The continuing downtrend in economic activity and repercussions of the earlier liquidity squeeze as well as higher interest rates have raised concerns of slippages in asset quality of banks. In this scenario, banks with a track record of maintaining asset quality at higher levels and following prudent lending practices would be safer bets. Among them is Corporation Bank, which has a good track record with one of the lowest non-performing assets (NPAs of 0.3 per cent) in the industry. All of its 1,000-odd branches are fully networked, and this focus on technology has enabled the bank to shore up higher levels of operational efficiencies over the years. This, along with a diversified loan book would ensure steady and profitable growth, going ahead.
Guarded approach Corporation Bank’s fairly diversified loan portfolio, with the corporate segment occupying around a third of its portfolio, and a majority of business coming from urban areas have ensured higher asset quality in the past. Even as the economic environment has weakened, the bank’s cautious lending practices and strong appraisal systems would help control any significant slippages in asset quality, going ahead. Among risk management tools, the bank prefers to sanction smaller sums even within the corporate segment.
Also, the focus is to lend more to high-end corporates with adequate cash flows (for their working-capital needs) than to new projects. To diversify its loan portfolio, the bank is looking to lend increasingly to infrastructure. Its cautious approach is also visible from the slowdown in lending to the retail segment; down to 10 per cent in Q3 (compared to 30 per cent growth in the overall advances). The share of retail in the overall loan book has reduced to 20 per cent in Q3 FY09 from 25 per cent from the same time, last year.
In the present tough market conditions, wherein many banks have opened channels to restructure loans, either through increasing the duration of repayment or a reduction of interest rate on the existing loan rates, Corporation Bank is no exception. The pressure is higher from the SME sector. Owing to its cautious stance and prudent practices, the bank has upped, though marginally, the provision coverage to 73.2 per cent in Q3 as compared to 70.7 per cent in Q2 FY09.
| STEADY TRACK RECORD | ||||
| in Rs crore | FY 08 | FY 09E | FY 10E | FY11E |
| Net Interest income | 1,443 | 1,732 | 1,992 | 2,298 |
| Other income | 775 | 813 | 840 | 953 |
| Total income | 2,218 | 2,545 | 2,832 | 3,251 |
| Operating profit | 1,326 | 1,549 | 1,747 | 1,992 |
| Net profit | 735 | 816 | 835 | 940 |
| EPS (Rs) | 51.38 | 57.03 | 58.36 | 65.71 |
| P/E (x) | 3.17 | 2.86 | 2.79 | 2.48 |
| P/BV (x) | 0.55 | 0.48 | 0.42 | 0.38 |
| E: Analyst estimates | ||||
Expanding reach
Corporation Bank has 60 per cent of its branches in metros and urban areas. Although higher concentration of branches in the urban areas proves helpful in the recovery and surveillance process, nevertheless this had been a drag on the mobilisation of lower cost-CASA deposits. While the bank’s CASA ratio has been relatively lower (around 30 per cent) as compared to its peers, the same has slipped to 25 per cent in Q3 FY09 thanks to the high interest rate regime (with customer shifting to term deposits, etc).
The bank is now increasing its overall branch strength; it was up by around 8 per cent in Q3, compared to last year, which should improve CASA ratio, going ahead. There has been concerted effort to improve its spread in the rural and semi-urban areas. The bank has drawn plans to open 700 new branches in next five years. In due course of time, it would expand into states in the North and the East, which would also help to diversify its concentrated presence in southern India (around 60 per cent of its branch network).
Operational effectiveness
While the bank has been cautious in lending, it has been in the forefront with respect to use of technology in its operations (including being among the first ones to introduce ATM and mobile banking) with most of its business fully networked. This would ensure higher capabilities in business processing, increased flexibility as well as lower operating costs. While the banks’ cost-to-income ratio has been steady at 39-40 per cent levels, analysts expect it to slip to 37-38 per cent over the next two years.
Treasury income on an average contributes around 20 per cent of the non-interest income. In Q3, thanks to the rally in bond prices (due to falling interest rates and bond yields), the banks’ mark-to-market (MTM) gains were up four-fold compared to Q3 FY08. Thus, non-interest income registered a healthy growth of 85 per cent. However, going ahead, with yields hardening, the profits from the treasury side would not be forthcoming. Notably, the non-interest or fee-based income (excluding treasury profits) relating to the core business grew at 28.7 per cent in Q3, which is a comforting sign. The healthy growth rates in non-interest income (excluding treasury profit) would also continue and the management expects treasury income to taper to around 20 per cent of total non-interest income.
Investment rationale
The total business (advances plus deposits) have grown at 26 per cent on an average in the last five years; the management expects that higher growth rates in Q3 are untenable. Says Asit Pal, executive director, Corporation Bank, “Expect the advances and deposits to grow at 24-25 per cent and 18-20 per cent, respectively by the end of FY10.”
Increase in term deposit rates earlier, had not only led to pressure on cost of funds, but also put pressure on mobilisation of lower-cost CASA deposits, thus putting pressure on the margins. However, the bank aims to increase mobilisation of CASA deposits, which along with recent cuts in deposit rates (much higher than lending rates), would help it to maintain net interest margin of about 2.53 per cent on a consistent basis.
While the growth in estimated earnings in FY10 looks subdued, it is largely due to a dip in treasury profits and partly due to an expected increase in provisioning for NPAs due to the weak economic situation. Beyond that and importantly, the growth in core business income (net interest and fee income) is expected to be healthy at about 15 per cent, and seen improving further in FY11.
At Rs 163, the stock is available at a price to estimated FY10 book value of just 0.42 times (and healthy dividend yield of a little over 6 per cent) and can deliver 15-18 per cent returns in a year’s time.
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