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Corporation Bank: Expectations

Jul 9, 2001

The banking sector reported subdued performance in the fourth quarter of FY01. The reason was significant decline in interest income and rise in provision for non-performing assets. A slowdown in the economic activity and industrial growth was reflected in the financials of banks.Corporation Bank, one of the better-managed public sector banks had also reported an 18% drop in net profits in the 4QFY01. A considerable fall in operating margins and jump in provisioning amount took toll on the bank’s fourth quarter performance.

Credit growth for banking sector has slowed down in the first quarter of the current fiscal. In the month of April, bank credit to commercial sector grew by 16% YoY, which was lower than over 19% growth witnessed in April last year. During the same period, the Index for Industrial Production (IIP) grew by a marginal 2.7% against 6.5% in April ‘00. During the period beginning from the second fortnight of March to the first week of June 2001, non-food credit has shown an incremental growth of 0.4% (Rs 20 bn). This was lower than Rs 125 bn recorded in the corresponding period in the previous year. Thus, year on year non-food credit for the period has declined by about 85%. The figures are indicative of the declining investment scenario in the country.

The credit offtake has however, shown some signs of improvement in the first fifteen days of June. During the fortnight, credit provided by the banking industry increased by Rs 10 bn to Rs 5,167 bn, compared to a fall of Rs 46 bn in the previous fortnight. Banks are concentrating on extending credit to sectors such as housing and retail, which are relatively safe. On the other hand, aggregate deposits declined by Rs 560 m to Rs 10,030 bn, compared to a rise of Rs 47 bn recorded in the previous fortnight. Investments made by the commercial banks too dropped by Rs 66 bn to 3,917 bn, compared with a growth of Rs 128 bn in the previous fortnight.

Expected financials
(Rs m)1QFY011QFY02EChange
Total Income 5,097 5,588 9.6%
Interest Expenses 3,168 3,446 8.8%
Operating Profit 1,929 2,142
Other Expenses 690 728 5.6%
Depreciation 61 59 -2.4%
Profits before tax 1,179 1,355 14.9%
Tax 301 325 8.0%
Provisions & contingencies 253 354 40.0%
Net Profit 625 676 8.1%
Equity shares (m) 120 120  

Performance ratios
Particulars1QFY011QFY02E
OPM 29.2%30.0%
Tax / PBT25.5%24.0%
NPM14.0%13.7%
EPS (Rs)20.822.5

Absence of lending opportunity by banks could affect their interest income growth in the first quarter. Corporation Bank is expected to report about 10% growth in total income and a single digit growth in profits for the June quarter. The bank's operating margins will also be under pressure.

In view of diversifying client base and generating higher yield on loan assets, the bank is focusing on increasing the proportion of retail assets. In FY01, Corporation Bank’s retail loan portfolio grew by 47% to Rs 6 bn, constitution 7% of the total advances. Housing accounted for 45% of its total retail loans. It is also targeting to improve non-interest income. It is already a pioneer in collection and payment services (cash management services) and plans to widen the client base.

At the current market price of Rs 140, Corporation Bank is trading at a P/E of 5.4x and a Price/Book value ratio of 1.1x FY02 projected earnings.


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