Corporation Bank, has reported dismal results for the September quarter on the back of significant rise in provisioning. While NPA provisioning in the September quarter is low, we believe most of the provisioning has been made towards depreciation in value of the company's investment (G-Sec) portfolio. Corporation Bank's bottomline has fallen by a significant 81% and topline has grown by a marginal 3% in 2QYF04 on a YoY basis, topline performance being much in line with the earlier quarters. The improvement in operating margins, however, highlights the improvement in the bank's operating efficiencies.
Income from Operations
Net interest income
Operating Profit Margin (%)
Provisions and Contingencies
Profit before Tax
Profit after Tax/(Loss)
Net Profit Margin (%)
No. of Shares (m)
Diluted Earnings per share* (Rs)
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What is the company’s business?
Corporation Bank is one of the few PSU bank's in India with a clean balance sheet and impressive track record. The bank has a well-established network of 742 branches out of which 431branches and 62 extension counters are fully automated. The bank also has a network of over 700 ATMs covering nearly 80 cities and towns throughout the country. In 2001, LIC acquired 27% stake in Corporation Bank. The bank has tie-ups with LIC, New India Assurance for cross selling products and services. It has recently entered into agreements with Oriental Bank and Karnataka Bank for sharing ATMs.
Advances growth encouraging: At the end of the September quarter the bank has seen a strong 43% rise in its advances and this is a welcome sign as the bank was struggling to show any improvement in its advances growth over the last 5-6 quarters. The bank has not provided a breakup of growth in its retail as well as non retail assets, however we believe that the growth in its advances has been mainly driven by string growth in the retail advances. However, this is nothing out of the ordinary, as almost all the banks are witnessing similar growth rates, especially in the retail segment. However despite the strong growth in advances the bank continues to witness slower topline growth, seemingly due to falling yields on both its advances as well as investment portfolios. A significant fall (17% YoY) in its investment portfolio has also led to the lackluster performance of the topline.
NIM, one of the best in the sector
Significant fall in cost of deposits to 4.6% from over 5.7% has led to a substantial improvement in net interest margin to over 4% from 3.6% in 2QFY04. This has also led to strong growth in net interest income and consequently operating profits and margins, this is despite the growth in operating expenses. Going forward, however, we believe that it will be difficult for Corporation Bank to further improve upon its NIM, on account of a hardening of interest rates.
Net Profits hit by rising interest rates:
There has been a fall in other income in 1HFY05. This is on account of a fall in treasury profits (G-Sec portfolio). Apart from that, due to the transfer of securities to the HTM (Held to Maturity) category, the bank has booked one time losses and these have been reflected in higher provisioning requirements for the September quarter. The bank had to absorb a depreciation of Rs 2.05 bn in its income statement (higher provisioning) on account of the transfer of securities to the HTM category. The profit from sale of investments, on the other hand, dropped to Rs 540 m in 1HFY05 compared to Rs 1770 m in the same period last year. Both these factors have taken a toll on the banks bottomline. Core fee based income has, however, shown a rise 35% YoY rise in 1HFY05. The net NPA to advances ratio stood at 1.7%, marginally lower compared to 1QFY05 (1.8%).
What to expect?
The stock is currently trading at Rs 262, at price to book ratio of 1.5 times. We believe that the bank has managed to grow its advances well in the September quarter, however it is too early to say whether this is a consistent trend. At the same time, Corporation Bank, like most other public sector banks, may have also seen the worst as far as the impact of rising interest rates are concerned (if one were to assume that there is no rapid rise in interest rates going forward). Thus going forward, improving core business fundamentals (better core interest and fee based income growth) will hold the bank in good stead.
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