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Corporation Bank or UTI Bank: Take your pick - Views on News from Equitymaster
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  • Aug 29, 2000

    Corporation Bank or UTI Bank: Take your pick

    Corporation Bank Ltd. (CBL) is one of the most efficient public sector banks (PSB) in India. It has well spread network of 649 branches throughout 18 States and 2 Union Territories. On the other hand UTI Bank (UB) is among the first private sector banks, promoted by leading financial institutions, operating through 49 fully computerised branches.

    In the past three years, UTI Bank has posted an excellent financial performance by growing its profits faster than income. On the other hand Corporation Bank’s profit growth slowed due to higher cost of borrowings. This has resulted in lower growth in profits compared to income. Also the bank is operating on a comparative higher base than UTI Bank.

    Comparative financials
      Corporation Bank UTI Bank
    Particulars (Rs m) FY00 3 yrs CAGR FY00 3 yrs CAGR
    Operating income 16,044 25.0% 4,833 37.5%
    Other income 2,708 37.1% 912 22.4%
    Total revenues 18,752 26.5% 5,744 34.7%
    Interest expended 11,461 33.9% 3,929 33.0%
    Operating profit 4,583 8.6% 904 64.5%
    Provision & Contingencies 873 4.1% 375 22.0%
    Other Expenses 3,040 15.1% 654 28.3%
    Profit before tax 3,378 23.3% 787 63.7%
    Profit after tax 2,324 18.0% 509 75.2%

    However Corporation Bank enjoys comparatively higher margins than UTI Bank due to its lower cost of operations. The bank has kept the trend of improving its margins quarter over quarter. During the 1QFY00, operating margins of the bank increased to 29.2% compared to 9.7% of UTI Bank. Higher cost of borrowing have adversely affected UTI Bank’s margins.

    Key Ratios
    Particulars CB UB
    Operating margin (excl. O.I.) 28.6% 18.7%
    Net profit margin 14.5% 10.5%
    EPS (Rs) 19.4 3.9

    The margins are not the only positive for Corporation Bank. The returns of Corporation Bank are also among the best in public sector banks. Further, a lower non-performing assets (NPAs) ratio confirms the bank’s good quality of assets. The bank has in fact excelled in all areas of performance parameters.

    Current valuations in the sector are accorded to technology savvy banks and those who can use IT to improve the operational performance. Corporation Bank has around 10 ATMs and is in talks with Citibank for sharing its ATM network (Citibank has 140 ATMs). On the other hand UTI Bank has 44 ATMs and plans to increase the same to 100 by the end of current year. It is also providing net banking service where Corporation bank is lagging behind.

    Though Corporation Bank may not have the first mover advantage it will always have a cutting edge over other PSB as also strength to compete with other private counterparts. During the year, the bank has earmarked Rs 560 m for its technology plans which includes aggressively tapping the retail market with e-commerce, extending internet banking and also extending the banks cash management services on the net.

    With a formidable network of branches, lowest NPA ratios and the most tech-savvy plans in place, Corporation Bank has better growth prospects than most of its peers.

    Measures of Investment
    Particulars CB UB
    Interest spread (%) 2.5% 2.5%
    RONW (%) 20.3% 21.3%
    ROA (%) 3.5% 2.2%
    ROIC (%) 2.5% 1.7%
    NPAs as a % of net advances 1.9% 4.7%

    At the current market price of Rs 71, Corporation Bank is trading at a significant discount compared to its peers. The market is yet to factor in the growth prospects of the bank as also other developments such as its foray into Insurance sector. The reasons behind its lower valuation are its public sector tag and slow move towards technology. Nevertheless in performance terms the bank compares well with UTI Bank. It would be able to sustain its future growth rate with superior management culture and operational efficiency. It could be a next takeover target for the large groups like ICICI and HDFC.

    Valuation measures
    Particulars CB UB
    Market price (Rs) 70.6 37.7
    Book value (Rs) 95.4 18.2
    Price/Book value (x) 0.7 2.1
    P/E (x) 3.6 9.8
    Dividend yield 5.7% 3.2%



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