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Corp Bank: Margins offer upside

Oct 28, 2010

Corporation Bank declared its 1HFY11 results. The bank has reported a 46% YoY and 24% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 46% YoY in 1HFY11 on the back of 33% YoY growth in advances.
  • Other income falls by 26% YoY during 1HFY11 due to lower treasury gains.
  • Net profit margin improves by 0.7% to 16.4% in 1HFY11 thanks to lower operating costs.
  • Capital adequacy ratio at 14.5% at the end of 1HFY11.
  • Net NPA to advances move marginally higher to 0.4% in 1HFY11.

Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income     17,695   21,581 22.0%       35,117         41,859 19.2%
Interest Expense 12,660    14,429 14.0%       25,407         27,730 9.1%
Net Interest Income      5,035       7,152 42.0%         9,710         14,129 45.5%
Net interest margin (%)       2.3% 2.6%  
Other Income      3,028       2,261 -25.3%         6,621            4,922 -25.7%
Other Expense      2,707       3,679 35.9%         5,793            7,112 22.8%
Provisions and contingencies          940          976 3.8%         1,960            2,242 14.4%
Profit before tax      4,416       4,758 7.7%         8,578            9,697 13.0%
Tax      1,500       1,241 -17.3%         3,050            2,841 -6.9%
Profit after tax / (loss)      2,916       3,517 20.6%         5,528            6,856 24.0%
Net profit margin (%) 16.5% 16.3%   15.7% 16.4%  
No. of shares (m)         143.4  
Book value per share (Rs)*                    450.4  
Price to book value (x)                        1.7  
* Book value as on 30th September 2010

What has driven performance in 2QFY11?
  • Corporation Bank managed to grow its advance book by nearly 33% YoY in the first half of FY11 at double the sector average growth rate. This was largely relying on the incremental offtakes to the large corporates. Also, the upward re-pricing of loans ahead of the base rate implementation helped matters. Corporation Bank's NIM moved up to 2.6% in 1HFY11 with CASA funding being 25% of total deposits. The bank expects another Rs 120 bn worth of assets to get re-priced under base rate and add Rs 1.6 bn over FY11. Its target for CASA is 35% over the next 3 to 4 years. This effort is expected to boost the bank's margins substantially.

    Leaning towards lower-risk assets...
    (Rs m) 1HFY10 1HFY11 Change
    Advances    525,680    697,800 32.7%
    Retail      98,990    125,160 26.4%
    % of total advances 19% 18%  
    SME      58,010      81,300 40.1%
    % of total advances 11% 12%  
    Large corporate    182,960    273,060 49.2%
    % of total advances 35% 39%  
    Deposits    808,884    969,198 19.8%
    CASA    181,208    242,641 33.9%
    % of total 22% 25%  
    Term deposits    627,676    726,557 15.8%
    % of total 78% 75%  
    Credit deposit ratio 65.0% 72.0%  

  • During 1HFY11, Corporation Bank witnessed lower share of non-interest income while the growth in fee income was restricted to 17% YoY. The fact that Corporation Bank has made very marginal headway on the fee income front continues to make it vulnerable to losses on the treasury side.

  • Corporation Bank's cost to income ratio was marginally higher at 37% in 1HFY11 as compared to 35% in 1HFY10. However, the same is nearly 5% lower than its peers in the PSU banking space and is one of the best (lowest) in the sector.

  • Corporation Bank's gross NPA has been brought down to 1.1% compared to 1.2% in 1HFY10 while its net NPA remained at 0.4% during this period. The bank's provision coverage ratio of 78% is also above the RBI's mandated limit of 70%.

What to expect?
At the current price of Rs 751, the stock is attractively valued at 1.1 times our estimated FY13 adjusted book value ( Research Pro subscribers can view latest updates here. The bank's annualised return on equity stands at a healthy 21.2%. However, Corporation Bank may require further equity dilution in the medium term to sustain growth at current rates. We see sustenance of margins and asset quality to be an issue in the coming quarters. Having said that, the current valuations, do leave moderate upside for investors.

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