Corporation Bank

Investors with a two-three year horizon can buy the Corporation Bank stock as it trades at a low valuation, though the bank has clocked a higher rate of earnings growth than most of its PSU peers, over the past five years. At the current market price of Rs 174, the stock trades at a trailing one-year PEM of 3 and at just half its December 2008 book value.

At this valuation (P/BV), the stock trades at a discount to most of its peers. The dividend yield for the stock is 6 per cent. The large valuation discount already factors in the possibility of moderation in profits in future (likely due to rising credit costs and falling advances growth). The bank’s earnings may, however, outperform peers beyond CY09.

The South-based Corporation Bank, with 67 per cent of its branches in South India and Maharasthra, was the first PSU bank to completely implement core banking solutions (CBS) at all its branches. Superior asset quality, high proportion of non-operating income (54 per cent of net revenues), high loan-loss provision coverage (73 per cent), higher operating efficiencies (cost-income ratio of 40 per cent) are key positives on the business.

Corporation Bank’s advances book grew at 26 per cent compounded annually in the last four years. In the same period, the net profit grew by 22 per cent annually. Corporation Bank’s advances continued to grow, recording 30 per cent growth for the period ended December, 2008.

The bank’s loan book is well-diversified and comprises of corporate loans (30.6 per cent), retail loans (20 per cent), SMEs (10.4 per cent) and agricultural loans (9.2 per cent) as of December. High growth in the past year was contributed by corporate advances (46 per cent year-on-year) and agricultural advances (39 per cent year-on-year).
Financials

For the nine months ended December 2008, the bank’s net profit grew by 19.44 per cent primarily boosted by a 33 per cent growth in non-interest income. The net interest income growth of 18 per cent is on the low side due to contraction in net interest margin (NIM) from 2.81 to 2.53 per cent over a year; pressured by higher cost of deposits. Corporation Bank’s CASA ratio has tended to be much lower than other PSU peers at 25.2 per cent and actually fell from 30 per cent last year.

Corporation Bank has leveraged on its first-mover advantage in being CBS-enabled, by generating fee-based income; non-interest income contributed 32 per cent of total income (16 per cent of total income comes from core non-interest income). Core non-interest income grew by 34 per cent year-on-year boosting the total income. Cost-income ratio of the bank stands at 40 per cent though higher provisions were provided for AS-15 and employee wage revision.

Though the bank has one of the lowest net non-performing assets (NNPA) proportions in the banking space, it is exposed to higher slippages due to its exposure to slowdown-sensitive sectors such as commercial real estate, exports, SMEs and textile sector. The retail side of the loan book may also see higher slippages. In terms of asset quality, the bank’s provisions for bad loans remained flat for the first nine months of this year. Provision coverage fell from 80 per cent last year to 73 per cent, but remains healthy enough to shield the bank from any slippages in the coming quarters.

Gross NPAs of the bank stood at 1.24 per cent of the total advances and the net NPA remained flat at 0.33 per cent of the total advances. The bank may not need re-capitalisation from the government in the near future as it has a capital adequacy ratio of a comfortable 12.76 per cent. The Government of India holds 57 per cent in the bank. Though the bank is raising Tier-2 capital to maintain its capital adequacy, with Tier-1 capital of 9.68 per cent, there is no urgency for the bank to raise money from equity markets.
Outlook

The credit-deposit ratio of the bank stands at 72 per cent and is expected to come down due to moderation in the credit offtake. Given the low CASA ratio, margin pressures for the bank may continue for a few quarters. Deposit rates may not fall as sharply as lending rates over the next few quarters. On the asset quality front, the current slippages from rate sectors may show up in the coming quarters, but restructuring measures and interest rate cuts may alleviate these concerns over the medium term.

The bank’s presence in rural areas and branchless banking provide opportunities to access untapped potential customers. The bank’s tie-up with automobile manufacturers for vehicle financing may aid growth in the loan book in the secured mode.