VRS expenses hit OBC's profits - Views on News from Equitymaster

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VRS expenses hit OBC's profits

Feb 7, 2001

Oriental Bank of Commerce (OBC) has reported a drop of 97% in net profit to Rs 22 m for the quarter ended December 2000. However, operating profits of the bank grew by 7% on the back of higher operating margins and cost efficiencies.

(Rs m)3QFY003QFY01Change9m FY009m FY01Change
Interest Income 6,308 6,676 5.8% 18,098 20,483 13.2%
Other Income 601 798 32.9% 1,698 1,886 11.1%
Interest Expenditure 4,559 4,811 5.5% 12,764 14,747 15.5%
Operating Profit (EBDIT) 1,750 1,865 6.6% 5,334 5,736 7.5%
Operating Profit Margin (%)27.7%27.9%29.5%28.0%
Other Expenditure 1,006 1,876 86.5% 3,061 4,153 35.7%
Profit before Tax1,345787-41.4%3,9703,469-12.6%
Provisions & Contingencies68476511.8%1,7701,8937.0%
Profit after Tax/(Loss) 660 22 -96.6% 2,200 1,576 -28.4%
Net profit margin (%)10.5%0.3%12.2%7.7%
No. of Shares (eoy) 193 193 193 193
Diluted Earnings per share*13.70.515.210.9
P/E (at current price)3.7

Earnings for the third quarter declined due to more than 85% jump in other expenditure. During the quarter OBC has made full provision towards compensation payable to employees under voluntary retirement scheme (VRS) announced in December 2000. These expenses are included in other expenditure. OBC is the first bank to charge VRS expenses at one stroke in the third quarter results. The bank is expected to save wage cost of Rs 120 m every year in view of VRS scheme. Its staff productivity is also expected to increase from the current Rs. 21.8 m to Rs. 27 m by March 2001.

OBC's deposits in the first nine months of FY01 grew by 10% and advances rose by 22%. Credit to deposit ratio of the bank also increased to 41% (from 46% ) during the same period.

At the current market price of Rs 41 OBC is trading at a P/E multiple of 4 times its 9 months FY01 annualised earnings and Price/Book value ratio of 0.8 times. Its current valuations are lowest among its peers in the sector. With its focus on reducing the level of NPAs, technology adoption and dilution of the government's stake in the company re-rating in the stock is likely.

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