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OBC: Catching up with peers

Feb 15, 2011

OBC declared its 3QFY11 results. The bank has reported 18% YoY growth in net interest income while its net profits have grown by 41% YoY. Here is our analysis of the results.

Performance summary
  • Interest income grows 17% YoY in 9mFY11 on the back of 16% YoY growth in advances.
  • Net interest margins (NIM) improve marginally due to higher yield on assets and lower cost of funds.
  • Bottomline grows by 43% YoY in 9mFY11 despite lower non fund income.
  • Net non-performing assets (NPA) decline to 0.9% of advances in 9mFY11 from 0.8% in 9mFY10.
  • Capital adequacy ratio at 12.3% (as per Basel II) at the end of 9mFY11.

Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income 26,716 30,328 13.5% 75,716 88,555 17.0%
Interest Expense 17,987 20,029 11.4% 56,536 56,913 0.7%
Net Interest Income 8,729 10,299 18.0% 19,180 31,642 65.0%
NIM (%)       3.0% 3.1%  
Other Income 2,376 2,314 -2.6% 9,346 6,602 -29.4%
Other Expense 4,877 4,873 -0.1% 12,081 14,222 17.7%
Provisions and contingencies 1,921 1,918 -0.2% 3,986 6,460 62.1%
Profit before tax 4,307 5,822 35.2% 12,459 17,562 41.0%
Tax 1,413 1,739 23.1% 4,284 5,869  
Profit after tax / (loss) 2,894 4,083 41.1% 8,175 11,693 43.0%
Net profit margin (%) 10.8% 13.5%   10.8% 13.2%  
No. of shares (m)       250.5 250.5  
Book value per share (Rs)*         338.9  
P/BV (x)         1.0  
* (Book value as on 31st December 2010)

What has driven performance in 9mFY11?
  • 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 FY11. OBC has lowered the proportion of retail credit to 8% of its total advance book, with the same de-growing by 12% YoY to accommodate more corporate assets. The same seem to have helped improve the bank's net interest margins by 0.1% bringing the same to 3.1% 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.

    Marginally trailing sector growth
      9mFY10 % of total 9mFY11 % of total Change
    Advances 785,546   908,101   15.6%
    Retail 84,839 10.8% 74,950 8.3% -11.7%
    Corporate 700,707 89.2% 833,151 91.7% 18.9%
    Deposits 1,107,447   1,293,345   16.8%
    CASA 268,457 24.2% 325,880 25.2% 21.4%
    Term deposits 838,990 75.8% 967,465 74.8% 15.3%
    Credit / Deposit 71%   70%    

  • OBC saw its other income drop by 29% Yoy in 9mFY11 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 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.

  • The bank's net NPA stood at 0.9% of advances in 9mFY11 as against 0.8% in 9mFY10, thereby indicating lower slippage in asset quality. Also the bank has successfully complied with RBI's mandate of 70% coverage ratio.

  • Capital adequacy at 12.3% although sufficient for near term growth may entail capital dilution in the coming fiscal.

What to expect?
At the current price of Rs 339, the stock is attractively valued at 0.8 times our estimated FY13 adjusted book value. OBC's performance in 9mFY11 has been broadly in line with our estimates. The bank's ability to improve margins while sustaining asset quality is also encouraging. More importantly it has caught up with its peers in terms of return ratios. We maintain our positive view on the stock. ResearchPro subscribers can view latest updates here.

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