Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Corporation Bank: Low base effect - Views on News from Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Corporation Bank: Low base effect
Oct 24, 2005

Performance Summary
Corporation Bank has declared its results for the second quarter and half year ended September 2005, reporting a trebling of the bottomline, albeit on a lower base. The extraordinary rise in profits must be seen in the light of the fact that in the corresponding quarter of FY05 the bank had to book high provisioning, leading to erosion of margins. Profit before provisions and taxes has risen by 10% YoY. We also attended the bank’s analyst meet and our result analysis includes excerpts from the meeting.

Rs (m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Income from operations 5,642 6,473 14.7% 11,169 12,441 11.4%
Other Income 1,216 1,380 13.5% 2,217 3,076 38.7%
Interest Expense 2,763 3,407 23.3% 5,500 6,566 19.4%
Net Interest Income 2,879 3,066 6.5% 5,669 5,875 3.6%
Net interest margin (%)       4.0% 3.8%  
Other Expense 1,688 1,806 7.0% 3,201 3,541 10.6%
Provisions and contingencies 2,137 960 -55.1% 2,825 1,773 -37.2%
Profit before tax 270 1,680 522.2% 1,860 3,637 95.5%
Tax 4 623 15475.0% 531 1,345 153.3%
Profit after tax/ (loss) 266 1,057 297.4% 1,329 2,292 72.5%
Net profit margin (%) 4.7% 16%   11.9% 18.4%  
No. of shares (m)       143.4 143.4  
Diluted earnings per share (Rs)*       18.5 32.0  
P/E (x)         11.0  
* (annualised)            

The ‘cherry’ amongst PSUs
One of the few PSU banks in India with a clean balance sheet and impressive track record, Corporation Bank has a well-established franchise of 782 branches and 83% of its business (504 branches) is on a core banking solution. The bank also has a network of over 814 ATMs covering nearly 80 cities and towns throughout the country. The bank has tie-ups with the LIC and New India Assurance for cross selling products and services. It has also entered into an agreement with the LIC (the latter has taken a 26% stake in Corporation Bank) for offering cash management services and has agreements with Oriental Bank and Karnataka Bank for ATM sharing.

What has driven performance in 2QFY06?
Growth - not filtering into margins: Given the comfort of having adequate capital (CAR) to propel its asset growth, Corporation Bank has remained consistent in its advance growth during 2QFY06. The bank witnessed 31.5% YoY growth in its advance book during 2QFY06, largely supported by growth in the corporate credit portfolio (grew 35% YoY). The share of retail credit has fallen from 30% in 2QFY05 to 28% in 2QFY06. Also, the bank has taken a cautious stance with respect to exposure to housing loans (that have witnessed higher delinquency rates of late) and the mortgage loans (grew 8% YoY) comprised 51% of the advance book in 2QFY06 against 59% in the corresponding quarter of FY05.

Credit deposit ratio improves…
(Rs m) 2QFY05 % of total 2QFY06 % of total Change
Advances 153,830   202,260   31.5%
Retail 46,440 30.2% 57,670 28.5% 24.2%
Corporate 107,390 69.8% 144,590 71.5% 34.6%
Deposits 242,289   297,608   22.8%
CASA 78,791 32.5% 98,654 33.1% 25.2%
Term deposits 163,498 67.5% 198,954 66.9% 21.7%
Credit deposit ratio 63.5%   68.0%    

However, the prime concern is that the bank has failed to fructify the higher asset growth into higher margins. This is because while the yields on advances continue to decline (as is the case with players across the sector), the bank faced pressures on the cost of funds, despite the fall in deposit costs. It may also be recalled that the bank recently went in for external commercial borrowings (ECBs) to the tune of Rs 13 bn that increased the cost of borrowing by 120% YoY. This has lead to the net interest margins (NIMs 3.6% in 2QFY06) contracting by approximately 40 basis points over 2QFY05.

Retail delinquency – a concern: Although the overall delinquency rate for the bank has declined to 1.6% in 2QFY06 over 1.9% in 2QFY05, it is very uninspiring to note that the delinquency rate in home loans is as high as 3.8% (industry average of retail NPAs is 1%). While the bank has taken a pre-emptive step by taking a cautious stance on mortgage loans going forward, high slippages remain a concern. However, cash recoveries to the tune of Rs 770 m and adequate provisioning has kept the NPA coverage ratio at a comfortable 71% while net NPAs stood at 1%, at the end of 2QFY06.

Efficiency improves: The bank also continues to improve its efficiency ratio across parameters. This could be attributed to higher automation of branches and increased focus on fee based revenues.

Productivity improves…
(Rs m) 2QFY05 4QFY05 2QFY06
Business per employee 37.9 36.4 44.1
Profit per employee* 0.4 0.3 0.5
Business per branch 497.1 489.4 581.4
Profit per branch* 13.6 12.4 13.8
*Annualised profit      

What to expect?
Going forward, Corporation Bank is targeting advance growth of 25% to 27% and net interest margins of 3.4% for FY06. While the bank remains bullish on the growth in the SME and agri-loan portfolios, the retail segment is also expected to witness a higher traction and comprise 32% of loan book in the next 2 fiscals. Although the bank has 57% of investments in the HTM (held to maturity) basket, relatively higher duration of assets in the AFS (available for sale) basket is another cause for concern (due to interest rate risks).

At the current price of Rs 349, the stock is trading at 1.2 times our estimated FY08 adjusted book value. With sufficient CAR (17%), the bank is well positioned to take advantage of the future buoyancy in credit growth. Although our outlook on Corporation Bank remains consistent in terms of asset growth, we may have to revisit our estimations of net interest margins. Improvement in fee income and benefits of organic growth (55 more branches to be set up in FY06) may, however, trigger an upside to the valuations in the longer term.

To Read the Full Story, Subscribe or Sign In

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 22, 2018 03:37 PM


  • Track your investment in CORPORATION BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks