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Corp Bank: NIMs hit harder than expected
Aug 2, 2011

Corporation Bank declared its results for the first quarter of the financial year 2011-2012 (1QFY12). The bank has reported 50% 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 8% YoY in 1QFY12, on the back of a 22% YoY growth in advances.
  • Capital adequacy ratio currently stands at 14.05% at the end of 1QFY12 from 15.1% at the end of 1QFY11 as per Basel II norms.
  • Net interest margin (NIM) shrinks to 2.1% from 2.6% in 1QFY11.
  • Net NPA (non-performing assets) to advances comes in higher at 0.5% in 1QFY12 from 0.4% in 1QFY11.
  • Other income falls by 5% YoY in 1QFY12.
  • Net profits increase by a muted 5% during the quarter on account of lower NII growth and lower other income.

Rs (m) 1QFY11 1QFY12 Change
Interest income 19,875 29,783 49.9%
Interest expense 13,302 22,708 70.7%
Net Interest Income 6,573 7,076 7.6%
Net interest margin (%) 2.6% 2.1%  
Other Income 3,064 2,897 -5.4%
Other Expense 3,433 4,209 22.6%
Provisions and contingencies 1,266 1,673 32.1%
Profit before tax 4,938 4,091 -17.2%
Tax 1,600 577 -63.9%
Effective tax rate 32.4% 14.1%  
Profit after tax/ (loss) 3,338 3,514 5.3%
Net profit margin (%) 16.8% 11.8%  
No. of shares (m)   148.1  
Book value per share (Rs)*   505.6  
P/BV (x)   1.0  
* (Book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • Corporation Bank managed to grow its advance book by nearly 22% YoY in 1QFY12, in line with the sector average. This was largely relying on the incremental demand from large corporate and SME segment. Also, the upward re-pricing of loans with base rate implementation helped increase lending yields. In line with moves from competition, the bank has also increased its Benchmark Prime Lending Rate (BPLR) from 14.5% p.a. to 15% p.a. and its base rate from 10.25% p.a. to 10.65% p.a. The bank however saw a 9% decrease in its loan book in the three month period from April-June 2011. Thus, the RBI's rampant rate hikes are leading to a slowdown in credit offtake. Nevertheless, the bank expects to grow its loan book by 25% YoY in FY12 by focusing on SME and retail advances. We have however, assumed a relatively muted loan growth.

  • Corporation Bank's NIM (net interest margins) moved down from to 2.6% in 1QFY10 with CASA (current account, and savings bank accounts) funding being 24% of total deposits. The bank expects to have a CASA base of 30% at the end of FY12. On account of higher interest costs, the growth in the NII was muted at 8% YoY. The bank however, hopes to increase its NIM to 3% bythe end of FY12. While our NIM estimate for full year FY12 is conservative at 2.4%, we may have to revise the same unless the bank manages to pass on the rate hikes to customers.

    SME advances see robust growth
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 648,050   789,040   21.8%
    SME 66,760 10.3% 119,250 15.1% 78.6%
    Deposits 910,350   1,177,820   29.4%
    Credit deposit ratio 71.2%   67.0%    

  • Corporation Bank's cost to income ratio increased to 42% in 1QFY12 from 36% in 1QFY11. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector. Salary costs saw a 26% increase this year on account of pension provisioning.

  • The bank is now adequately capitalized, with a capital adequacy ratio (CAR) of 14.05% as per Basel II norms, with 8.6% Tier 1 ratio.

  • Corporation Bank's gross NPA was sustained to at around 1.1% in 1QFY12, however, at the net level NPAs came in higher at 0.5% as against 0.4% in 1QFY11. The bank has managed to maintain its asset quality, even in a tough macroeconomic environment. However, further rate hikes may put asset quality under pressure. The recent court verdict prohibiting development in the Greater Noida area and returning of land to farmers is a cause of concern for the company. The bank has an exposure of Rs 1 bn exposure to two builders and other retail borrowers in the area. The bank also has exposure to the beleaguered microfinance sector.

What we expect?
At the current price of Rs 490, the stock is valued at 0.7 times our estimated FY14 adjusted book value. The bank's annualised return on equity stands at a healthy 18.8% and return on assets at 1%. We however see sustaining margins and asset quality to be an issue in the coming quarters. The bank has not been able to adequately contain its cost of funds, and needs to expand its CASA base substantially and shed its costly bulk deposits. However, it has recently raised its interest rates in order to offset higher costs. Irrespective, the current valuations leave significant upside for investors from 2 to 3 year perspective. We reiterate our positive view on the stock from 2 to 3 year perspective.

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