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Oriental Bank: More restructuring on the anvil - Views on News from Equitymaster
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Oriental Bank: More restructuring on the anvil
Feb 1, 2012

Oriental Bank of Commerce (OBC) declared its results for the third quarter of financial year 2011-2012 (3QFY12). The bank has reported 38% YoY growth in interest income and 13% YoY fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 38% YoY in 3QFY12 and 31% in 9mFY12 on the back of 22% YoY growth in advances.
  • Net interest margins (NIM) see a decline from 3.3% to 2.8% in 9mFY12.
  • Net profits see a 13% YoY fall in 3QFY12, on account of increased provisions on non-performing assets (NPA) and higher interest costs, however lower tax outlays and increased other income helped.
  • Net non-performing assets (NPA) increased sharply to 1.9% of advances in 9mFY12 from 0.9% in 9mFY11.
  • Capital adequacy ratio at 12.1% (as per Basel II) at the end of 3QFY12

Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 30,328 41,965 38.4% 88,555 115,941 30.9%
Interest expense 20,029 30,566 52.6% 56,913 84,465 48.4%
Net Interest Income 10,299 11,399 10.7% 31,642 31,476 -0.5%
Net interest margin (%)       3.3% 2.8%  
Other Income 2,314 2,953 27.6% 6,602 8,965 35.8%
Other Expense 4,873 6,081 24.8% 14,223 16,575 16.5%
Provisions and contingencies 1,918 3,809 98.6% 6,460 11,805 82.7%
Profit before tax 5,822 4,462 -23.4% 17,561 12,062 -31.3%
Tax 1,739 920 -47.1% 5,869 3,295 -43.9%
Profit after tax/ (loss) 4,083 3,542 -13.2% 11,692 8,767 -25.0%
Net profit margin (%) 13.5% 8.4%   13.2% 7.6%  
No. of shares (m)         291.8  
Book value per share (Rs)*         356.5  
P/BV (x)         0.7  
* On a trailing 12-months basis

What has driven performance in 9mFY12?
  • OBC managed to grow its advances by 22%, which was higher than the average growth in the sector. The RBI has now revised the sector growth outlook to 16% in FY12, thus OBC should beat the sector average comfortably. It saw healthy loan growth in the agricultural space, and the micro, small and medium enterprises space. It has crossed the priority sector target as set by the RBI. The bank's retail book however saw muted growth on account of the high interest rate environment and cautious lending to this segment. The bank's net interest margins also declined by 0.5% bringing the same to 2.8%. This was mainly on account of cost of funds seeing a sharp increase, due to the RBI's aggressive interest rate policy, as well as the increase in interest on savings bank accounts. The bank is targeting to maintain its NIMs at around 2.9-2.85% for FY12.

  • The bank plans to grow its loan book slightly higher than the sector average for FY12 (at around 18-20%). Since it has already grown its loan book by 22% in the first 9 months, it expects to comfortably achieve this target. However we have been relatively conservative with our estimates, on account of the tough credit environment.

    Strong loan growth...but sees pressure on CASA
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 908,011   1,106,983   21.9%
    Deposits 1,293,346   1,561,942   20.8%
    CASA 307,326 23.8% 332,259 21.3% 8.1%
    Tem deposits 986,020 76.2% 1,229,683 78.7% 24.7%
    Credit deposit ratio 70.2%   70.9%    

  • The bank has a 21% exposure to the infrastructure sector, out of which the beleaguered power sector counts for 12% of the total, telecom accounts for 2%. Exposure to the state government accounts for around 7.7% of the total advance book (63% of the total power sector exposure). Out of these the heaviest exposure likes in states like Rajasthan, Haryana, Gujarat, Punjab and Uttar Pradesh. Distribution companies (discoms) account for 4% of the total advances. This is by far the worst performing segment of the power sector. State electricity boards have been bleeding losses and have even of late 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. Thus, some of these accounts may see some stress going forward and may even come under corporate debt restructuring. One SEB in Uttar Haryana was restructured in 3QFY12.

  • OBC saw a robust increase in other income, which grew by 28% YoY in 3QFY12; it grew by around 36% YoY in 9mFY12. 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 1.9% of advances in 9mFY12 as against 0.9% in 9mFY11, thereby indicating a huge slippage in asset quality. Migration to the system driven recognition of NPAs has led to further slippages since it takes into account any accounts whose payments are outstanding as of a particular date. Restructuring of accounts took a toll on the company's accounts as Rs 22 bn was restructured during the quarter including major accounts like telecom group player GTL (Rs 6 bn) and the Haryana SEB. Provisions were taken on the restructured accounts, yet most of them remain standard assets. However the bank expects additional restructuring of Rs 15 bn which can go up to Rs 30 bn if Air India exposure is also restructured in 4QFY12. Out of the restructured book only 14% has moved into the NPA category so far.

  • Slippages for the quarter came in at Rs 7 bn with the current economic environment adding stress to various sectors including agricultural, textile and iron and steel segments). Retail credit has also seen some stress. The bank's provisioning coverage ratio was eroded to 63.3% in 3QFY12, compared to 75% just six months earlier in June 2011.

What to expect?
At the current price of Rs 256, the stock is valued at 0.7 times our estimated FY14 adjusted book value. OBC's performance in has been below par on account of provisioning charges, a spike in NPAs as well as on account of higher cost of funds. However the back has somewhat recovered from its performance in 2QFY12 where profits were down 58%.

The bank's inability to maintain its margins is a worry; however it intends to try and maintain the same at around 2.9-2.95%. Easing of the RBI's monetary policy stance should help in efforts to maintain margins and the bank has also been reducing its dependence on bulk deposits. Incremental slippages are a cause of concern, even though the bank is confident of sustaining asset quality for the year by a sustained focus on recovery. The bank has fast tracked its efforts on the same. Exposure to infra and power and the spike in restructured assets is also worrying. The bank expects some further pressure on the restructuring front, and the Air India issue also still needs to be resolved by the concerned bankers. We have been reasonably conservative with our estimates and maintain a 'BUY' view at current levels; however our target price has been revised to Rs 390 from FY14 perspective.

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