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OBC: Bottomline growth slows

Feb 3, 2004

OBC, has reported a good performance in the December quarter, mainly on the back of a significant fall in interest expenses. For 3QFY04, the bottomline has surged by 25%, while the topline growth has been marginal at 3%. It must b noted that the growth in bottomline has come about despite a fall in other income, however, fall in provisioning seems to have made up for the same. It must be kept in mind that OBC had reported zero net NPAs in the September quarter. For 9mFY04, while the topline has declined marginally (due to the impact of the first two quarters), the bottomline growth has been strong at 35% on a YoY basis.

(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Income from Operations 8,080 8,327 3.1% 24,579 24,399 -0.7%
Other Income 1,913 1,558 -18.6% 4,053 5,656 39.6%
Interest Expenses 5,115 4,530 -11.4% 15,957 13,848 -13.2%
Net interest income 2,965 3,797 28.1% 8,622 10,551 22.4%
Other Expenses 1,499 1,664 11.0% 4,385 4,916 12.1%
Operating Profit 1,466 2,133 45.5% 4,237 5,635  
Operating Profit Margin (%) 18.1% 25.6%   17.2% 23.1%  
Provisions and Contingencies 1,165 938 -19.5% 2,618 3,789 44.7%
Profit before Tax 2,214 2,753 24.3% 5,672 7,502 32.3%
Tax 998 1,231 23.3% 2,298 2,931 27.5%
Profit after Tax/(Loss) 1,216 1,522 25.2% 3,374 4,571 35.5%
Net Profit Margin (%) 15.0% 18.3%   13.7% 18.7%  
No. of Shares (m) 192.5 192.5   192.5 192.5  
Diluted Earnings per share* 25.3 31.6   35.1 47.5  
P/E Ratio         4.8  

The bank has reported an encouraging performance as far its interest income from advances is concerned. In 3QFY04, interest income from advances grew by 6%. However, growth in interest income from investments was flat despite a 25% rise in the investment portfolio of the bank. The topline performance has been encouraging for the bank considering that in the previous two quarters, it had reported a fall in the same. There has been a strong growth in advances or the loan portfolio of the bank, mainly due to growth in retail assets. While overall advances grew by 18%, retail advances grew by 108% (primarily driven by housing loan growth). Non-retail advances growth stood at 6%, indicating that credit offtake is yet to pick up. A signifincant growth in investments portfolio is also indicative of the fact that the bank has not been sucessful enough as far as deploying credit is concerned. For FY04, we had projected a topline growth of 3% for OBC in our research report.

Soft interest rates and consequently reducing interest expenses continues to help the bank improve upon its operating performance, thus more than compensating for the fall in topline. Net interest income, thus, has risen by 28% during the December quarter. Operating margins have improved by over 700 basis points as a consequence. Cost to income ratio has remained more or less stagnant at 31% in the December quarter compared to the same period last year indicating that the bank has been managing its operating expenses well considering the strong growth in retail assets that are more intensive as far as servicing is concerned. Operational efficiency is likely to improve further as VRS expenses get completely written off.

Unlike the previous quarters, OBC has seen a fall in its other income, seemingly due to lower profits on the G-Sec portfolio. This has pared the growth in its bottomline, which unlike the last two quarters (44% and 38%) has grown by 25%. While the lower provisioning requirements would be beneficial for the bottomline growth of the company going forward, one must keep in mind the fact that the bank is yet to implement the 90-day overdue rule for NPAs. The 90-day overdue rule may increase the provisioning requirements of the bank.

At the current market price of Rs 235, OBC is trading at a P/E of 5x. The bank seems to have achieved success in its efforts to shrug off the PSU bank image. While OBC has a strong balance sheet and good quality of assets, we feel that, at this price, future growth may have been already factored into the stock price. Also, while the bank has managed to achieve a strong bottomline growth, the sluggish topline growth as well as high dependence of the bottomline on treasury gains nevertheless remain a cause of concern.

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