Corporation Bank (CB) is a mid-sized public sector bank, with 1,000-plus branches in the southern and western parts of the country. It has the reputation of being one of the best-managed public sector banks in India with a relatively clean balance sheet and an impressive track record.
Operating efficiency: The bank’s operating efficiency ratios have improved markedly over the past three years. Its employee cost as a percentage of income has come down from its peak of 11.37 per cent in FY06 to 7.45 per cent in FY10. But on a quarter-on-quarter (q-o-q) basis the company’s operating cost has been rising: its cost-to-income ratio stood at 39.1 per cent in Q2FY11, compared to its own eight-quarter average of 35.3 per cent.
Strong NIM levels: The bank has historically (over the past five years) had net interest margins (NIM) in the range of 2.9-3.8 per cent. But analysts expect that NIM will decline to the 2.3-2.5 per cent range due to incremental cost pressures and its bias towards lending to large corporates (38 per cent of total loan book). Even though this ensures quality, it lowers the margins.
Safe loan portfolio: Till Q2FY11 its exposure to real estate compromised 4 per cent of its total advances while just 4 per cent of its total advances underwent restructuring. In Q2FY11 it had provision coverage ratio of 78.5 per cent, up from 76.7 per cent in Q1FY11. Hence any potential downside from risky (real estate) assets is unlikely to have much of an impact on the bank’s balance sheet.
Well capitalized: Though the minimum capital adequacy ratio (CAR) that banks have to maintain is 12 per cent, CB is well capitalised with a 14.5 per cent CAR at the end of Q2FY11. Moreover, the high stakes held in the bank by government and LIC ensure that they will be able to infuse capital whenever the need for more funds arises.
Low CASA growth: A high percentage of total deposits mobilised by the bank comes from term deposits. This is also responsible for its low margins. In Q2FY11 the bank’s term deposits grew at 30 per cent plus y-o-y vs 25 per cent growth in overall deposits. In Q2FY11 the bank’s CASA ratio stood at 25 per cent, up from 24.1 per cent in Q1FY11. The bank aims to raise the percentage of its CASA deposits to 26 per cent.
Limited reach: The bank is present predominantly in western and southern India, but its branch network in tier II and III cities and in the rest of the country is limited. This hinders the bank’s further growth and limits its ability to expand its CASA ratio.
Low fee income: The bank’s level of fee income is not high. Though its has made various attempts to raise it, such us by offering cash management service to LIC, so far it has not been able to fully exploit the potential of this area.
Over the last three years CB has maintained an average return on equity (RoE) of 18 per cent. Analysts expect this ratio to rise further to an average 19 per cent over the next three years. According to their estimates, the bank is likely to post an EPS growth of 14 per cent between FY10-13 (not a high number).
The stock is currently trading at 1.16 times price to book value. The three-year median P/BV of the stock is 1.12. Thus it is trading close to its historic trading level. Investors with at least a three-year investment horizon may buy the stock on dips.