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Corpn. Bank: Banking on investment gains - Views on News from Equitymaster

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Corpn. Bank: Banking on investment gains

Jul 30, 2009

Performance summary
  • Interest income grows by 35% YoY in 1QFY10 on the back of 22% YoY growth in advances.
  • Net interest margin (NIM) drops marginally to 2.3% in 1QFY10 from 2.4% in 1QFY09.
  • Higher other income offsets rise in provisioning costs and tax incidence.
  • Net NPA to advances remain at 0.3% at the end of 1QFY10.
  • Capital adequacy ratio at 14.8% at the end of June 2009.

Rs (m) 1QFY09 1QFY10 Change
Interest income 12,887 17,422 35.2%
Interest Expense 9,106 12,746 40.0%
Net Interest Income 3,781 4,676 23.7%
NIM (%) 2.4% 2.3%  
Other Income 1,575 3,593 128.1%
Other Expense 2,146 2,556 19.1%
Provisions and contingencies 1,010 1,550 53.5%
Profit before tax 2,200 4,163 89.2%
Tax 357 1,550 334.2%
Profit after tax / (loss) 1,843 2,613 41.8%
Net profit margin (%) 14.3% 15.0%  
No. of shares (m)   143.4  
Book value per share (Rs)*   359.7  
P/BV (x)   1.0  
* (Book value as on 30th June 2009)

What has driven performance in 1QFY10?
  • Although at a relatively moderated pace as compared to the earlier quarters, Corporation Bank managed to grow its advance book faster than the sector average in 1QFY10 as well. Shy of possible slippages in the retail segment, the bank grew its advance book by 22% YoY, largely relying on the incremental off-take to agri credit and the large corporates. The growth of 32% YoY in deposits was, however, largely on the back of growth in term deposits. Therefore going forward, the bank ought to be more cautious about sustaining its CASA proportion. Although the higher cost of funds has marginally pressurised the bank’s NIM, the same are well within our estimates. The bank had earlier attributed the drop in NIM partly to the write-off of interest charged on agricultural loans that are subject to waiver.

    Business sustains momentum
      1QFY09 % of total 1QFY10 % of total Change
    Advances 389,523   473,775   21.6%
    Agri + Large corp. 249,295 64.0% 317,429 67.0% 27.3%
    Retail 97,381 25.0% 108,968 23.0% 11.9%
    SME 42,848 11.0% 47,378 10.0% 10.6%
    Deposits 547,417   721,271   31.8%
    CASA 150,101 27.4% 168,331 23.3% 12.1%
    Term deposits 397,316 72.6% 552,940 76.7% 39.2%

  • Corporation Bank grew its non-interest income by a sterling 128% YoY in 1QFY10, thanks to profit on sale of investments that multiplied nearly 10 times over that in 1QFY09. This comprised 40% of the bank’s other income in 1QFY10. Fee income which comprised 20% of the bank’s other income in 1QFY10 also grew 300% YoY.

  • Corporation Bank’s cost to income ratio declined from 40% in 1QFY09 to 31% in 1QFY10. The bank’s cost to income ratio is nearly 10% lower than its peers in the public sector banking space and is one of the best (lowest) in the sector. This is despite the fact that the bank had increased its employee base and added 73 branches to its franchise in the past 12 months. It also continues to sustain one of the best employee efficiency numbers.

  • Going forward, over the next 5 years, the bank is planning to add 700 braches a year that may entail higher costs. A large part of the cost curtailment is due to the bank’s financial inclusion initiative in the rural areas through use of biometric cards. Corporation Bank has pioneered the effort in setting up branchless banking units and introduced the same in 411 villages until the end of March 2009 as against the target of 400 villages.

  • Corporation Bank’s gross NPA has been brought down to 1.3% compared to 1.5% in 1QFY09 while its net NPA came down to 0.3% during this period. The bank could affect a cash recovery and upgradation of NPAs of Rs 527 m in 1QFY10, which also helped in keeping the NPA level under control.

What to expect?
At the current price of Rs 350, the stock is attractively valued at 0.9 times our estimated FY11 adjusted book value. The bank’s annualised return on equity stands at a healthy 20.3%. While the bank stands reasonably capitalised and has outperformed our growth estimates, erosion of margins due to the higher cost of deposits remains a concern. Also, despite the higher provisioning (due to AS-15) and higher tax incidence the bank’s bottomline performance is also marginally better than our estimates. We retain our positive outlook on the bank from a long term perspective.

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Mar 22, 2019 (Close)


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