Stock Review: Corporation Bank

 

Higher growth in net interest income and a better asset quality should help Corporation Bank grow its profit at a higher rate in the coming quarters

   WITH a market capitalisation of over 11,000 crore, Corporation Bank has now joined the club of large-cap state-owned banks. The bank has reported a robust performance in the quarter ended September 30, 2010, on the back of higher growth in loan book and high margins. The bank, which was nationalised in 1980, was the second public sector bank to come out with an initial public offer. Corporation Bank was also one of the first few banks to implement centralised banking system (CBS).

BUSINESS:

Corporation Bank has primarily focused on the southern and western parts of the country. However, the bank is expanding its reach in other parts as well. It plans to add 200 branches this fiscal to its network of 1,155. A wider base helps a bank increase its share of lowcost current and savings account (CASA) balances at a fast pace.

   Apart from its core business of borrowing and lending, the bank also derives its income from other sources, such as case management businesses. Centralising banking system has helped the bank in providing services on behalf of other banks and lending institutions.

   However, the bank gradually lost income from this source since most banks transformed their systems to CBS. Besides, rising bond yields have resulted into a lower other income for the bank for the past four quarters. To tackle the situation, the bank has stepped up operations and plans to derive higher income from third party product sales for insurance companies, guarantees, letters of credits etc.

FINANCIALS:

The net profit Corporation Bank grew 21% year-on-year in the September 2010 quarter. The bank has maintained its bottomline growth around this level for the past four quarters. Moreover, profit growth was squeezed on account of hardening of yields in the September quarter. This led to limited opportunities for making trading gains. If we remove the effect of this one time factor, profit growth would have been higher.

   The bank's profits grew on the back of high growth in the loan book. Advances grew 32% yo-y, much higher than the system's 19% growth. In fact, the bank has been able to outgrow its industry for the past four quarters in terms of loan book growth. Sectors such as infrastructure and auto would help the bank maintain a 25% growth in the loan book going forward, as indicated by the management.

   The bank reported a net interest margin (NIM) of 2.6% for the September quarter. NIM is a measure of the interest rate spread between borrowing and lending activities of the bank. On this front, the bank is yet to catch up with its larger peers as it reported higher NIMs for the September quarter. For instance Allahabad Bank reported 3.3% rise in NIM. What is important is the fact that the bank was able to maintain its NIM sequentially even after the banking regulator raised the borrowing costs of banks. With indications of an interest rate hike by the RBI, the bank's NIM might come under pressure.

   However, the bank's renewed focus on increasing its share of CASA base might help it in reducing the hike in the overall costs of borrowing thereby driving its margins. CASA balances formed 25% of its total deposit base in September. The bank's asset quality seems to have deteriorated marginally in September. Net non-performing assets (NPA) formed 0.4% of net advances in the September quarter, up by about 10 basis points from the year-ago period. However, even at this level, its NPAs are one of the lowest in the industry. Very few banks have been able to maintain NPAs below 1%. To add to this, NPA recognition for 93% of the bank's loan book are now identified through the systems as against branch level recognition. As such, there might be lower negative surprises in the asset quality going forward.

VALUATION:

At a price-to-book value (P/BV) of around 1.8, the bank's stock is trading at its all-time high valuations. Still, it is trading at a discount compared to its peers such as Allahabad Bank and Bank of Baroda, which have an average P/BV of around 2. The stock has outperformed the Sensex on a consistent basis over the past three months. This shows that investor confidence in the bank's stock has started increasing.

   Corporation Bank has posted a high growth in its core net interest income for the past four quarters. This combined with a better asset quality will allow the bank to grow at a higher rate in the coming quarters. Investors can consider this stock for the long term.