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Corporation Bank: Growth plans

Sep 7, 2001

Corporation Bank has set a target of achieving business volume of Rs 700 bn in the next five years and a compounded annual growth rate (CAGR) of 23% in net profits by 2006. However, the bank is likely to witness a squeeze in its spread due to its lending at sub-PLR rates. As on FY01, the bank’s interest spread was 3.6%, which is likely to drop around 3% in the near future. The bank’s prime lending rate (PLR) is at 11.5% but it is lending at 10%. The size of advances at sub-PLR rates is estimated to be around Rs 4 bn (total advances of Rs 90 bn). Consequently, the returns on the blue-chip segment are getting lower. The bank’s average cost of funds is 7.5% and average return is around 11%. With a dismal growth in interest income from corporates, Corporation Bank is focusing on fee-based income and retail.

In the retail segment, the bank sees the growth opportunities in housing, car/vehicle loans, consumer durables and personal loans. It has targeted an increase of Rs 5 bn in the housing loans in FY01. The bank is expecting the total retail advances to account for about 14% of its total advances in the current year. This would help in maintaining the operating margins.

Among the other developments, Corporation Bank has issued 24 m shares to LIC at Rs 196 per share (current market price Rs 130). The bank has entered into a strategic alliance with LIC for acting as its corporate agent for marketing insurance products. After this tie-up, LIC’s stake in the bank has increased to 27% (from 12%) and consequently, the government’s stake in the bank has come down to 57% (from 68%). Apart from this the bank is concentrating on its bullion business where it had earned Rs 37 m in FY01 on turnover of Rs 16 bn. It expects to achieve a turnover growth of over 80% in the precious metal trading in FY02. These recent initiatives of the bank would help in improving fee-based income.

On the costing part too, the bank aims to bring down its cost to income ratio from the current level of 39%. Its net NPA to advances ratio is also expected to drop to about 1.8% from 2% in FY01. The bank has targeted NPA recovery of about Rs 800 m in the current year (Rs 580 m in FY01) by way of one time settlement. Its gross NPAs were Rs 49.5 bn in FY01. Corporation Bank’s risk management is considered to be one of the best in the industry.

At the current markets price of Rs 130, Corporation Bank is trading at a P/E of 5 times on FY02 projected earnings. The bank’s Price/Book value ratio has come down to 0.8, due to a sharp fall in price from Rs 145. Attractive valuations could trigger some buying interest in the stock, as the business plans are still intact and the bank is all set to grow. Considering the past performance of the bank and its recent road map to boost business volumes, the target set by the bank is likely to be achieved.

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