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OBC: Provisions dent bottom-line

Jan 28, 2013

Oriental Bank of Commerce (OBC) declared its results for the third quarter of financial year 2012-2013 (3QFY13). The bank has reported 6.5% YoY growth in interest income and 8% YoY fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 6.5% YoY in 3QFY13 and 13.6% in 9mFY13 on the back of 12% YoY growth in advances.
  • Net interest margins (NIM) stay steady at 2.8% in 9mFY13.
  • Net profits see a 8% YoY fall in 3QFY13, on account of increased provisions on non-performing assets (NPA) and higher expenses, however a tax write back and increased other income helped.
  • Net non-performing assets (NPA) increased to 2.1% of advances in 9mFY12 from 1.9% in 9mFY12.
  • Capital adequacy ratio at 12.25% (as per Basel II) at the end of 3QFY13.

Financial performance: A snapshot
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 41,965 44,687 6.5% 115,941 131,705 13.6%
Interest expense 30,566 32,643 6.8% 84,465 96,831 14.6%
Net Interest Income 11,399 12,044 5.7% 31,476 34,874 10.8%
Net interest margin (%)       2.8% 2.8%  
Other Income 2,953 3,778 28.0% 8,965 11,930 33.1%
Other Expense 6,081 6,559 7.9% 16,575 19,362 16.8%
Provisions and contingencies 3,809 6,038 58.5% 11,805 13,958 18.2%
Profit before tax 4,462 3,226 -27.7% 12,062 13,483 11.8%
Tax 920 -39 -104.2% 3,295 3,283 -0.4%
Profit after tax/ (loss) 3,542 3,264 -7.9% 8,767 10,200 16.4%
Net profit margin (%) 8.4% 7.3%   7.6% 7.7%  
No. of shares (m)         291.8  
Book value per share (Rs)*         401.7  
P/BV (x)         0.8  
* (Book value as on 30th December 2012)

What has driven performance in 9mFY13?
  • OBC managed to grow its advances by 12%, which was below the average growth in the sector. It saw healthy loan growth in the agricultural space, and the micro, small and medium enterprises space. The bank's retail and corporate (both large and mid) book however saw muted growth on account of the high interest rate environment. The bank's net interest margins remained stable at 2.8% on account of sustained efforts to reduce costly bulk deposits. The bank plans to maintain its NIMs at around 2.85% by the end of FY13.

  • The bank plans to grow its loan book slightly below the sector average for FY13 (at around 14%). With only a 12% growth in the loan book so far, it will really have to step up the game in the last quarter if it expects to achieve its target.

    Sees slowing business growth
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 1,106,980   1,236,260   11.7%
    Deposits 1,561,940   1,684,920   7.9%
    CASA 348,050 22.3% 402,290 23.9% 15.6%
    Tem deposits 1,213,890 77.7% 1,282,630 76.1% 5.7%
    Credit deposit ratio 70.9%   73.4%    

  • The bank has a 19.4% exposure to the infrastructure sector, out of which the beleaguered power sector counts for 13.2% of the total, telecom accounts for 2%, ports, roads and highways accounts for 4.1% of advances. Exposure to the state government accounts for around 7.5% of the total advance book (57% of the total power sector exposure). Out of these the heaviest exposure likes in states like Rajasthan, Haryana, Uttar Pradesh, Gujarat, and Punjab. Distribution companies (discoms) account for 5.6% of the total advances. This is by far the worst performing segment of the power sector.

  • State electricity boards that have been bleeding with losses and have of late even stopped making payments to leading power producer NTPC. They are facing problems on account of power theft, technical and commercial losses and delayed tariff revision. The government has come out with a bailout plan for these discoms involving the lenders and the various state governments. If this comes through, 50% of the SEB restructured loan book will be converted into bonds and in due time will be converted into special state government securities. These may have a preferred claim to state government finances versus normal bonds. For OBC, discoms currently contribute Rs 41.1 bn to restructured accounts, with Rajasthan (Rs 19 bn), UP (Rs 12.8 bn), and Haryana (Rs 9.3 bn). The Punjab discom (Rs 1.2 bn) is also set for restructuring next quarter.

  • OBC saw a robust increase in other income, which grew by 28% YoY in 3QFY13; it grew by around 33% YoY in 9mFY13. The bank saw an increase in its core fee income, treasury gains and recovery of its written off accounts, which helped propel its other income.

  • The bank's net NPA stood at 2.14% of advances in 9mFY13 as against 1.89% in 9mFY12. The bank expects net NPAs to settle at 2% at the end of FY13. Restructuring of accounts took a toll on the company's accounts as Rs 7.4 bn was restructured during the quarter. However the bank expects Rs 22 bn in fresh restructuring next quarter, including Moserbaer, Suzlon Energy and the Punjab SEB. Provisions were taken on the restructured accounts, at 2.75%, from 2% previously which caused a spike in provisioning costs.

  • Recovery was something that was earlier ignored by the bank staff; however the bank has now improved its efforts on the same. The bank's provisioning coverage ratio decreased slightly to 63.6% in 9mFY13, compared to 63.3% in 9mFY12. However the restructuring pipeline next quarter and the challenging environment may lead to increased slippages. Most of the bank's Gross NPAs are in the priority sector loan category which may be prone to further slippages if the economic situation doesn't improve. Additional slippages were around Rs 22 bn this quarter, compared to Rs 26 bn in the previous period.

  • Capital adequacy stood at 12.25% in 9mFY13, with Tier 1 capital at 9.14%. The bank had not gone for any capital infusion in FY12. The bank is currently comfortable on the capital front and a call on further capital raising may only to be taken only in the second half of next fiscal.

What to expect?
At the current price of Rs 329, the stock is valued at 0.9 times our estimated FY15 adjusted book value. OBC's performance in has been weak this quarter on account of additional provisioning on restructured assets and increased wage provision. However major restructurings of Rs 22-25 bn are still in the offing. The bank has also been able to keep its NIMs steady despite lower yields and margins may improve on further shedding of bulk deposits and on monetary easing. Incremental slippages and the restructuring pipeline are a cause of concern, even though the bank is confident of sustaining asset quality for the year by a focus on recovery. Exposure to infra and power and the spike in restructured assets is worrying. However if the SEB bailout deal comes through, it will help reduce the restructured book. But, growth has been below par on account of the current economic environment and a pick-up looks difficult.

While the heavily discounted valuations of the bank do suggest that the stock could offer reasonable upsides over the next two to three years, the fact that there is very little comfort on the NPA, growth and margin front do not make the stock very attractive. Hence, we would recommend investors to 'Sell' the stock as we highlighted in our September quarter performance review.

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