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Corporation Bank: Seeking synergies
Oct 26, 2006

Performance Summary
Corporation Bank declared results for the second quarter and half year ended September 2007. Ability to control operating costs and lower provisioning requirement have kept the bottomline growth buoyant. However, while a higher growth in advances and superior net interest margins has aided the bank’s net interest income growth, inability to maintain the traction in fee income is palpable. The benign impact of the bank’s MOU with OBC and Indian Bank is expected to be visible in its numbers by the next fiscal.

Rs (m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from operations 6,473 8,325 28.6% 12,441 15,626 25.6%
Other Income 1,380 1,131 -18.1% 3,076 3,006 -2.3%
Interest Expense 3,407 5,158 51.4% 6,566 9,211 40.3%
Net Interest Income 3,065 3,167 3.3% 5,875 6,415 9.2%
Net interest margin (%)       3.4% 3.2%  
Other Expense 1,806 1,941 7.4% 3,541 3,823 8.0%
Provisions and contingencies 960 387 -59.7% 1,773 1,450 -18.2%
Profit before tax 1,679 1,970 17.3% 3,637 4,147 14.0%
Tax 623 700 12.4% 1,345 1,435 6.7%
Profit after tax / (loss) 1,056 1,270 20.3% 2,292 2,712 18.3%
Net profit margin (%) 16.3% 15.3%   18.4% 17.4%  
No. of shares (m) 143.5 143.5   143.5 143.5  
Diluted earnings per share (Rs)* 29.4 35.4   32.0 37.8  
P/E (x)         10.4  
* (12 months trailing)

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) runs 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 of Commerce and Karnataka Bank for ATM sharing.

What has driven performance in 2QFY07?
Credit-learnings from the past: Recovering from the negative surprises of high delinquencies in its incremental retail advances in 1HFY06, Corporation Bank has caught up with its peers in terms of credit growth in the current fiscal. The bank clocked advance growth of 39% YoY in 1HFY07, driven largely by corporate loans (75% of advance portfolio in 1HFY07), which grew by 45% YoY while retail loan growth was 21% YoY. The bank’s mortgage loans also grew by 32% YoY in the same period, albeit on a lower base. Mortgage loans comprised 56% of the retail portfolio and 14% of total advances in 1HFY07. While deposits grew by 27% YoY, the proportion of low cost deposits (CASA) to total deposits declined to 30%, thus resulting in incremental credit being funded largely by high cost term deposits. The bank, however, explained that the same were garnered to cater to the maturity of a couple of big-ticket low yielding advances in 3QFY07, the re-pricing of which will relieve some pressure from the NIMs. In the meanwhile, the bank’s NIMs have shrunk to 3.2% from 3.6% in 1HFY06 and 3.4% in 1QFY07. We have estimated FY07E NIMs at 3.0%.

Credit growth…term deposit funded
(Rs m) 1H06 % of total 1H07 % of total Change
Advances 202,260   280,050   38.5%
Retail 57,670 28.5% 69,950 25.0% 21.3%
Corporate 144,590 71.5% 210,100 75.0% 45.3%
Deposits 297,608   380,174   27.7%
CASA 98,653 33.1% 113,381 29.8% 14.9%
Term deposits 198,955 66.9% 266,793 70.2% 34.1%
Credit deposit ratio 68.0%   73.7%    

Fees – Anchoring to ‘synergy’ hopes: The bank continued to witness a very negligible 14% YoY growth in its fee income (7% of total income) during 1QFY07. The MoU with the LIC for cash management services is also proving to be of no avail, as pricing pressures continue. The bank’s MOU with OBC and India Bank that will give it access to customers in the northern regions of the country and enable it to leverage the delivery channels of the other two banks is expected to enhance its revenue growth on the fee income side. This will, however, materialise over the next 6 to 9 months and will reflect in the bank’s numbers by FY08.

Delinquencies – A thing of the past? The bank’s loan loss provisions (ex-recoveries) stand at merely 0.1% of loans in this quarter (0.8% in 1HFY06). Although the overall coverage ratio (provision to gross NPAs) is above 70%, given the past experiences, with an aggressive stance on mortgage loans going forward, the possibility of high slippages remains a concern. We, therefore, see the bank making higher provisions towards loan delinquencies in the coming quarters. The overall delinquency rate for the bank has improved with net NPAs having declined to 0.5% in 2QFY07 from 1.0% in 2QFY06. However, the NPAs in the retail book (3.1%) and mortgage loans (3.8%) are amongst the highest in the sector.

What to expect?
At the current price of Rs 410, the stock is fairly priced at 1.6 times our estimated FY08 adjusted book value. The bank is well capitalised (CAR 13.3% in 1HFY07) to capture the growth opportunities in the sector. Post Basel-II implementation, the same will come down to 11.7% as per the bank’s estimations. Nevertheless, investors need to factor in the upcoming margin pressure and provisioning requirements. Lack of planning for future growth and initiatives for capturing the retail potential (for both fund and non-fund income growth) remain a major disappointment. All said, given the prospects of the synergies due to the MOU, Corporation Bank continues to remain a long term play.

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