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Corp Bank: Benign profit growth on higher costs
Aug 1, 2012

Corporation Bank declared its results for the first quarter of the financial year 2012-2013 (1QFY13). The bank has reported 23% YoY and 5% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 14% YoY in 1QFY13, on the back of a 25% YoY growth in advances.
  • Capital adequacy ratio currently stands at 12.92% at the end of 1QFY13 as per Basel II norms.
  • Net interest margin (NIM) drops to 2.3% from 2.4% in 1QFY12.
  • Net NPA (non-performing assets) to advances comes in higher at 1.2% in 1QFY13 from 0.5% in 1QFY12.
  • Other income increases by 23% YoY in 1QFY13.
  • Net profits increase by a muted 5% during the quarter on account of lower NII growth, higher provisioning and tax outlays.

Rs (m) 1QFY12 1QFY13 Change
Interest income 29,783 36,506 22.6%
Interest expense 22,708 28,422 25.2%
Net Interest Income 7,076 8,084 14.3%
Net interest margin (%) 2.4% 2.3%  
Other Income 2,665 3,276 22.9%
Other Expense 4,208 4,662 10.8%
Provisions and contingencies 1,440 2,166 50.4%
Profit before tax 4,092 4,533 10.8%
Tax 577 830 43.8%
Effective tax rate 14.1% 18.3%  
Profit after tax/ (loss) 3,514.5 3,703 5.4%
Net profit margin (%) 11.8% 10.1%  
No. of shares (m)   148.1  
Book value per share (Rs)*   583.7  
P/BV (x)   0.7  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Corporation Bank managed to grow its advance book by nearly 25% YoY in 1QFY13, faster than the sector average. This was largely relying on the incremental demand across the board, especially from the large corporate and retail segments.

  • Corporation Bank's NIM moved lower from 2.4% in 1QFY12 to 2.3% in 1QFY13 with CASA (current account, and savings bank accounts) forming 21% of total deposits. On account of higher interest costs, the growth in the NII was muted at 14% YoY, compared to a 23% YoY growth in interest income.

    Advances see robust growth across the board
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 789,039   985,457   24.9%
    SME 119,250 15.1% 146,640 14.9% 23.0%
    Agri 59,610 7.6% 72,120 7.3% 21.0%
    Large Industries 334,330 42.4% 450,300 45.7% 34.7%
    Retail 131,890 16.7% 198,380 20.1% 50.4%
    Deposits 1,177,820   1,341,030   13.9%
    CASA 247,330 21.0% 277,690 20.7% 12.3%
    Term deposits 930,490 79.0% 1,063,340 79.3% 14.3%
    Credit deposit ratio 67.0%   73.5%    

  • Corporation Bank's cost to income ratio decreased to 41% in 1QFY13 from 43% in 1QFY12. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector. Salary costs saw an 11% YoY increase this year.

  • The bank is now adequately capitalized, with a capital adequacy ratio (CAR) of 12.92% as per Basel II norms, with 8.3% Tier 1 ratio. Corporation Bank's gross NPA increased to 1.71% in 1QFY13 from 1.07% in 1QFY12 and the net level NPAs came in higher at 1.2% as against 0.5% in 1QFY12. The bank's provision coverage ratio was also drawn down from 74.9% at the end of 1QFY12 to 61% currently. Almost all accounts saw a spike in NPA levels, especially agri, SME, and large industries.

  • The bank's restructuring has also increased with restructured accounts coming at 7% of advances, cumulatively. Out of this Rs 10.8 bn was added in the quarter ended June 2012. The bank had 16.1% loan book exposure to the infra space, out of which 9.6% is to the troubled power sector is a cause of concern.

What to expect?
At the current price of Rs 402, the stock is valued at 0.7 times its trailing twelve months book value. The bank's annualised return on equity stands at a healthy 17.5% and return on assets at close to 1%. While asset quality is expected to be somewhat of an issue in the coming quarters, the bank should be able to improve its NIMs going forward in light of the RBI's monetary easing. Corporation Bank has not been able to adequately contain its cost of funds, and needs to expand its CASA base substantially. It has been shedding its costly bulk deposits; however this still remains at elevated levels. Going forward it plans to focus on increasing its CASA base by adding branches and also focus on recovery efforts. It also plans to open branches in rural areas to be able to meet its priority sector lending targets which are still below mandated levels. Irrespective, the current valuations leave significant upside for investors from 2 to 3 year perspective. We maintain our buy view on the stock.

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