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Corporation Bank: Better late than never - Views on News from Equitymaster
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Corporation Bank: Better late than never
Jul 22, 2005

Performance Summary
Initiating the current fiscal on a very positive note, Corporation Bank posted a healthier 17% growth in bottomline for 1QFY06, as against the corresponding quarter of FY05. While the growth in net interest income is appreciable, higher growth in other income has been another profit driver. After lagging its peers in terms of asset growth during the initial quarters of FY05, the bank’s advance growth has picked up of late, indicating a positive signal. Asset quality and net interest margins also remain the best for Corporation Bank amongst its peers in the PSU banking sector.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 5,527 5,968 8.0%
Other Income 1,001 1,696 69.4%
Interest Expense 2,736 3,159 15.5%
Net Interest Income 2,791 2,809 0.6%
Other Expense 1,513 1,735 14.6%
Net interest margin (%) 3.8% 4.0%  
Provisions and contingencies 688.0 813.0 18.2%
Profit before tax 1,591 1,957 23.0%
Tax 536 722 34.7%
Profit after tax/ (loss) 1,055 1,235 17.1%
Net profit margin (%) 19.1% 20.7%  
No. of shares (m) 143.4 143.4  
Diluted earnings per share (Rs)* 29.4 34.5  
P/E (x)   12.4  
* Annualised      

The ‘cherry’ amongst PSUs
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 777 branches out of which 431 branches and 62 extension counters are fully automated. The bank also has a network of over 800 ATMs covering nearly 80 cities and towns throughout the country. The bank has tie-ups with LIC, New India Assurance for cross selling products and services. It has also entered into an agreement with LIC (LIC has taken a 26% stake in Corporation Bank) for offering cash management services to the latter and has agreements with Oriental Bank and Karnataka Bank for ATM sharing.

What has driven performance in 1QFY06?
Assets grow, margins too:  Given the comfort of having adequate capital (CAR) to propel its asset growth, Corporation Bank has remained consistent in its advance growth during 1QFY06. While the total advance growth has been to the tune of 30% on a YoY basis during the quarter, the bank has not divulged details of growth in retail (31% of advance book) and corporate segments. The credit deposit ratio however stands at 68% as against 60% in 1QFY05. The slower deposit growth of 12% is also indicative of pressure on cost of deposits. Despite this, the fact that the bank has raised sufficient funds through the low cost ECB issue in FY05, has aided the expansion in the bank’s net interest margin from 3.8% in 1QFY05 to 4% in 1QFY06. Although the bank is looking at a credit growth of 25% during FY06, we envisage some margin pressure going forward.

Segmental view
(Rs m ) 1QFY05 % of total 1QFY06 % of total Change
Banking operations
Assets 232,938 80.1% 294,327 88.7% 26.4%
Revenue 4,787 73.3% 6,151 80.3% 28.5%
Profit* 2,299 88.0% 2,126 79.6% -7.5%
Profit margin 48.0%   34.6%    
Assets 58,028 19.9% 37,332 11.3% -35.7%
Revenue 1,740 26.7% 1,512 19.7% -13.1%
Profit* 313 12.0% 544 20.4% 73.8%
Profit margin 18.0%   36.0%    
Assets 290,966   331,659   14.0%
Revenue 6,527   7,663   17.4%
Profit* 2,612   2,670   2.2%
Profit margin 40.0%   34.8%    
* Profit before provisions and taxes

Other income insulated:  The spurt in other income could be attributed to the bank’s relatively lower risk profile in terms of interest rate risks and pick up in fee income growth. Although the allocation of assets to treasury has reduced during the quarter, the fact that the bank has transferred 60% of its investments to the HTM category, keeps the treasury book well hedged against future hardening of interest rates. Although the bank has not given the component of fee income in the other income, a significant proportion of the fee revenue (45%) that is derived from the cash management services offered to LIC is expected to witness exponential growth going forward.

Quality conscious:  Corporation Bank continues to improve its asset quality, albeit at a slower pace. While the Gross NPA of the bank has come down substantially from 5.0% in 1QFY05 to 3.4%, the net NPAs (1.8% at the end of 1QFY05) have been pared to 1.1% in 1QFY06. The delinquency rate has been brought down to 1.3% (from 1.9%). With higher provisioning (additional Rs 500 m provided during 1QFY06), the bank has a NPA coverage ratio to the tune of 71%.

Capital rich:  Corporation Bank’s capital adequacy ratio (CAR) at 17% stands amongst the highest in the sector. The bank is planning to utilise this in acquiring a strategic stake in a commercial bank during the year, besides opening a representative office in the UAE. Also, the bank plans to launch 100 more technology driven products and add 70 branches to its existing branch network during FY06. Having raised US $200 m through external commercial borrowings (ECBs) during FY05, no additional capital raising plans are envisaged during the current fiscal.

What to expect?
At the current price of Rs 426, Corporation Bank’s stock is trading at 1.6 times our estimated FY07 adjusted book value. With sufficient CAR, the bank is well positioned to take advantage of the future buoyancy in credit growth. Although our outlook on Corporation Bank has definitely improved given the consistency in performance and sustenance of asset quality and margins, we believe that it has already been factored into the valuations. Improvement in fee income and benefits of inorganic growth may, however, trigger an upside to the valuations in the longer term.

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