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OBC: Banking on writebacks

Feb 10, 2009

Performance summary
  • Interest income grows 32% YoY in 9mFY09 on the back of 28% YoY growth in advances.
  • Net interest margins improve by 0.4% due to higher yield on assets.
  • Bottomline grows by 57% YoY in 9mFY09 due to the absence of GTB write-offs and write back of tax liability. Excluding this extraordinary item, the bottomline has grown by 12% YoY.
  • Capital adequacy ratio at 12.0% at the end of 9mFY09.
  • Net NPAs decline to 0.8% of advances in 9mFY09 from 1% in 9mFY08.

Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest earned 17,479 24,028 37.5% 49,277 65,084 32.1%
Interest expense 13,456 18,350 36.4% 36,287 49,722 37.0%
Net Interest Income 4,023 5,678 41.1% 12,990 15,362 18.3%
Net interest margin (%)       2.1% 2.5%  
Other Income 1,674 3,154 88.4% 4,561 7,301 60.1%
Other Expense 2,730 4,970 82.1% 8,070 11,196 38.7%
Provisions and contingencies 258 519   1,113 4,466 301.3%
Profit before tax 2,709 3,343 23.4% 8,368 7,001 -16.3%
Tax 713 821 15.1% 2,004 (95) -104.7%
Effective tax rate 26.3% 24.6%   23.9% -1.4%  
Profit after tax/ (loss) 1,996 2,522 26.4% 6,364 7,096 11.5%
Extraordinary item** 612 -   1,837 -  
Net profit 1,384 2,522 82.2% 4,527 7,096 56.7%
Net profit margin (%) 7.9% 10.5%   9.2% 10.9%  
No. of shares (m)         250.5  
Book value per share (Rs)*         230.6  
P/BV (x)         0.7  
* (Book value as on 31st March 2008)** write off of GTB losses

What has driven performance in 3QFY09?
  • OBC managed to grow its business even in difficult times primarily on the back of higher accretion of deposits to PSU banks. Despite being short of capital, OBC grew its advance book as well as deposits in excess of our overall estimates for FY09. While restricting its growth in retail credit to 14% YoY, OBC has adopted a more aggressive strategy for growing its corporate portfolio. 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 helped its net interest margins (NIMs). The bank is targeting low cost deposits to comprise 35% of deposits in FY09.

    The bank had lodged a claim of Rs 3.8 bn towards reimbursement of farm loan waiver, of which 41% (Rs 1.5 bn) was reimbursed to it in 3QFY09.

    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 512,240   656,170   28.1%
    Retail 86,569 16.9% 98,426 15.0% 13.7%
    Corporate 425,671 83.1% 557,745 85.0% 31.0%
    Deposits 741,800   913,740   23.2%
    Credit / Deposit 69%   72%    

  • OBC clocked 60% YoY growth in other income in 9mFY09 due to a relatively higher proportion of investments in the mark to market category. However, the bank’s 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.

  • Although OBC has successfully re-aligned the costs of the erstwhile GTB’s branches with itself, there been a hike in cost to income ratio from 46% in 9mFY08 to 49% in 9mFY09. The same includes provision of Rs 900 m towards employee wage revision.

  • The bank’s net NPAs stood at 0.8% in 9mFY09 against 1.0% in 9mFY08 indicating lower slippage in asset quality. However, going forward the bank will have to be more careful as it is not in a position to provide for the same.

  • The bank wrote back income tax liability to the tune of 1.5 bn in the previous quarter pertaining to valuation of investments in the available for sale (AFS) basket. The same has reduced its effective tax rate during the nine month period.

What to expect?
At the current price of Rs 130, the stock is valued at 0.5 times our estimated FY11 adjusted book value. OBC’s performance in 9mFY09 has been broadly in line with our estimates. However, the bank’s low capital adequacy, inability to capitalise on its pan-India presence coupled with poor efforts on increasing the contribution of fee based income may stop it from harnessing higher asset growth and sustained profitability. Having said that, efforts at improving NIMs and sustaining asset quality may bring better times for the bank going forward.

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