The results announced are from the best banks in the public and the private sector respectively so there is no indication yet, as to the extent of deterioration in the quality of assets which is such a major concern for the stock market.

Like HDFC Bank, Corporation Bank's YoY performance is very good while the incremental performance over the first and second quarter is poor. The third quarter PAT is lower than both the first and the second quarter PAT. Even the growth in advances and deposits have been far lower than earlier. In fact the maximum growth came about in the second quarter, when deposits grew by 19 per cent while advancesincreased by 16 per cent. In the third quarter the accretion to deposits was less than 5 per cent and accretion to advances is by 6 per cent.

The additional provision for standard assets and other categories such as state government guaranteed loans which are non-performing will not bother Corporation Bank. It plans to make the provision in one shot in the current year, instead of the three years provided for in the CBSR report.

This means a Rs 20-crore hit to the bottomline. Despite this the management has maintained that the capital adequacy will be at 15 per cent. Assuming that the year-end YTM is favourable then Corporation Bank will benefit by writing back Rs 5.5 crore of provisions made upto the third quarter for depreciation in the investment portfolio.

Volume of advances have increased but at the same time the provisions against bad debts have reduced. The provisions for bad debts as a percentage of average working funds (AWF) has fallen steadily from 1.6 per cent in December 1997 to 1.5 percent in March 1999 to 1.1 per cent in December 1999. Further, the ratio of coverage of gross non-performing loans has been declining during the last several accounting periods. The ratio has declined from 78 per cent in 1995-96 to 62 per cent in 1998 where it is at present.

But the bank can afford to relax a little. Firstly, consistent efforts have been made to recover bad loans. The target for the current year is Rs 50 crore of which Rs 17.5 crore is left to recover in the last quarter. Second, there has been a grading of NPLs where the process of recovery begins before the account slips into the sub-standard category. Third, the present focus is to lend to blue chip companies.

Of the bank's total assets, 25 per cent is now represented by blue chip accounts while 40 per cent of incremental assets are represented by blue chips. The benefit is visible as the bank's net NPLs are the envy of the Indian banking system. As of the latest quarter the net NPL is just 2.63 per cent, down from 2.8 per cent in theprevious quarter. The intention is to reduce this figure further to 2.5 per cent by March 1999.

But, like in the case of HDFC Bank this focus to higher rated or blue chip companies has meant a tightening of spreads. Yield on advances are down to 13.3 per cent while the cost of deposits has increased to 8.9 per cent. This situation has been compounded by the fact that there has been a shift away from demand deposits and into time deposits which has increased the cost of funds in the last six months.

Operating costs are a big issue with banks at present as they are faced with wage negotiations with bank unions and it is widely anticipated that there could be an additional charge in the last quarter. The final outcome could hamper profitability as the additional liability for Corporation Bank could be Rs 10 crore. But the mark to market provisions will be a cushion for the bank in the final quarter.

German Remedies: Below expectations

For the third quarter running this company has defied themarket and has reported an earnings figure which is way below expectations. For the present quarter the company has announced a net profit of Rs 4 crore. This is against a market expectation of Rs 7-8 crore. In the earlier periods the same story prevailed. For the first half, against an expected earnings of Rs 15 crore the company reported an earnings of Rs 11 crore.

For the full year the expectation was that the company would report a total profit of Rs 31 crore. This means that the company has to report a net profit of Rs 16 crore in the last quarter, which industry watchers say will be difficult. The discounting has already taken a hit as the valuation reflected these higher expectations. The stock traded at a forward multiple of 40 times at its recent peak price of Rs 800, which is the forward multiple attached to companies such as Glaxo and Novartis.