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Corporation Bank: Margins go for a toss - Views on News from Equitymaster
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Corporation Bank: Margins go for a toss
Jul 30, 2008

Performance summary
  • Interest income grows by 15.1% YoY in 1QFY09 on the back of 28.3% YoY growth in advances.
  • Net profit margin drops by 1.5% to 14.3% in 1QFY09 due to higher provisioning.
  • Capital adequacy ratio at 12.4%.
  • Net NPA to advances drop from 0.5% in 1QFY08 to 0.4% in 1QFY09.
  • Cost to income ratio reduced to 40%.

Rs (m) 1QFY08 1QFY09 Change
Interest income 11,201 12,887 15.1%
Interest Expense 7,479 9,107 21.8%
Net Interest Income 3,722 3,780 1.6%
Net interest margin (%) 3.0% 2.4%  
Other Income 1,187 1,576 32.8%
Other Expense 2,154 2,146 -0.4%
Provisions and contingencies 200 1,008 404.0%
Profit before tax 2,555 2,202 -13.8%
Tax 785 358 -54.4%
Profit after tax / (loss) 1,770 1,844 4.2%
Net profit margin (%) 15.8% 14.3%  
No. of shares (m) 143.5 143.5  
Book value per share (Rs)*   294.8  
Price to book value (x)   0.9  
* Book value as on 30th June 2008

What has driven performance in 1QFY09?
  • NIMs shrink at faster clip: At a time when most banks in the public as well as private sector have felt an impact of 20 – 30 basis points (0.2% to 0.3% YoY) on their net interest margins (NIMs), Corporation Bank despite growing almost in line with the sector in terms of advance growth, has taken a substantial cut in its NIMs (0.6% YoY). The bank has attributed this partly to the write-off of interest charged on agricultural loans that are subject to waiver. The faster growth in term deposits have also pressurised the NIMs. Further, the interest income has been impacted by the write-off of amortisation of investment premia against net interest income. The bank has further reduced its exposure to the retail asset segment and home loans in particular in this the last 12 months.

    Leaning towards lower-risk assets…
    (Rs m) 1QFY08 1QFY09 Change
    Advances 303,510 389,520 28.3%
    Retail 76,614 91,400 19.3%
    % of total advances 25% 23%  
    SME 33,838 42,430 25.4%
    % of total advances 11% 11%  
    Corporate 193,058 298,120 54.4%
    % of total advances 64% 77%  
    Deposits 432,310 547,420 26.6%
    CASA 108,078 125,907 16.5%
    % of total 25% 23%  
    Term deposits 324,233 421,513 30.0%
    % of total 75% 77%  
    Credit deposit ratio 70.2% 71.2%  

  • Fees start filtering in: During 1QFY09, Corporation Bank witnessed 32.8% growth in its non-interest income while the growth in fee income was restricted to 20% YoY. Fee income contributed 58% of the bank’s total other income and 17% to the bank’s total income. Despite the formation of the alliance with OBC and Indian Bank, which gives it access to customers in the northern regions of the country and enables it to leverage the delivery channels of the other two banks, Corporation Bank has made very marginal headway on the fee income front.

  • Costs contained: Corporation Bank’s cost to income ratio has fallen marginally from 44% in 1QFY08 to 40% in 1QFY09. The same is nearly 5% lower than its peers in the PSU banking space and is one of the best (lowest) in the sector. This is also despite the fact that the bank had increased its employee base and brought 100% of its branches on the CBS (core banking solution) platform. Going forward, over the next 3-4 years, the bank is planning to add 100 braches a year that may entail higher costs.

  • Provisioning burden: During the current quarter, with the yield on bonds moving up sharply and the inflationary pressure and liquidity constraints resulting in substantial depreciation in investment portfolio, the bank had to provide for mark to market loss on its investment book. But for the heavy depreciation on investment portfolio, the 1QFY09 net profit growth would have been about 40% YoY.

What to expect?
At the current price of Rs 265, the stock is attractively valued at 0.6 times our estimated FY11 adjusted book value. The bank’s annualised return on equity stands at a healthy 16.7%. However, the current CAR of 12.4% at the end of June 2008 may require further equity dilution. Corporation Bank is targeting asset growth of 20% to 25% in FY09 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). We, however, retain our conservative estimates on this front. Also, investors need to factor in the margin pressure and provisioning requirements.

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Feb 23, 2018 (Close)


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