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Corp. Bank: Riding on other income

Jul 9, 2001

Corporation Bank has beaten market expectations by reporting a 25% growth in net profits for the first quarter of the current fiscal. The bank's topline growth was however sluggish at 5.2%.

(Rs m)1QFY011QFY02Change
Interest Income 4,475 4,707 5.2%
Other Income 622 832 33.8%
Interest Expenditure 3,168 3,229 1.9%
Operating Profit (EBDIT) 1,307 1,479 13.1%
Operating Profit Margin (%)29.2%31.4% 
Other Expenditure 751 887 18.0%
Profit before Tax1,1781,42420.8%
Provisions & Contingencies25330320.2%
Tax 301 340 13.0%
Profit after Tax/(Loss) 625 780 24.9%
Net profit margin (%)14.0%16.6% 
No. of Shares (eoy) 120 120  
Diluted Earnings per share*20.826.0 
P/E (at current price) 6.1 

During the quarter, the bank's operating margins rose by about 220 basis points to 31.4%. This was despite competitive pressure. The industrial slowdown and subdued investment demand was reflected in its topline growth.

Corporation Bank's net profit growth was boosted by 34% jump in other income. The contribution of other income to total income increased to 15% from 12% in 1QFY00. The bank has one of the best cash management services (CMS), which could have pushed the other income. CMS contributed 3.3% to total income in FY01.

Lower tax rate and reduction in cost to income ratio further contributed in fueling bottomline growth. Effective tax rate of the bank declined to 24% from 26% in 1QFY01. Cost to income ratio of the bank was also down by 55 basis points to 38.4% in 1QFY02.

As part of its alliance with LIC, the bank has decided to issue 24 m equity shares at Rs 196 to LIC on a preferential allotment basis. The bank's insurance venture with LIC, if approved, could result in a significant jump in other income in the next year.

At the current market price of Rs 158, Corporation Bank is trading at a P/E of 6x and Price/Book value ratio of 1.2x FY02 projected earnings. The bank's decision to allot shares to LIC at Rs 196 could result in a technical rise in the stock price in the short term. However, in the long term, the sustainability of PBV at 1.5x (at Rs 196) depends on the bank's ability to improve topline growth and curtail the level of non-performing assets.

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