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Corp Bank: Profit growth stays muted
Nov 19, 2012

Corporation Bank declared its results for the second quarter of the financial year 2012-2013 (2QFY13). The bank has reported 21% YoY and 1% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 8% YoY in 2QFY13, on the back of a 20% YoY growth in advances.
  • Capital adequacy ratio currently stands strong at 13.05% at the end of 1HFY12 from 13.6% at the end of 1HFY11 as per Basel II norms.
  • Net interest margin (NIM) sees a decrease to 2.3% from 2.4% in 1HFY12.
  • Net NPA (non-performing assets) to advances comes in higher at 1.4% in 1HFY13 from 0.9% in 1HFY12.
  • Other income decreases 16% YoY in 2QFY13 on lower profit on sale of investments, exchange transactions, dividends and cash management income.
  • Net profits increase by a muted 1% during the quarter on account of lower NII growth and higher provisions and lower other income. However lower tax payments aided some growth.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 30,907 37,445 21.2% 60,691 73,951 21.8%
Interest expense 23,471 29,412 25.3% 46,179 57,834 25.2%
Net Interest Income 7,436 8,032 8.0% 14,512 16,117 11.1%
Net interest margin (%)       2.4% 2.3%  
Other Income 3,894 3,260 -16.3% 6,559 6,536 -0.3%
Other Expense 4,422 4,435 0.3% 8,630 9,096 5.4%
Provisions and contingencies 1,954 2,688 37.6% 3,394 4,854 43.0%
Profit before tax 4,954 4,169 -15.8% 9,045 8,702 -3.8%
Tax 943 112 -88.1% 1,520 942 -38.0%
Effective tax rate 19.0% 2.7%   16.8% 10.8%  
Profit after tax/ (loss) 4,011 4,057 1.1% 7,526 7,760 3.1%
Net profit margin (%) 13.0% 10.8%   12.4% 10.5%  
No. of shares (m)         148.1  
Book value per share (Rs)*         611.1  
P/BV (x)         0.6  
* (Book value as on 30th September 2012)

What has driven performance in 1HFY13?
  • Corporation Bank managed to grow its advance book by 20% YoY in 1HFY13, above the sector average. This was largely relying on the incremental demand from large corporate, retail and agri segments.

  • Corporation Bank's NIM moved down from 2.4% to 2.3% in 1HFY13 with CASA (current account, and savings bank accounts) funding only 21% of total deposits. The bank continues to be heavily dependent on bulk deposits. On account of higher interest costs due to its large bulk deposit base, the growth in the NII was muted at 11% YoY in 1HFY13.

    Retail advances see robust growth
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 816,340   981,610   20.2%
    SME 127,920 15.7% 157,840 16.1% 23.4%
    Retail 138,700 17.0% 211,670 21.6% 52.6%
    Deposits 1,206,130   1,437,380   19.2%
    CASA 263,060 21.8% 300,620 20.9% 14.3%
    Term 943,070 78.2% 1,136,760 79.1% 20.5%
    Credit deposit ratio 67.7%   68.3%    

  • Corporation Bank's cost to income ratio decreased to 40.3% in 1HFY13 from 41% in 1HFY12. 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 13.05% as per Basel II norms, with 8.4% Tier 1 ratio.

  • Corporation Bank's gross NPA increased to around 1.97% in 1HFY13; compared to 1.32% earlier. At the net level also NPAs came in higher at 1.4% as against 0.9% in 1HFY12. The bank's asset quality has continued to deteriorate. The bank saw Rs 4.4 bn in fresh slippages during the quarter (as against Rs 7.2 bn in the previous quarter), with Rs 11.7 bn coming in for the first 6 months of the year. The bank's provisioning coverage ratio also decreased from 64.7% to 60.4% in 1HFY12.

  • The bank's restructuring has also seen some deterioration coming in at 9.06% of advances. The cumulative restructuring now amounts to Rs 88.7 bn. The bank's restructuring during the current quarter however was significantly lower than what was seen in the previous quarter (1QFY13), coming at Rs 2.5 bn versus over Rs 10.7 bn in the previous quarter. But, this doesn't mean that all the challenges in the underlying economy have been addressed. Irrespective the bank's 16.8% exposure to the infra space, out of which 10% is to the power sector is some cause of concern.

What to expect?
At the current price of Rs 392, the stock is valued at 0.5 times its FY15 estimated adjusted months book value. The bank's annualised return on equity stands at a healthy 18.3% and return on assets at over 1%. While asset quality is expected to be somewhat of an issue in the coming quarters, the bank should be able to improve its NIMs going forward in light of the RBI's monetary easing. In fact it has held its margins steady so far. Corporation Bank has not been able to adequately contain its cost of funds, and needs to expand its CASA base substantially. It has been shedding its costly bulk deposits; however this still remains at elevated levels. The bank has a target to bring this down to 15% levels by March 2013 but this will be a challenge. Going forward it plans to focus on increasing its CASA base by adding branches and also focus on recovery efforts. It also plans to open branches in rural areas to be able to meet its priority sector lending targets which are still below mandated levels. Irrespective, the current valuations (the stock is trading well below book value) leaves significant upside for investors from 2 to 3 year perspective. We maintain our buy view on the stock.

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