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Corporation Bank: All but capital - Views on News from Equitymaster

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Corporation Bank: All but capital

Nov 17, 2008

Performance summary
  • Interest income grows by 26% YoY in 1HFY09 on the back of 33% YoY growth in advances.
  • Net interest margin (NIM) remains stable in 2QFY09 QoQ; but drops by 0.6% YoY over 2QFY08.
  • Net profit margin drops by 1.8% to 13.7% in 1HFY09 despite lower operating costs.
  • Capital adequacy ratio at 11.8%.
  • Net NPA to advances remain at 0.4% in 1HFY09.

Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 10,779 14,488 34.4% 21,783 27,375 25.7%
Interest Expense 7,092 10,421 46.9% 14,571 19,528 34.0%
Net Interest Income 3,687 4,067 10.3% 7,212 7,847 8.8%
Net interest margin (%)       3.0% 2.4%  
Other Income 1,690 1,743 3.1% 3,074 3,319 8.0%
Other Expense 2,432 2,295 -5.6% 4,586 4,441 -3.2%
Provisions and contingencies 542 558 3.0% 741 1,566 111.3%
Profit before tax 2,403 2,957 23.1% 4,959 5,159 4.0%
Tax 790 1,042 31.9% 1,575 1,400 -11.1%
Profit after tax / (loss) 1,613 1,915 18.7% 3,384 3,759 11.1%
Net profit margin (%) 15.0% 13.2%   15.5% 13.7%  
No. of shares (m)       143.5 143.5  
Book value per share (Rs)*         320.9  
Price to book value (x)         0.6  
* Book value as on 30th September 2008

What has driven performance in 2QFY09?
  • Notwithstanding the liquidity crunch in the previous quarter, Corporation Bank managed to grow its advance book by nearly 33% YoY, largely relying on the incremental offtakes to the large corporates. The re-pricing of loans also helped the banks keep its NIM stable over that in 1QFY09 despite the cost of funds rising by 0.3% in the last quarter alone. The bank has attributed the drop in NIM over the corresponding quarter of FY08 partly to the write-off of interest charged on agricultural loans that are subject to waiver. The faster growth in term deposits have also pressurised the NIMs. We have estimated the NIMs at 2.3% by the end of FY09.

    Leaning towards lower-risk assets...

    (Rs m) 1HFY08 1HFY09 Change
    Advances 326,656 435,470 33.3%
    Retail 81,664 100,158 22.6%
    % of total advances 25% 23%  
    SME 35,932 47,902 33.3%
    % of total advances 11% 11%  
    Corporate 209,060 335,312 60.4%
    % of total advances 64% 77%  
    Deposits 457,425 602,775 31.8%
    CASA 122,150 142,920 17.0%
    % of total 27% 24%  
    Term deposits 335,275 459,855 37.2%
    % of total 73% 76%  
    Credit deposit ratio 71.4% 72.2%  

  • During 2QFY09, Corporation Bank witnessed 41% growth in its non-interest income while the growth in fee income was restricted to 26% YoY. Nevertheless, fee income contributed 17% to the bank’s total other income in this quarter as against 15% in 2QFY08. 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 45% in 1HFY08 to 40% in 1HFY09. 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 83 branches to its franchise in the past 12 months. Going forward, over the next 3-4 years, the bank is planning to add 100 braches a year that may entail higher costs.

  • Corporation Bank’s gross NPA has been brought down to 1.4% compared to 1.9% in 1HFY09 while its net NPA remained at 0.4% during this period. The bank could affect a cash recovery and upgradation of NPAs of Rs1.3 bn in 1HFY09, which also helped in keeping the NPA level under control.

What to expect?
At the current price of Rs 205, the stock is attractively valued at 0.5 times our estimated FY11 adjusted book value. The bank’s annualised return on equity stands at a healthy 16.3%. However, the current CAR of 11.8% at the end of September 2008 may require further equity dilution. Corporation Bank had set a target of asset growth of 20% to 25% in FY09 on the back of CASA comprising 36% of its total deposits (i.e., through low cost funding). While the former is likely to be achieved, 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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