interest income revenue streams.
Analysis of CMS
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Corporation Bank’s business recorded a satisfactory growth rate during the year. Its deposits and advances were up by 16% and 11% respectively. Deposit growth in the fourth quarter was however affected by repayment of high cost corporate deposits. The bank has successfully reduced its cost of deposits to 8.1% in FY01 from 8.5% in the previous year. Low cost retail deposits contributed 20% to its total deposit base of Rs 165.6 bn. This has resulted in over 360 basis points expansion in operating margins (32.2%). However, its 4Q margins declined by about 257 basis points. Considering the increasing competition from private sector banks, it will be difficult for the bank to reduce the deposit cost further and expand margins.
The point against the bank is its technology upgradation, which is being done at a comparatively slower pace than the private sector banks. Although, it has automated 81% of its branches, they are not yet networked. The bank had spent Rs 550 m in the current year and plans to spend further Rs 1.3 bn in the current year for its IT initiatives. Currently the bank has only 11 ATMs, but plans to increase the number by 200 in the current fiscal (investment of Rs 500 m for ATMs excluding premises cost). Nevertheless, at present absence of a complete delivery channel is restraining the bank’s topline growth.
The bank’s asset management is considered to be one of the best in the industry. However, in FY01, its gross non-performing assets (NPA) grew by 12% to Rs 4.8 bn. Incremental NPAs were mainly from the chemical, paints, pharma and engineering sector. (While chemical sector accounted for 14%, engineering sector formed 8% of gross NPAs). The adverse industry conditions led to a 41% jump in provisioning amount in the current year to Rs 988 m. As a result the bank’s net NPA ratio went up to 1.98% in FY01 (from 1.92% in FY00). Nevertheless, it is amongst the lowest in the banking sector.
Corporation Bank’s proposed alliance with LIC could prove to be a silverline to drive its future business growth. Under the agreement the bank will be appointed as the corporate insurance agent for LIC (distributor of LIC’s policies). LIC has allowed the bank to open extension counters and ATMs on its 2,048 branches (can be used for payment of insurance premium). Apart from this LIC will also use the bank branches for various purposes like payment of dividend, taxes and for an effective cash flow management (CMS). If this agreement works well, Corporation Bank’s fee based income is likely to increase substantially in the coming years.
As part of its centenary vision 2006, the bank has targeted to grow its earnings at a compounded annual growth rate of 18% every year. It expects its deposits and advances to grow at a CAGR of 23%, which looks a bit ambitious looking at the current market conditions and a competitive scenario. The bank aims to expand its non-interest income base by 20% in FY02 (growth of 8% in FY01). This also depends a lot on its ability to maintain the market share in CMS, forex markets and portfolio management (both equity and government securities). The bank’s higher capital adequacy ratio (at 13.3%) is likely to facilitate its future growth rates.
At the current market price of Rs 130 Corporation Bank is trading at a P/E of 6x FY01 earnings and 5x FY02 projected earnings. Its price to book value ratio of 1.2x is amongst the lowest in the sector. The trigger for the stock price over the long term depends on its ability to successfully implement technology plan, maintain the healthy organic growth by venturing into new revenue streams and leveraging optimally on its alliance with LIC.
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