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Corp. Bank: Short term concerns

Sep 16, 2002

Over the last few months the Corporation Bank stock is lacking interest. The company’s low visibility for fee based income, especially after the tie-ups with leading insurance companies, has affected its stock price. The stock has widely under-performed the BSE Sensex over the last one year. While the Sensex is up by 4%, Corp. Bank’s stock is down by over 13% during this period. The performance of the bank, in the first quarter was however, encouraging with 44% rise in non-interest income, which fueled profits by 26%. The bank successfully maintained its operating margins at 12.6%, which are one of the best in the sector. It also brought down the cost to income ratio to 35% in 1QFY03 from 38% in FY02. The bank’s operating costs are one of the lowest in the banking sector.

For detailed first quarter performance click here

Despite these encouraging results, concerns over lack of revenue clarity from alliance with LIC and NIC (New India Assurance Company) are keeping investors away. These alliances will open up other income avenues like issuance of overdrafts, cheques/warrants, cash management, free floating cash, bank assurance products and government securities dealing. The bank plans to open 125 ATMs, 100 extension counters and 25 branches in the premises of LIC for the purpose. Looking at the size of these insurance companies, the outlook for fee-based income is bright but the management has not been able to quantify the same.

Another concern is its long maturity investment portfolio whereby nearly 65% of the bank’s investments are invested for over 5 years. Consequently, with any adverse movements in interest rates, the bank could have to incur capital losses (on G-Sec portfolio). Profits of its wholly owned subsidiary, Corp. Securities, could also get affected due to similar reasons. Financial performance of primary dealers in general was already under pressure during the first quarter of FY03 due to volatile movement in gilt prices. Corp. Securities, which reported profits of Rs 660 m in FY02, is likely to post depleted earnings in the range of Rs 200 m in the current year.

The bank’s home loan subsidiary is too small to influence the consolidated results. In FY02 it reported profits of Rs 34 m, which was less than 1% of consolidated profits. On a standalone basis, Corp. Bank is expected to report pre-tax earnings growth in the range of 17%-18% for FY03. However, on a consolidated basis, profits could decline marginally on account of an expected significant decline in bottomline of Corp. Securities.

At the current market price of Rs 105, Corp. Bank is trading at a P/E of 4x FY03 projected earnings and price to adjusted book value ratio of 0.6x. Book value of the bank has been adjusted assuming 80% write off from gross NPAs (non-performing assets) on a conservative basis. Its financial performance is comparable to private banks. However, it needs to catch up with its peers in terms of improvement in employee productivity. Although, in the near term consolidated profits are expected to remain flat, we have projected a CAGR of over 10% in earnings over the next five years.

Comparative analysis
ParticularsSBICorp. BankOBCHDFC BankUTI BankIDBI Bank
Mkt. Price (Rs)233105432163622
P/e - FY02 (x)5.04.92.620.45.15.9
ROA (%)0.7%1.4%1.1%1.5%1.1%0.9%
NPA to advances (%)5.6%2.3%3.2%0.5%3.3%3.7%
NIM (%)2.9%3.0%3.4%3.4%1.6%2.6%
Cost to income ratio54.4%38.2%36.6%43.4%33.4%53.7%
Business/employee (Rs m)18.7 26.8 31.4 65.4 105.3 70.4
Business / branch (Rs m)430.8 419.5 441.0 1,431.0 1,399.9 1,016.3
Profits/employee (Rs m)0.1 0.3 0.2 0.8 0.8 0.5


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