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Corporation Bank: Growth concentration…

Aug 8, 2006

Performance summary
Corporation Bank, one of the best-managed PSU banks in the country, registered better resultsin 1QFY07 as compared to most of its peers in the sector. In fact, the growth in bottomline comes after two consecutive quarters of decline. Despite a higher growth in assets, the bank managed to sustain its NIMs over 3%. A slower growth in fee income and concentration towards the corporate loan portfolio, however, gives a skewed picture of growth.

Rs (m) 1QFY06 1QFY07 Change
Income from operations 5,967 7,301 22.4%
Other Income 1,696 1,875 10.6%
Interest Expense 3,159 4,053 28.3%
Net Interest Income 2,808 3,248 15.7%
Net interest margin (%) 3.5% 3.4%
Other Expense 1,734 1,883 8.6%
Provisions and contingencies 803 1,063 32.4%
Profit before tax 1,967 2,177 10.7%
Tax 732 735 0.4%
Profit after tax / (loss) 1,235 1,442 16.8%
Net profit margin (%) 20.7% 19.8%
No. of shares (m) 143.5 143.5
Diluted earnings per share (Rs)* 34.4 40.2
P/E (x) 6.5
* (12 months trailing)

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 782 branches and 83% of its business (504 branches) runs on a core banking solution. The bank also has a network of over 814 ATMs covering nearly 80 cities and towns throughout the country. The bank has tie-ups with the LIC and New India Assurance for cross selling products and services. It has also entered into an agreement with the LIC (the latter has taken a 26% stake in Corporation Bank) for offering cash management services and has agreements with Oriental Bank of Commerce and Karnataka Bank for ATM sharing.

What has driven performance in 1QFY07?
Credit-shying away from retail: Corporation Bank's advance growth of 37% YoY in 1QFY07 has been almost at par with its peers in the private sector. The growth continues to be driven by corporate loans (74% of advance portfolio in 1QFY07), which grew by 46% YoY while retail loan growth was 18% YoY. The bank has slowed down growth in mortgage loans (where it is facing asset quality pressure), which have grown by merely 9% YoY. Mortgage loans comprised 56% of the retail portfolio in 1QFY07 against 61% in 1QFY06. While deposits grew by 27% YoY, the proportion of low cost deposits (CASA) to total deposits declined to 33%, thus resulting in incremental credit being funded largely by high cost term deposits. The bank has witnessed an uptick in cost of funds faster than the yield on its assets, which has resulted in its net interest margins being pressurized (3.4% in 1QFY07 vis-à-vis 3.6% in 4QFY06).

Credit growth…term deposit funded
(Rs m) 1Q06 % of total 1Q07 % of total Change
Advances 187,980 258,248 37.4%
Retail 57,050 30.3% 67,130 26.0% 17.7%
Corporate 130,930 69.7% 191,118 74.0% 46.0%
Deposits 267,675 339,398 26.8%
CASA 91,010 34.0% 110,304 32.5% 21.2%
Term deposits 176,666 66.0% 229,094 67.5% 29.7%
Credit deposit ratio 70.2% 76.1%

LLP- a concern: The bank's loan loss provisions (ex-recoveries) stand at merely 0.16% of loans in this quarter (0.86% in 1QFY06). Although the overall coverage ratio (provision to gross NPAs) is above 70%, given the past experiences, with an aggressive stance on mortgage loans going forward, the possibility of high slippages remains a concern. We, therefore, see the bank making higher provisions towards loan delinquencies in the coming quarters. The overall delinquency rate for the bank has improved with net NPAs having declined to 0.6% in 1QFY07 from 1.2% in 1QFY06.

Fees to no avail: While the adjacent chart seems to suggest rising contribution of other income to total income, the same is due to the sale of some high coupon bonds in this quarter. The bank, in fact, has witnessed a very negligible growth in its fee income during 1QFY07. The MoU with the LIC for cash management services is also proving to be of no avail as pricing pressures continue.

What to expect?
At the current price of Rs 261, the stock is trading at 1.0 time our estimated FY08 adjusted book value. The bank is well capitalised (CAR 13.9% in 1QFY07) to capture the growth opportunities in the sector. Nevertheless, investors need to factor in the upcoming margin pressure and provisioning requirements. Lack of planning for future growth and initiatives for capturing the retail potential (for both fund and non-fund income growth) remain a major disappointment. All said, given its credibility with respect to higher credit growth, better NIMs and good asset quality, Corporation Bank, at the current valuations, is amongst our top picks in the PSU banking sector.

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