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Corp Bank: No respite from restructured assets
Aug 19, 2014

Corporation Bank declared its results for the first quarter of the financial year 2014-2015 (1QFY15). The bank has reported a de-growth of 2.1% YoY in net interest income and a significant 38.8% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Interest income grows by decent 13.6% YoY in 1QFY15, on the back of healthy 18.2% YoY growth in advances. Net Interest Income (NII), however, declines by 2.1% YoY for 1QFY15.
  • Other income disappoints and de-grows 37.8% YoY in 1QFY15, primarily on account of lack of gains on investments.
  • Provisions up by 2.7% YoY during 1QFY15.
  • Consequently, net profits report significant 38.8% YoY fall for 1QFY15 on account of poor performance across most of the parameters.
  • Net NPA (non-performing assets) to advances spiked to 2.7% in 1QFY15 from 1.7% in 1QFY14.
  • Capital adequacy ratio currently stands at 11.2 % at the end of June quarter 2014 as per Basel III norms.

Financial Performance Snapshot
Rs (m) 1QFY14 1QFY15 Change
Interest income 42,715 48,534 13.6%
Interest expense 33,068 39,092 18.2%
Net Interest Income 9,647 9,442 -2.1%
Net interest margin (%) 2.26% 1.93%  
Other Income 5,812 3,616 -37.8%
Other Expense 5,509 6,083 10.4%
Provisions and contingencies 4,470 4,589 2.7%
Profit before tax 5,480 2,386 -56.4%
Tax 1,700 72 -95.8%
Effective tax rate 31.0% 3.0%  
Profit after tax/ (loss) 3,780 2,315 -38.8%
Net profit margin (%) 8.8% 4.8%  
No. of shares (m)   167.54  
Book value per share (Rs)*   613.86  
P/BV (x)   0.5  
* (Book value as on 30th June 2014)

What has driven performance in 1QFY15?
  • The first quarter of FY15 is seemingly no different from the previous quarter as the bank continues to report losses at the bottom-line. The core income and the non-interest income have reported de-growth, dragging the profits in red. More importantly, had it not been for the lower provisions and taxes, the profits for the bank would have fallen abysmally low. The weak earnings profile has depressed the return ratios to dismal levels (return on equity at 9.1% and return on assets at 0.4% in June 2014). The asset quality woes persist with bad loans soaring higher each quarter. Margins have been a drag too as costs have remained on the higher side and CASA performance continues to remain subdued. On the balance sheet growth front, the bank continues to put up a good show. The advances have reported a healthy 18.15% YoY growth backed by sturdy growth in corporate, retail and MSME loan book. While the deposits have grown by strong 16.4% YoY, the CASA base has shrunk to 18.4% for the June quarter of 2014.

  • While the core other income performance has remained more or less intact, the decline in investment gains has been disappointing during the June quarter of 2014.

  • The operating expenses for the quarter have also shot up by 10.4% YoY during 1QFY15. While the employee costs have stood higher by 5.3% YoY, the overheads have gone up by 15.6% YoY during the same period. Consequently, the cost-income ratio has jumped to higher levels of 47% during 1QFY15.

  • The bank has not seen any respite with respect to asset quality pressures. The provisions against bad debts that increased by staggering 119.2% during the quarter, continues to weigh down the earnings for the bank. The gross NPAs for the bank have gone up to 3.9% in 1QFY15 from 2.4% a year ago. Net NPAs too were seen heading upwards to 2.7% in June 2014 from 1.7% in same period a year ago. Bad loans across large corporate, agri and SME portfolios continue to haunt the credit quality of the bank. The slippages for 1QFY15 have been reported higher at Rs 13.2 bn as against Rs 8.7 bn a year ago. Moreover, the stock of restructured assets has stood at Rs 104.8 bn as at the end of June quarter of 2014.
What to expect?
At the current price of Rs 329, the stock is valued at 0.6 times our estimated FY17 estimated adjusted book value.

Corporation Bank is amongst the PSU banking entities that have been the worst affected by the steep rise in bad loans from restructured assets. Add to that lower other income and higher operating costs that have dealt a heavy blow to the bank's profitability. We believe that the current discounted valuations of the bank factor in most of the downside risks. However, it will be extremely risky for investors to buy more of the stock. The management of the bank has failed to showcase any attempts of improving the performance on the NPA front. It will therefore be a while before Corporation Bank shows any signs of sustainable recovery. As the valuations of the stock are still not very expensive and factor in most of the downside risks, we reiterate HOLD view on the stock. However, for the investors who do not hold the stock, we advise not to buy at current levels given the daunting challenges associated with the bank.

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