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Corp Bank: Big setback on profits

Nov 20, 2013 | Updated on Oct 30, 2019

Corporation Bank declared its results for the second quarter (2QFY14) and first half (1HFY14) of the financial year 2013-2014. The bank has reported 13.3% YoY growth in net interest income and 96.2% YoY decline in net profits. Profits for the first half declined by 50% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 13.3% YoY in 2QFY14, on the back of healthy 23.3% YoY growth in advances.
  • Net interest margin (NIM) moved downwards to 2.2% levels during the first half of FY14.
  • Net NPA (non-performing assets) to advances spiked to 2.2% in 2QFY14 from 1.4% in 2QFY13.
  • Other income grows modest 4.2% YoY in 2QFY14 on the back of core income growth of 11% YoY.
  • However; net profits report a stupendous fall of 96.2% YoY for 2QFY14 on account of higher provisions and higher operating costs.
  • Capital adequacy ratio currently stands at 10.6% at the end of 2QFY14 as per Basel III norms.

Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 37,445 44,340 18.4% 73,951 87,055 17.7%
Interest expense 29,412 35,241 19.8% 57,834 68,309 18.1%
Net Interest Income 8,032 9,098 13.3% 16,117 18,746 16.3%
Net interest margin (%)       2.3% 2.2%  
Other Income 3,260 3,397 4.2% 6,536 9,209 40.9%
Other Expense 4,435 5,852 32.0% 9,097 12,362 35.9%
Provisions and contingencies 2,688 6,998 160.3% 4,854 10,468 115.6%
Profit before tax 4,169 -355 -108.5% 8,702 5,125 -41.1%
Tax 112 -510 -554.5% 942 1,190 26.3%
Effective tax rate 2.7% 143.5%   10.8% 23.2%  
Profit after tax/ (loss) 4,057 155 -96.2% 7,760 3,935 -49.3%
Net profit margin (%) 10.8% 0.3%   10.5% 4.5%  
No. of shares (m)         152.9  
Book value per share (Rs)*         651.3  
P/BV (x)         0.4  
* (Book value as on 30th September 2013)

What has driven performance in 2QFY14?
  • The profits for the Corporation Bank tumbled by as high as 96.2% during 2QFY14. The half yearly profits were down by almost 50%. Stupendous increase in provisions and operating costs marred the profitability of the bank during 2QFY14.

  • The NII for the second quarter grew by 13.3% YoY on the back of healthy 23.3% YoY growth in advances. Moreover, the interest income on investments that grew handsomely by 30.9% YoY in 2QFY14 largely boosted the interest income performance for the bank. However, margins for the quarter have dipped to 2.04% levels down from 2.23% in 2QFY13. Thatís because the yields on advances have seen a decline since the lower yielding assets form major portion of the credit portfolio. Also weak CASA base could barely support the margins sustenance.

  • The loan growth for the quarter remained tepid reporting mere 2% YoY growth during 2QFY14. While SME, agri and retail continue to be the growth engine drivers to the advances portfolio for Corporation bank, the large corporate segment forms the major chunk which also contributes largely to the bank's bad loans.

    SME, agri and retail advances see robust growth, CASA moderates
    (Rs m) 2QFY13 % of total 2QFY14 % of total Change
    Advances 1,187,170   1,210,670   2.0%
    SME 157,840 13.3% 219,780 18.2% 39.2%
    Agri 80,040 6.7% 107,500 8.9% 34.3%
    Retail 211,670 17.8% 278,800 23.0% 31.7%
    Deposits 1,437,380   1,734,100   20.6%
    CASA 300,620 20.9% 325,320 18.8% 8.2%
    Term 1,136,760 79.1% 1,408,780 81.2% 23.9%
    Credit deposit ratio 82.6%   69.8%    

  • The deposits during 2QFY14 grew by healthy 20.6% YoY. However, the growth largely came form term deposits that grew 23.9% YoY. Whereas the low-cost deposit base grew by mere 8.2% YoY. Therefore, the already weak CASA base fell further to 18.8% levels which stand as one of the lowest in the industry.

  • The other income performance also remained subdued during the second quarter primarily due to 14.6% decline in non-core income areas. The core fee income grew by 11.0% YoY during 2QFY14.

  • The operating costs shot up by 32.0% in 2QFY14 on account of increased salary costs that grew 42.3% YoY and other operating expenses that increased 23.2% YoY. Consequently, the cost-income ratio was seen up at 47% levels in 2QFY13; up from 39% same period a year ago.

  • Asset quality pressures continue to bother bank's balance sheet. The gross NPAs spiked to 3.2% levels in 2QFY14 from 1.9% in 2QFY13. The net NPAs too were seen up from 1.4% in 2QFY13 to 2.2% in 2QFY14. The provision coverage continues to fall and was recorded at 51.6% levels during 2QFY14. The fact that bank's credit continues to be exposed to the beleaguered sectors of the economy, the asset quality deterioration does not come as a shock. The bank's credit portfolio comprises of 16.8% exposure to infrastructure of which 9.9% is exposed to power sector followed by above 3.0% exposures to other vulnerable sectors such as gems and jewellery, iron and steel and engineering. Larger proportion of bad loans has emerged from large corporate accounts (3.8%), agri (3.9%) and SME (2.8%). Also, the slippages for the quarter were recorded higher at Rs 20.5 bn.

  • Additionally, with 5.8% of the total credit portfolio slipping into restructured category implies that the asset quality pressures are here to stay for Corporation bank.

  • Lastly, the stupendous 160.3% YoY increase in provisions dragged the profitability of Corporation bank and the profits shrunk by as high as 96.2% during 2QFY14.
What to expect?

At the current price of Rs 265, the stock is valued at 0.4 times its FY16 estimated adjusted months book value.

The September quarter profits tumbled largely due to increased costs. Operating inefficiencies and bad loans took a toll on the earnings performance of Corporation Bank. Moreover the exposure to vulnerable sectors of the economy would continue to bother the earnings performance of the bank.

At current levels, the stock is trading well below the book value. We would prefer to wait and watch particularly the shaping up of asset quality of the bank in the light of tough macroeconomic environment; before we recommend our investors to buy into the stock. Hence, we recommend investors to hold on to the stock from a long term perspective, provided exposure to it is less than 3% of one's overall portfolio. Corporation Bank stands in relatively good stead in terms of return ratios in comparison to its peers. Also the fact that the bank is a good dividend payer makes it worthy of being held in the portfolio. However, we would recommend investors to not buy more of the stock despite attractive valuations.

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