Corporation Bank

A Rs 5,000 seed capital will go a long way, especially if you have some 103 years to make things happen. At Corporation Bank (CB), founded in Udupi, Karnataka by a group of philanthropists, the trip has been quite eventful. Today, it controls a business of over Rs 1,33,456 crore.

 

From being at the forefront of using technology to promote financial inclusion (surely something that the founders would have approved) to the fact that it has been paying dividend continuously for 98 years now (something that would appeal to the modern investor) CB has been generating positives for long. It has also done pioneering work in ensuring 100 per cent network connectivity for its core business and has backed that up with a very strong and well-diversified global business. With a holistic vision and a modern managerial mind-set, CB has unquestionably carved a niche all its own.

 

All of which leaves it well-placed to leverage the strong numbers that India generates. Among them is the fact that 70 per cent of the population is below the age of 70 and it will remain so for the next 40 years. That is an ideal mix wherein a massive majority of the population will be economically active. That 60 per cent of the population does not have a bank account leaves ample space for growth too, for nifty banks.

 

CB was nationalized in the 1980s and government holds a 57.17 per cent stake. LIC, with which it has a strategic alliance, is the next major stakeholder at 26 per cent—insurance distribution and treasury operations are the obvious synergies.

 

Nationalisation does not seem to have had a negative impact. In the last 5 years, its earnings grew at a compounded annual growth rate (CAGR) of 17 per cent with advances and deposits clocking 21 per cent and 22 per cent CAGR respectively.

 

CB has a large number of branches in the urban areas (around 60% of its business is in metropolitan locations) which the bank has turned to its advantage by developing strong corporate relationships — evident from the dominant share of corporate business in its total portfolio.

 

To ensure future fast-paced growth, CB has also been expanding its branch network, averaging 66 per year over the last five years. The result has been that its advances have grown between FY05-09. Aside from a strong growth in deposits, implementation of superior technology and efficient utilization of its retail system helped boost profitability. Also, its returns on assets (RoAs) is among the highest. This has been possible due to significantly higher operational efficiencies, which is the result of a clairvoyant intent towards technological upgradation, which helped it cut costs. As a result the bank's cost-to-income ratio is low and at the same time it has significantly improved business margins per branch. Over the last 5 years CB's net-profit-per-employee nearly doubled.

 

CB's asset quality and capital adequacy is also the highest amongst peers. This is despite having a high exposure to retail and SME sectors, which indicates that its lending practices carry prudent and conservative provisioning policies. This helped it reduce its gross non-performing assets (NPAs) from 5.5 per cent in FY03 to 1.14 per cent in FY09 — net NPAs have declined to 0.29 per cent from 1.65 per cent. CB has a high provision coverage — 75 per cent, which is above the 70 per cent mandated by the RBI. Therefore, while its peers will be impacted by central bank's guidelines, CB will be left unaffected.

 

The same applies to restructured loans. The FY2011 Rs 1,243 crore (or 1.78% of the loan book) restructured loans is negligible enough for some analysts to say that even if 100 per cent of these assets turn bad, the worst case stress on the FY11 book value would be ~18 per cent.

 

CB's fee-based income continues to be buoyant. Income was up 38 per cent YoY in Q2FY2010, demonstrating the robust growth at a time when most banks have suffered.

 

However, CB's net interest margins (NIMs) continue to be under pressure, mostly because its CASA growth is poor. During the period FY05-09, overall deposits grew at a CAGR of 22 per cent, while the low cost CASA grew by a 19.8 per cent. In fact, the slower growth in CASA had increased the cost of funds, which in turn has led to lower NIMs. But these have improved marginally after Q4FY2009, with a proportionate decline in the cost of deposits. NIMs should improve as CASA share rises.

 

Bulk of its profit before tax (PBT) in the nine months of FY2010 was from treasury operations and wholesale banking (up by over 50% over the same period in previous fiscal). But, the retail story is a concern. The bank's PBT from the retail segment is nearly 10 per cent less than what it was in the same period in 2008.