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Ready for the big leap?
It has been as a regional bank for over a century. Now Corporation Bank is eyeing for a berth in the country’s big banks league. But the question remains... Is the bank strong enough and ready for it?
Issue Date - 22/12/2011
Less written, even lesser known, and mostly growing by organic expansion, Corporation Bank is one public sector bank that has never been analysed in a similar fashion as the State Bank/HDFC/ICICI et al. Yet, when it comes to efficiency and performance, this 105-year-old banking institution has given the big guns a run for their money. With an average of Rs.157.30 million business generated per employee, it’s the best bank in the country today in terms of business per employee (second in terms of profit per employee, Axis Bank being the leader). That too while maintaining a net NPA to advances ratio of 0.46%, one of the best among all banks (better than SBI’s 0.91% and ICICI Bank’s 1.11%) and a return on asset of 121%, which only a few public sector banks have been able to achieve till date. Moreover, after spending almost a century as a heavily tradition-driven south Indian banking institution, over the past decade or so the bank has also slowly but surely crossed the milestone of being just another south Indian bank. At the start of Q3 this year, the bank shocked everyone by announcing its ambitious expansion plan - to add 200 new branches per year and scale up its total business to Rs.5 trillion by FY 2014-15, almost 250% of its current size of Rs.2 trillion. But the question remains, after playing it successfully as a regional player, can Corporation Bank make it large on a bigger pan-India scale?

Corporation Bank’s confidence to take the big leap stems from its performance over the past three years, during which the bank has more than doubled it’s total business from Rs.946 billion to Rs.2 trillion. Backed by a strong balance sheet and banking on the efficiency factor, the bank is now eyeing to generate a business of Rs.100 billion from each new branch during the initial years of their operations. But that’s just a plan on paper. Going by reality, this aggressive expansion plan faces two critical hurdles. First, the branch expansion plan is surely a costly way to grow as it results in higher employee cost and fixed overheads, which lead to rising operating expenses for the bank, pulling the bank’s profitability down. Second, even if Corporation Bank, which currently has 1,375 branches, manages to set up 200 branches per year, by the end of FY 2014-15, it will have around 2,000 branches in its network. And how sustainably the bank can clear the Rs.5 trillion mark in terms of total business with these many branches will be a real big question. Going by the current scenario, all of the public sector bank’s with a total business of around Rs.5 trillion are operating with much higher number of branches (Punjab National bank – 5,315 branches, Canara Bank – 3,437 branches, Bank of India – 3,752 branches and Bank of Baroda – 3,492 branches). Interestingly, all these banks also operate at a healthy business per employee ratio (Rs.102 million, Rs.123 million, Rs.128 million and Rs.133 million respectively). This clearly means that even after achieving its branch expansion target, Corporation Bank will need a lot more to even get closer to the Rs.5 trillion mark.

Moreover, the bank also has to remember that maintaining the initial profitable results achieved by a new branch is a daunting task going into the future; mainly due to increasing density of bank’s own branches and, of course, that of the competitors as well. In fact, this is one of the main reasons for which the government itself discouraged branch expansion programmes in 1990s. For Corporation Bank this is even more challenging for its deposits structure. While a higher CASA saves a bank from higher interest outflow, it only makes for 21.8% (as compared to 25.8% in Canara Bank, 34.02% in BoB and 37.1% in PNB) of Corporation Bank’s total deposits, the rest being relatively expensive term deposits. Worse, while the bank’s total deposits are growing at 24.45% (year-on-year basis in Q2 FY’12), CASA is growing at a paltry 8.41%. And the result, more so under the current rising interest scenario, is clearly visible on the bank’s net interest margin, which has come down to 2.42% in the first half of the current financial year from 2.82% for the same period in the previous fiscal.

Banking analysts feel that Corporation Bank needs to focus on a few thing first before rushing into breakneck expansion mode. “The risk for the bank at present is to maintain and increase NIM in today’s high interest rate scenario,” says Shanu Goel, Senior Research Analyst, Bonanza Portfolio Ltd. But there is no dearth of initiatives that the Corporation Bank has taken to forge ahead. In fact, it has been the pioneer in many services like Gold Coin Service, Branchless Banking et al. However, despite the first mover advantage, it has never been able to capitalize on these initiatives. For that matter, the bank has already even tried to position itself as a tech-savvy bank, but it has not succeeded completely in achieving that reputation. And now it is trying to achieve a pan-India presence through an aggressive expansion plan, which looks more like a hurried shot at a far away target. And a failure on this score may land this profit-making and promising bank in a very distressed condition. More so after the bank invests a huge sum in creating new branches.

In fact, at this point of time, the bank perhaps should take a lesson from the McKinsey research that suggests 70% of regional banks’ profits come from local revenue streams. In other words, the more “regional” the bank can be, the more it will appeal to its most critical customer base. Combining this with RBI’s surveys, which prove that 40% of the country’s over 1.2 billion population still do not have access to banking, and a considerable lot live in southern pockets of the nation, the bank should first explore the regional and rural market in a slow yet steady manner before going berserk over expansion in a jiffy.

Latika Sharma           

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