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Corp Bank: Interest costs pile up
Nov 4, 2011

Corporation Bank declared its results for the second quarter of the financial year 2011-2012 (2QFY12). The bank has reported 45% YoY and 14% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 45% YoY in 2QFY12, on the back of a 17% YoY growth in advances.
  • Capital adequacy ratio currently stands strong at 13.6% at the end of 1HFY12 from 14.1% at the end of 1HFY11 as per Basel II norms.
  • Net interest margin (NIM) drops to 2.4% from 2.8% in 1HFY11.
  • Net NPA (non-performing assets) to advances comes in higher at 0.9% in 1HFY12 from 0.4% in 1HFY11.
  • Other income increases 25% YoY in 1HFY12 on higher profit on sale of investments, dividends and forex income.
  • Net profits increase by a muted 14% during the quarter on account of lower NII growth and higher provisions, however higher other income and lower tax payments aided growth.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 21,387 30,907 44.5% 41,262 60,691 47.1%
Interest expense 14,429 23,471 62.7% 27,730 46,179 66.5%
Net Interest Income 6,959 7,436 6.9% 13,532 14,512 7.2%
Net interest margin (%)       2.8% 2.4%  
Other Income 2,455 3,987 62.4% 5,519 6,884 24.7%
Other Expense 3,679 4,422 20.2% 7,112 8,630 21.4%
Provisions and contingencies 976 2,048 109.7% 2,242 3,720 65.9%
Profit before tax 4,759 4,954 4.1% 9,696 9,045 -6.7%
Tax 1,241 943 -24.0% 2,841 1,520 -46.5%
Effective tax rate 26.1% 19.0%   29.3% 16.8%  
Profit after tax/ (loss) 3,517 4,011 14.0% 6,855 7,526 9.8%
Net profit margin (%) 16.4% 13.0%   16.6% 12.4%  
No. of shares (m)         148.1  
Book value per share (Rs)*         532.7  
P/BV (x)         0.8  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • Corporation Bank managed to grow its advance book by 17% YoY in 1HFY12, slightly lower than the sector average. This was largely relying on the incremental demand from large corporate and SME segment. Its retail segment also saw good growth versus other banks. Also, the upward re-pricing of loans helped increase lending yields. The bank however saw a 6% decrease in its loan book in the six month period from April-September 2011 on account of a weakening credit environment. Thus, the RBI's rampant rate hikes are leading to a slowdown in credit offtake. The bank however expects to grow its loan book by 20% YoY in FY12 (25% estimate earlier) by focusing on SME and retail advances. We have however, assumed a relatively muted loan growth.

  • Corporation Bank's NIM moved down from 2.8% to 2.4% in 1QFY12 with CASA (current account, and savings bank accounts) funding being only 22% of total deposits. The bank expects to increase its CASA base to around 30% by the end of FY12 by giving more focus to increasing the same. On account of higher interest costs due to its large bulk deposit base, the growth in the NII was muted at 7% YoY. The bank however, hopes to increase its NIM to 3% at the end of FY12, however we have believe that it will sustain at less than 2.5% going forwards. The savings bank deregulation as well as the inability to increase lending yields may also put pressure on NIMs.


  • SME advances see robust growth, CASA disappoints
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 697,800   816,340   17.0%
    SME 81,300 11.7% 127,930 15.7% 57.4%
    Retail 125,160 17.9% 160,720 19.7% 28.4%
    Deposits 969,200   1,206,130   24.4%
    CASA 242,640 25.0% 263,060 21.8% 8.4%
    Term 726,560 75.0% 943,070 78.2% 29.8%
    Credit deposit ratio 72.0%   67.7%    

  • Corporation Bank's cost to income ratio increased to 40.3% in 1HFY12 from 37.3% in 1HFY11. However, the same is lower than its PSU banking peers and is one of the best (lowest) in the sector.

  • The bank is now reasonably well capitalized, with a capital adequacy ratio (CAR) of 13.6% as per Basel II norms, with 8.4% Tier 1 ratio.

  • Corporation Bank's gross NPA increased to around 1.3% in 1HFY12, however, at the net level NPAs came in higher at 0.9% as against 0.4% in 1HFY11. The bank's asset quality has deteriorated to some extent on account of system migration of smaller accounts on to the core banking technology. However the comforting part is that none of the bigger accounts have moved into NPAs and there will now be a recovery drive from the smaller accounts. The bank's provisioning coverage ratio also increased from 78.5% to 84.7% in 1HFY12.

  • The bank's restructuring has also been below its other PSU peers with restructured accounts coming at 4.6% of advances. Irrespective the bank's 16% exposure to the infra space, out of which 8.2% is to the power sector is some cause of concern.

What to expect?
At the current price of Rs 430, the stock is valued at 0.7 times our estimated FY14 adjusted book value. The bank's annualised return on equity stands at a healthy 19.1% and return on assets at over 1%. We however see sustaining NIMs and asset quality to be somewhat of an issue in the coming quarters. The bank has not been able to adequately contain its cost of funds, and needs to expand its CASA base substantially and shed its costly bulk deposits. Going forward it plans to focus on increasing its CASA base by adding new branches and also focus on recovery. It plans to open branches in rural areas to be able to meet its priority sector lending targets which is still below mandated levels. Irrespective, the current valuations leave significant upside for investors from 2 to 3 year perspective.

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