Corporation Bank reported its performance for the second quarter ended September 2002 yesterday. Backed by a sharp rise in retail assets, spurt in investment income and a significant decline in average cost of deposits, the bank has posted a 27% rise in net profit for 2QFY03. For 1HFY03, growth in interest income and net interest margins are also encouraging.
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*
Banks continue to find it difficult to find borrowers at the current juncture which is reflected in a fall in advances in 2QFY03 for Corporation Bank. After growing at 14% in 1QFY03, weakness in advances indicates that despite the rise in both industrial and agricultural output in FY02, investment demand has failed to increase. Also, Corporation Bank posted a sharp rise in advances in the corresponding quarter last year due to sub-PLR (prime lending rate) after the cash infusion from Life Insurance Corporation (LIC). In 1HFY02, sub-PLR lending surmounted to as high as Rs 19 bn. Since such lending opportunities are not profitable, the bank has scaled down in 2QFY03 and this has also resulted in a weak advances growth figures in 2QFY03.
Interest income breakup
Interest on advances
Income from investments
Interest on others
– Cash management services
In order to widen its advances portfolio, most of the banks have been focusing aggressively on increasing retail assets from housing finance, car and other personal loans. Corporation Bank is no exception. Total housing loan portfolio for the first half of the current fiscal year stood at Rs 18 bn (Rs 6 bn in FY02), which is higher by more than 60% YoY. Corporation Bank had targeted at doubling its housing loan portfolio in FY03 and it seems that it is well on track for achieving the same. With other retail assets also growing in 1HFY03, contribution of retail assets to total advances has increased from 14.5% in FY02 to 20.6% in 1HFY02. Since yield on retail assets are comparatively higher, the increase in contribution gains significance.
Since advances growth has remained lacklustre, the bank has been parking most of its surplus funds in government securities. Total investments have increased by 19.8% to Rs 96.5 bn since March 2002. Due to profit booking, income from investments have increased sharply in 16.2% in 2QFY03. But since the average duration is around 5 years, we expect other income growth to remain subdued in the coming quarters in light of fall in interest rates.
Cash management services (CMS), where Corporation Bank was dominant once, has witnessed pressure from increased competition and in light of increasingly commoditised nature of the same. The decline has been steep in 1HFY03 despite the addition of more than 300 clients during the same period. With LIC increasing its stake in the company, one expected CMS income to increase in light of huge balance sheet of the insurance major. Corporation Bank expects benefits from the tie-up with LIC more in terms of access to cheaper funds rather than huge flow as income from cash management services in the long term.
Though productivity parameters of the bank do not compare with the new generation private sector peers, there has been a rise in the same. This combined with growing computerisation has enabled the bank to increase operating margins both in 2QFY03 an 1HFY03. Almost 90% of the bank's business are computerised as of 1HFY03. Operating profit growth was also aided by increase in interest spread in light of a 80 basis points fall in cost of deposits to 6.9% as of September 2002. Just to put things in perspective, PNB's (Punjab National Bank) cost of deposits was 6.6% in March 2002, which was one of the lowest in the sector.
Cost to income ratio
Cost of deposits
Yield on advances
Avg. business per employee
Avg. business per branch
Despite a sharp rise in provisions, net NPAs have increased from 2.3% in March 2002 to 2.9% as of September 2002 (Net NPAs stood at Rs 2.7 bn in September 2002). The bank's capital adequacy ratio (CAR) stood at 22.2% in September 2002, which is a cause of concern. Though the bank's management in the analyst meet said that lower weightage on housing assets is one of the reasons for the rise from 17.9% in FY02, it is worrisome aspect. With no real economic growth prospects in sight, we do not foresee any significant increase advances in the near term.
Our interaction with one of the treasury managers of the bank suggest that most of the off take from the corporate sector is primarily towards lowering average interest costs by refinancing loans. That said, there has been a marked rise in demand for funds from the infrastructure sector from the likes of National Highway Authority of India. Interest rates are expected to remain soft for the next six to eight months with no real impetus for investment demand at the current juncture. As a result, excess liquidity scenario is expected to continue in the near future.
Corporation Bank currently trades at Rs 100 implying a P/E multiple of 3.3x. Though productivity is on the lower side (average business per employee for Corporation Bank is Rs 27 m, which is significantly lower than Rs 100 m per employee (approx.) for UTI Bank), there is lot of room for improvement in the same. On the adjusted price to book value basis, the stock trades at the attractive level of 0.7x.
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