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OBC: Marked improvement in NIMs - Views on News from Equitymaster

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OBC: Marked improvement in NIMs
Feb 5, 2010

Performance summary
  • Interest income grows 17% YoY in 9mFY10 on the back of 20% YoY growth in advances.
  • Net interest margins (NIM) improve by 1% due to higher yield on assets and lower cost of funds.
  • Bottomline grows by 15% YoY in 9mFY10 due to lower costs and higher non fund income.
  • Net non-performing assets (NPA) decline to 0.8% of advances in 9mFY10 from 0.9% in 9mFY09.
  • Capital adequacy ratio comfortable at 13.2% (as per Basel II) at the end of 9mFY10.


Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 24,005 26,716 11.3% 65,012 75,716 16.5%
Interest Expense 18,350 17,987 -2.0% 49,722 56,536 13.7%
Net Interest Income 5,655 8,729 54.4% 15,290 19,180 25.4%
NIM (%)       2.0% 3.0%  
Other Income 3,177 2,377 -25.2% 7,373 9,344 26.7%
Other Expense 4,970 4,878 -1.9% 11,196 12,081 7.9%
Provisions and contingencies 519 1,921 270.1% 4,466 3,986 -10.7%
Profit before tax 3,343 4,307 28.8% 7,001 12,457 77.9%
Tax 821 1,413 72.1% (89) 4,284  
Profit after tax / (loss) 2,522 2,894 14.8% 7,090 8,173 15.3%
Net profit margin (%) 10.5% 10.8%   10.9% 10.8%  
No. of shares (m)       250.5 250.5  
Book value per share (Rs)*         257.6  
P/BV (x)         1.0  
* (Book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • OBC managed to grow its business in line with the average growth in the sector and marginally higher than our estimates for the bank for full year FY10. OBC has restricted the proportion of retail credit to 14% of its total advance book, despite growing the same by 255 YoY. The same seem to have helped improve the bankís net interest margins by 1% bringing the same to 3% and in line with the sector average. Having said that, the bank seems to have reduced its exposure to high cost bulk deposits to fund the advances, which along with higher yields also helped its NIM. The bank is targeting low cost deposits to comprise 35% of total deposits in the next 3 to 4 years.

    Moving in line with sector
      9mFY09 % of total 9mFY10 % of total Change
    Advances 656,156   785,550   19.7%
    Retail 84,945 12.9% 105,790 13.5% 24.5%
    Corporate 571,211 87.1% 679,760 86.5% 19.0%
    Deposits 913,738   1,107,450   21.2%
    CASA 222,835 24.4% 270,500 24.4% 21.4%
    Term deposits 690,902 75.6% 836,950 75.6% 21.1%
    Credit / Deposit 72%   71%    

  • OBC clocked 27% YoY growth in other income in 9mFY10 due to a relatively higher proportion of investments in the mark to market category. The income in the third quarter was impacted by the provisioning for investments in the available for sale (AFS) book. However, the bankís ability to generate fee based income through its initiatives of offering cash management services, vending insurance products and other third party products leaves a lot to be desired.

  • The bankís net NPA stood at 0.8% of advances in 9mFY10 as against 0.9% in 9mFY09, thereby indicating lower slippage in asset quality. However, going forward the bank will have to be more careful in terms of provisioning to comply with RBIís mandate of 70% coverage ratio.

  • The bank had written back some tax liability in the corresponding quarter of FY09 for sale of investments in AFS basket, which had resulted in lower tax liability. The effective tax rate was therefore higher during the nine month ended December 2009.

What to expect?
At the current price of Rs 254, the stock is valued at 0.7 times our estimated FY12 adjusted book value. OBCís performance in 9mFY10 has been broadly in line with our estimates. However, the bankís inability to capitalise on its pan-India presence coupled with poor efforts on increasing the proportion of low cost deposits and sustainable fee income may dampen its prospects of long term profitability. Having said that, efforts at improving NIM and improving asset quality may bring better times for the bank going forward. We maintain our positive view on the stock.

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