• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

SHAREHOLDERS in the stock of Corporation Bank can consider reducing their exposures. They can utilise the run-up in stock price over the past 12 months to book profits.

The stock now trades at 1.2 times its book value at a multiple of slightly more than seven times its earnings for the 12-month period ended September 2003. This is rich compared to the valuation of other public sector banks. The stock offers a dividend yield of less than 2 per cent, one of the lowest among public sector banks.

In terms of most operating parameters, Corporation Bank emerges superior to most public sector banks. In the quarter ended September 2003, unlike most public sector banks that saw a relative slowdown in retail lending, Corporation Bank was able to maintain its rate of growth in retail lending.

Corporation Bank has also steadily increased the proportion of low-cost deposits in its funding base. This has led to a decline in its cost of funds. Its net interest margin is also healthy at about 3.5 per cent. It has also traditionally suffered less due to bad loans compared to other public sector banks. Non-performing loans continue to be less than 1.5 per cent of net advances. Corporation Bank's cost to income ratio, which measures the efficiency of the bank to deliver services, is also among the lowest in the industry.

However, similar to most public sector banks, the contribution of treasury gains to profit growth has remained high for Corporation Bank as well. Profit from sale of government securities rose 57 per cent in the first half of 2003-04. The Bank is still sitting on sizeable unrealised gains on its portfolio of government securities. Still, with interest rates stabilising, the ability to sustain profit growth is dependent on a recovery in credit offtake from the industries.

Growth in credit offtake has proved elusive so far. In the first half of 2003-04, Corporation Bank reported growth in net advances of only about 11.8 per cent. This is much lower than what was achieved by some of large public sector banks and the more nimble private sector banks. Corporation Bank also recorded a decline of 10 per cent in net advances compared to the level as at end-March 2003.

Most public sector banks reported much better performance on this score. In effect, the growth in income in the first half of 2003-04 was largely driven by investments in government securities.

Taking into account these factors, the valuation enjoyed by Corporation Bank does not appear justified. The stock price is more vulnerable to downside risks than that of other public sector banks.

As such, investors can consider reducing exposure to the stock now. In the event of any sustained improvement in credit offtake in the next six months, fresh evaluation of the stock's investment potential can be considered.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Karnataka Bank's `Swarna Nidhi'

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line