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Corporation Bank: Pricing pressure spoils the show
Nov 7, 2009

Performance summary
  • Interest income grows by 28% YoY in 1HFY10 on the back of 21% YoY growth in advances.
  • Net interest margin (NIM) drops by 0.1% YoY over 1HFY09 to 2.3%.
  • Net profit margin improves by 2% to 15.7% in 1HFY10 thanks to lower operating costs.
  • Capital adequacy ratio at 18.2% in 1HFY10.
  • Net NPA to advances remain stable at 0.3% in 1HFY10.


Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest income 14,488 17,695 22.1% 27,375 35,118 28.3%
Interest Expense 10,421 12,660 21.5% 19,528 25,407 30.1%
Net Interest Income 4,067 5,035 23.8% 7,847 9,711 23.8%
Net interest margin (%)       2.4% 2.3%  
Other Income 1,744 3,028 73.6% 3,319 6,621 99.5%
Other Expense 2,295 2,707 18.0% 4,441 5,263 18.5%
Provisions and contingencies 558 940 68.5% 1,566 2,490 59.0%
Profit before tax 2,958 4,416 49.3% 5,159 8,579 66.3%
Tax 1,042 1,500 44.0% 1,401 3,050 117.7%
Profit after tax / (loss) 1,916 2,916 52.2% 3,758 5,529 47.1%
Net profit margin (%) 13.2% 16.5%   13.7% 15.7%  
No. of shares (m)       143.5 143.5  
Book value per share (Rs)*         379.9  
Price to book value (x)         1.1  
* Book value as on 30th September 2009

What has driven performance in 2QFY10?
  • Notwithstanding the lower credit demand in the past six months, Corporation Bank managed to grow its advance book by nearly 21% YoY, largely relying on the incremental offtakes to the large corporates. However, the downward re-pricing of loans and the fact that nearly 80% of the bank’s loan priced below PLR rates did not help matters. Corporation Bank’s NIM slipped to 2.3% in 1HFY10 with CASA funding being 22% of total deposits. The faster growth in term deposits have also pressurised the NIMs. We have estimated the NIMs at 2.3% by the end of FY10.

    Leaning towards lower-risk assets…
    (Rs m) 1HFY09 1HFY10 Change
    Advances 435,420 525,680 20.7%
    Retail 91,720 98,990 7.9%
    % of total advances 21% 19%  
    SME 44,540 58,010 30.2%
    % of total advances 10% 11%  
    Large corporate 124,460 182,960 47.0%
    % of total advances 29% 35%  
    Deposits 602,775 808,884 34.2%
    CASA 153,339 181,209 18.2%
    % of total 25% 22%  
    Term deposits 449,436 627,675 39.7%
    % of total 75% 78%  
    Credit deposit ratio 72.2% 65.0%  

  • During 2QFY10, Corporation Bank witnessed doubling of its non-interest income while the growth in fee income was restricted to 45% YoY. Nevertheless, fee income contributed 12% to the bank’s total other income in this half year, same as in 1HFY09. Although Corporation Bank has made very marginal headway on the fee income front, the fact that its investments are well hedged against interest rates risks (79% of investments are in held-to-maturity basket) makes it a safer play.

  • Corporation Bank’s cost to income ratio has fallen marginally from 40% in 1HFY09 to 32% in 1HFY10. The same is nearly 5% lower than its peers in the PSU banking space and is one of the best (lowest) in the sector. This is also despite the fact that the bank had increased its employee base and added 73 branches to its franchise in the past 6 months. Going forward, over the next 2 years, the bank is planning to add 150 braches a year that may entail higher costs.

  • Corporation Bank’s gross NPA has been brought down to 1.1% compared to 1.4% in 1HFY09 while its net NPA remained at 0.3% during this period. The bank’s provision coverage ratio of 75% is also above the RBI’s mandated limit of 70%.

  • Corporation Bank has been a pioneer in branchless banking in the rural areas and had 1,000 such units at the end of September 2009 with 5 lac accounts and deposits of Rs 210 m. Further 18% of the bank’s branches were in the rural areas of Andhra Pradesh and Karnataka. The bank plans to open 1,000 more branchless banking by December 2010.

What to expect?
At the current price of Rs 426, the stock is attractively valued at 0.9 times our estimated FY12 adjusted book value. The bank’s annualised return on equity stands at a healthy 20.3%. Further, with CAR of 18.1% at the end of September 2009, the bank will not require further equity dilution. Corporation Bank has set a target of asset growth of 20% in FY10 on the back of CASA comprising 30% of its total deposits (i.e., through low cost funding). While we have been slightly more conservative in terms of balance sheet growth, we see sustenance of margins and asset quality to be an issue in the coming quarters. Having said that, at the current valuations, most of the risks seem to be factored in.

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