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Corporation Bank: Content with little - Views on News from Equitymaster
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Corporation Bank: Content with little
Oct 31, 2007

Performance summary
  • Interest income grows by 30% YoY in 2QFY08 on the back of higher PLR and 16.6% YoY growth in advances.
  • Other income grows 62% YoY with increased cash recovery of bad debts.

  • Net interest margins lower at 2.9%, from 3.0% in 1HFY07 due to write off of investment amortisation premia.

  • Net profit margins decline to 15.6% (17.8% in 1HFY07) despite lower provisioning.

  • Return on equity improves to 16.5% (14.9% in 1HFY07) in 1HFY08.

Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Interest income 8,175 10,637 30.1% 15,251 21,641 41.9%
Interest Expense 5,158 7,092 37.5% 9,211 14,571 58.2%
Net Interest Income 3,017 3,545 17.5% 6,040 7,070 17.1%
Net interest margin (%)       3.0% 2.9%  
Other Income 1,130 1,832 62.1% 3,005 3,216 7.0%
Other Expense 1,940 2,432 25.4% 3,823 4,585 19.9%
Provisions and contingencies 237 541 128.3% 1,075 741 -31.1%
Profit before tax 1,970 2,404 22.0% 4,147 4,960 19.6%
Tax 700 790 12.9% 1,435 1,575 9.8%
Profit after tax / (loss) 1,270 1,614 27.1% 2,712 3,385 24.8%
Net profit margin (%) 15.5% 15.2%   17.8% 15.6%  
No. of shares (m)         143.5  
Book value per share (Rs)*         262.5  
Price to book value (x)         1.6  
* Book value as on 30th September 2007

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 918 branches and 100% of its business runs on a core banking solution. The bank also has a network of over 932 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 2QFY08?
High interest impact on assets…
(Rs m) 1HFY07 1HFY08 Change
Advances 280,046 326,657 16.6%
Retail 76,610 81,550 6.4%
% of total advances 27% 25%  
Home loans 1,503 1,343 -10.6%
% of retail advances 2% 2%  
Corporate 203,436 245,107 20.5%
% of total advances 73% 75%  
Deposits 380,174 457,425 20.3%
CASA 104,390 122,150 17.0%
% of total 27% 27%  
Term deposits 275,784 335,275 21.6%
% of total 73% 73%  
Credit deposit ratio 73.7% 71.4%  
Advances – No surprises: In remaining in line with our estimates, Corporation Bank has completed the first half on this fiscal on a relaxed note in terms of incremental advance growth. Clocking a mere 16.6% YoY growth in advances in 1HFY08, the bank has not only underperformed the sector average but also most of its peers in the PSU banking segment. The reason as to why we had a conservative stance on the bank’s asset growth estimates was due to its non-aggressive approach after a bad experience on the home loan delinquency front in FY06 (gross NPAs in home loans were 5% when the sector average was 1%).

Backed by a comfortable CAR position, the bank has however been able to sustain its net interest margins above the industry average so far. Nevertheless, the faster growth in deposits have pressurised the NIMs by 40 basis points over that of last year and by 10 basis points QoQ despite higher yields. The same have also been impacted by the write-off of amortisation of investment premia against net interest income. Excluding amortisation, the NIMs in 1HFY08 would have been 3.0% while the comparable figure for 1HFY07 would be 3.2%. It must also be noted that the bank has nearly 72% of its loans in the 9% plus interest bucket and more than 90% are on floating rate basis, thus offering sufficient headroom for improvement in NIMs if the yields remain firm. We have estimated FY08 NIMs at 2.9%.

The bank has further reduced its exposure to the retail asset segment and home loans in particular in this quarter. While the deposit growth of nearly 20% YoY is in line with the industry, the proportion of low cost deposits (CASA) to total deposits remained stable. This is enthusing, more so, in a rising interest rate scenario.

Other income – Fees yet to stabilise: During 2QFY08, Corporation Bank witnessed 12% YoY growth in its non-interest income while the growth in fee income was restricted to 3% YoY. Fee income contributed 49% of the bank’s total other income. However. The bank’s fee income is yet to show signs of stability as a percentage of total income despite the formation of the alliance with OBC and Indian Bank, which gives it access to customers in the northern regions of the country and enables it to leverage the delivery channels of the other two banks. The bank had also sold its stake in NSE, the income from which was booked in the first quarter of FY08.

Better off in NPAs: Corporation Bank’s loan loss provisions stand at 82% of loans in 1HFY08. However ex-recoveries the ratio is much lower. Nonetheless, given the fact that the bank has shelved its aggressive approach on mortgage loans, going forward, the possibility of high slippages remains lower. The overall delinquency rate for the bank has improved with net NPAs having declined to 0.4% in 1HFY08 from 0.5% in 1HFY07. The NPA rate in home loans has reduced to 3.1% from 3.7% in 1HFY07.

Costs on the decline: While most PSU banks are paring their operational overheads by franchise and employee rationalisation, Corporation Bank has also been falling in line with its cost to income ratio reducing marginally from 47% in 1HFY07 to 45% in 1HFY08. The same is nearly 5% lower than its peers in the PSU banking space and one of the best in the sector. This is also despite the fact that the bank has increased its employee base by nearly 25% in FY07 and brought 100% of its branches on the CBS (core banking solution) platform. Going forward the bank is planning to add 100 braches a year that may entail higher costs.

What to expect?
At the current price of Rs 430, the stock is trading at 1.3 times our estimated FY10 adjusted book value. The bank’s annualised return on equity stands at a healthy 16.5% and CAR at 13.6% at the end of September 2007 and is estimated to be 13.3% as per Basel-II accord. It is targeting asset growth of 20% to 25% in FY08 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). We, however, retain our conservative estimates on this front. Also, investors need to factor in the margin pressure and provisioning requirements. With 77% of the investments in the ‘held to maturity’ basket, the risks on the treasury front are limited. Having said that, investors should not discount the fact the bank continues to enjoy one of the best operating and capital adequacy ratios (amongst PSU banks) and prospects of the synergies due to the MOUs.

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Feb 23, 2018 (Close)


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