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OBC: Walking on tightrope

Feb 5, 2008

Performance summary
  • Interest income grows 33% YoY on the back of 24% YoY growth in advances.
  • Other income grows by 26% YoY due to higher fee income contribution.

  • Capital Adequacy comfortable at 12.7%.

  • Bottomline falls 18% YoY and 24% YoY including and excluding the extraordinary items respectively.

  • Effective tax rate increases from 18.4% to 26.3% in 3QFY08.

  • Gross NPAs pared to 2.7% from 4.2% in 3QFY07.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Income from operations 13,137 17,479 33.1% 37,313 49,277 32.1%
Interest Expense 8,924 13,455 50.8% 24,862 36,827 48.1%
Net Interest Income 4,213 4,024 -4.5% 12,451 12,450 0.0%
Net interest margin (%)       2.7% 2.5%  
Other Income 1,329 1,673 25.9% 3,443 4,561 32.5%
Other Expense 2,476 2,730 10.3% 7,328 8,070 10.1%
Provisions and contingencies 81 257 217.3% 820 572 -30.2%
Profit before tax 2,985 2,710 -9.2% 7,746 8,369 8.0%
Tax 549 712 29.7% 1,801 2,004 11.3%
Effective tax rate 18.4% 26.3%   23.3% 23.9%  
Profit after tax/ (loss) 2,436 1,998 -18.0% 5,945 6,365 7.1%
Extraordinary item** 612 612 0.0% 1,837 1,837 0.0%
Net profit 1,824 1,386 -24.0% 4,108 4,528 10.2%
Net profit margin (%) 13.9% 7.9%   11.0% 9.2%  
No. of shares (m)         250.5  
Book value per share (Rs)*         223.6  
P/BV (x)         1.2  
* (Book value as on 31st March 2007)** write off of GTB losses

What has driven performance in 3QFY08?
Well in line with target: In contrast to the past few quarters when the growth in OBC’s retail credit was restricted to single digits, OBC has adopted a more aggressive strategy for growing its retail and SME portfolios. Having set a target of 17% YoY growth in advances for the current fiscal, the bank has been able to outperform the same so far. The bank is targeting low cost deposits to comprise 35% of deposits in FY08. Nonetheless, inability in re-pricing the loans according to the higher costs has impacted the bank’s net interest income as well as net interest margins.

(Rs m) 9mFY07 % of total 9mFY08 % of total Change
Advances 414,900   512,240   23.5%
SME credit 48,120 11.6% 61,500 12.0% 27.8%
Farm credit 54,490 13.1% 64,980 12.7% 19.3%
Deposits 607,060   741,800   22.2%
Credit / Deposit 68%   69%    

Lack of fee income visibility: Fee income (9mFY08 growth not divulged) has once again slowed down in 9mFY08 and comprised 13% of the bank’s total income. This is, however, higher against 10% in the corresponding period of the previous fiscal. Going forward, the bank hopes to leverage its collaboration with Corporation Bank and Indian Bank (that have a significant presence in the south) to propel its initiatives of offering cash management services, vending insurance products and other third party products The potential risk on the treasury side has also reduced, albeit marginally. The bank had 44% of its investment portfolio in the HTM (held to maturity) basket in FY07. We however, fail to find any visible fee income stream in the near term.

Employee costs scale up: OBC had successfully re-aligned the costs of the erstwhile GTB’s branches with itself, which led to the marginal decline in cost to income ratio in FY07. The cost to income ratio has increased to 55% in this quarter, partially due to the AS-15 provisions. Although the cost to income ratio is amongst the lowest in public sector banks, the same is exerting pressure on the bank’s margins.

Breakup of operating expenses
(Rs m) 9mFY07 % of total 9mFY08 % of total Change
Employee expenses 3,947 53.9% 4,404 54.6% 11.6%
Other operating expenses 3,380 46.1% 3,667 45.4% 8.5%
Total operating expenses 7,327   8,071   10.2%
Cost / Income 46%   47%    

What to expect?
At the current price of Rs 271, the stock is valued at 1.1 times our estimated FY10 adjusted book value. OBC’s performance in 9mFY08 has been broadly in line with our FY08 estimates. The bank’s comfortable capital adequacy, ability to capitalise on its pan-India presence coupled with good quality appraisal will enable it to harness higher asset growth and good asset quality positions it favourably. Nonetheless, inability to sustain NIMs, generate fee income and leverage on its franchise may, however, lead to loss of market share for the bank.

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