The Hindu Business Line : Corporation Bank: Pare exposures

SHAREHOLDERS of Corporation Bank can consider reducing their exposure to the stock, which trades at valuations that are far superior to the stocks of other public sector banks.

Corporation Bank's performance, however, cannot be considered to be substantially superior to that of many other PSBs that are trading at lower valuations. The bank's showing in the quarter-ended June 2005 has also not matched expectations factored into the valuations.

Nominal growth

Corporation Bank reported a 30 per cent growth in advances year-on-year. This, however, belies the fact that the actual growth in advances in the quarter ended June was below the industry average.

Advances growth between Match and June was 1.5 per cent lower than the industry average of 5 per cent.

There are also indications of erosion in spreads . The net interest income in the quarter-ended June 2005 remained stagnant.

This was despite a sharp increase in the proportion of advances in working funds (advances plus investments) and a rise in the total volume of business. In contrast, Allahabad Bank reported a 24 per cent increase in net interest income on the back of a 34 per cent rise in advances.

The proportion of Corporation Bank's bad loans went up slightly despite increased in provisioning for non-performing assets.

If the bank reported a profit growth of 17 per cent, it was mainly because of a jump in `other income', which will not be as much as it was in the first quarter. So profitability depends on business growth.

Making up for the slack

It is quite likely that Corporation Bank will make up for the slack in the coming quarters. It expects:

Advances to grow 25-30 per cent;

A credit-deposit ratio of 75 per cent.

Going by these two targets, balance-sheet size should expand by 10-12 per cent this financial year. If spreads remain unchanged, profits could grow 10 per cent-plus, because provisions for depreciation in the value of government securities and bad loans could be lower compared to the previous year.

But there was a trend of declining spreads in the first quarter, which is not encouraging. That could, however, offset the effect of lower provisions, depressing profit growth.

Rich valuations

Corporation Bank trades at a premium to many of the other PSBs for a reason. It has a substantially high capital adequacy ratio, of nearly 17 per cent. There is considerable scope for enhancing this because the bank has still not exhausted the limit for borrowings. These factors indicate that business expansion for the next three-four years can continue without any need for expansion of equity.

In addition, the bank has made significant advances on the technology front. It expects to capture 95 per cent of the business through a core banking solution by the end of this financial year. It is also one of the few banks that has more ATMs than branches.

The stock, thus, deserves to trade at a premium compared to other PSBs. Its unimpressive performance is, however, a let down. Most public sector banks trade at a price-to-earnings multiple of less than 10; Corporation Bank trades at a PE of almost 15.

A nominal 10-12 per cent growth in net interest income in the quarter-ended June 2005 would have been encouraging and justified the higher valuation. In the absence of such growth, it makes sense to sell a portion of the holdings now.

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