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Corporation Bank: Takeover target?

Dec 15, 2000

Corporation Bank is one of the most efficient nationalized banks in India. The bank’s main focus areas include corporate lending, treasury operations, non-fund based activities and retail lending. The bank, which has a strong presence in Southern India, has a network of 650 branches across the country. Over the past three years, Corporation Bank has grown its operating income at a compounded annual growth rate (CAGR) of 25% and profits at a CAGR of 18%. Among the public sector banks it enjoys the highest operating profit margins and comparatively lower non-performing assets to advances ratio (1.8%). During the first half of the current year also it has declared excellent financial performance both in terms of growth and profit margins.

Financial Overview
(Rs m) 1HFY00 1HFY01 Change
Interest Income 7,792 8,810 13.1%
Total Income 9,080 10,118 11.4%
Operating Profit 3,285 4,147 26.3%
Other Expenses 1,319 1,559 18.2%
Depreciation 94 109 16.1%
Profits Before Tax 1,872 2,479 32.4%
Tax 444 644 44.9%
Profits After Tax 1,428 1,836 28.6%
Provisions & Contingencies 311 500 61.1%
Net Profit 1,117 1,336 19.5%
Equity shares (m) 120 120  

Key Ratios
Particulars 1HFY00 1HFY01
Operating profit margins 25.6% 32.2%
Tax / PBT 23.7% 26.0%
Net profit margins 15.7% 18.1%
EPS (Rs) 18.62 22.26

The bank has set a target of achieving a 29% growth in profits for the year ended March 2001. The higher operating profit margin is likely to drive its profits growth. Further, operational efficiencies are expected to help the bank to cushion the impact on profitability from a slow down in credit offtake. It is also expecting interest spread to rise to around 3.4% (from 2.8% in FY00).

Apart from the normal banking business, Corporation Bank is a leader in cash management services (accounted for 30% to its total profits in FY00). However its leadership position in the market is under threat from new players such as ICICI Bank and HDFC Bank coupled with other public sector banks. To minimize its risk, the bank plans to diversify its revenue streams by foraying into primary dealership, depository services and tapping domestic gold deposits. The bank has also expressed its desire to enter into the insurance sector.

During the year, the bank has earmarked Rs 560 m for its technology plans. These include aggressively tapping the retail market with e-commerce, extending Internet banking and also extending the banks cash management services on the net. The bank has plans to offer payment gateway by the year-end to facilitate Internet banking. It has recently adopted the US GAAP as a precursor to its overseas listing.

The Government's intention to bring down its stake to 33 % in all public sector banks is likely to evince interest of private sector banks for acquisition purpose. Corporation Bank’s lower NPA ratio, technology improvement and strong network of branches particularly in South could make it a likely take over target. At the current market price of Rs 88 Corporation Bank is trading at a P/E multiple of 3.5 times its FY01 projected earnings and a Price/Book value ratio of 0.8 times.


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