Corporation Bank: Bright prospects

Suresh Krishnamurthy

FRESH investments can be considered in the stock of Corporation Bank.

In the banking sector, Corporation Bank stock is in a relatively better position to deliver superior returns. The stock closed on Friday last week at Rs 126.50.

The stock is trading at a discount to its book value and its price to earnings multiple is also less than six times its earnings. In addition, with a substantial portion of the profits being retained now, the prospect for increase in dividends per share, which is currently Rs 4, over the medium term is also strong.

The bank also fares well on parameters such as net non-performing assets to advances ratio and spreads. The healthy capital adequacy ratio and return on net worth also indicate potential for growth. The consistent record of the bank in terms of maintaining a relatively healthy portfolio of assets is also a positive factor.

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The association with Life Insurance Corporation of India, strengthened through an increase in its stake in the latter to 27 per cent, is also a positive factor. Over the long-term, the association could generate financial benefits to the Corporation Bank too.

Suitability: The beta, which indicates lower volatility in stock price compared to an index, of many banking sector stocks has been much less than one. The stock of Corporation Bank is no exception. Given that the present valuation of the stock is not on the high side, a continuation of trend of low volatility can be expected. Given its characteristics, the stock is suitable for inclusion even in a portfolio with a conservative risk profile.

Performance: In the first half of the current year, Corporation Bank reported a 28.3 per cent growth in net profits compared to the corresponding quarter of the previous year. The significant decline in interest rates has allowed banks to book profits in their holdings in Government securities, which in turn has boosted profit growth.

Given the recent cut in cash reserve ratio and Bank Rate, banks are likely to report decent growth in profits over the next two quarters too. In addition, the income from the capital infused through the preferential offer to LIC will also boost the bottomline of the bank in the short-term.

The momentum in growth, though, is not likely to be sustained beyond the next two quarters. But modest growth in profits over the long-term with out any significant deterioration in asset quality can translate into superior stock price performance.