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OBC: Analyst meet extracts
Feb 23, 2005

We recently attended the Oriental Bank of Commerce (OBC) analyst meet, its first after merger with the erstwhile Global Trust Bank (GTB). Besides explaining the rationale behind the merger, the discussion also focused on the strategies that OBC had adopted to wipe off GTB’s losses.

About OBC
Nationalised in 1980, OBC is one of the most efficient public sector banks in the country. The bank has close to 1,000 branches that are mainly concentrated in northern India. OBC, like most other public sector banks, has chosen to concentrate on the fast growing retail market, where it has met a reasonable amount of success. The bank, which was also the first public sector bank to have zero net NPAs, no longer has the “zero NPA” tag to its credit. This is because, post the liquidation of the erstwhile Global Trust Bank (GTB), OBC has merged the operations of GTB with itself and is carrying GTB’s poor asset legacy in its books.

Rationale behind the merger…
The key rationale behind the merger, as highlighted by OBC, was to expand its presence in south India and lend OBC a pan India presence. GTB had a total network of 104 branches, with a major presence in south India (51 branches). Thus, it has almost doubled OBC’s presence in the south. Further, since GTB and OBC were operating on a common software platform, the technological integration was likely to be hurdle free. GTB also had a young and trained manpower, coupled with a high share of non-interest income. However, on the downside, GTB had inadequate capital for growth, high level of NPAs, poor corporate governance and sever liquidity constraint, each of which OBC was in a position to rectify.

After the merger…
Nevertheless, the ‘merger’ caused OBC to take a major hit on its bottomline. While the bank’s NIM, EPS and book value got partially eroded, it also lost its ‘zero NPA tag’ due to GTB’s bad asset legacy.

However, GTB’s high efficiency ratios aided those of OBC.

Post merger scenario…
Aug-04 OBC eGTB Merged entity
Business/Employee (Rs m) 43.5 75.9 44.2
Business/Branch (Rs m) 571.1 642.5 572.6
CAR (%) 16.7 Negative 9.4
Cost to Income (%) 34.2 528.1 38.8
Cost of Deposits (%) 5 4.6 4.9
Yield on advances (%) 8.3 6.3 8.1
Yield on Investments (%) 9.2 5.2 9.0
Net NPA (%) 0 27.7 1.7
*eGTB = erstwhile GTB

What OBC has acquired from GTB

  • Apart from the branches and employees, OBC has acquired deposits (high cost) worth Rs 52 bn and advances worth Rs 17.5 bn (after knocking off all stress assets).

  • GTB’s net accumulated loss was Rs 12.2 bn and its net NPAs stood at Rs 4.6 bn.

  • At the operating level, GTB incurred a loss of Rs 564 m (August-December 2004).

Actions initiated by OBC to correct the sorry state of affairs:

  • High cost deposits of Rs 9 bn were paid off, thereby reducing the cost of funds.

  • Rationalisation of owned and leased premises of GTB resulting in savings of Rs 25 m per annum and refund of interest free deposits of Rs 200 m.

  • Valuation of assets of erstwhile GTB on mark to market basis and necessary provisions made.

Handling NPAs…
While poor asset quality was GTB’s weakness, recovering dues was OBC’s strength. It was on this premise that OBC went ahead with cleaning its asset book and met with reasonable success in the same.

Transforming the NPAs of erstwhile GTB
  No. of A/c Rs m
Cash recoveries of NPA accounts 55 957.9
Restructuring of dues in NPA accounts 8 3,558.5
Upgradation of sub standard to standard 3 492.2
Total 66 5,008.6
Source:OBC

Also, the bank has continued to maintain its conservative approach when it comes to provisioning and has not abstained from taking a hit on its bottomline to make adequate provisions for GTB’s losses. In 3QFY04, the bank made provisions of Rs 0.5 bn for future GTB claims and Rs 0.6 bn for writing off GTB’s losses. The bank is confident of getting a tax break to the tune of Rs 3.5 bn to write off the accumulated losses. To implement this, the bank expects amendment in the necessary acts in the upcoming budget.

Yet to transfer assets to ‘HTM’ category…
The bank, unlike most others in its league, has not yet transferred securities from ‘available for sale’ to ‘held to maturity’ category’. At present, 13% of its SLR book is in HTM category. The bank has already made a provision of Rs 1 bn for any losses in this regard and hopes to transfer the assets as and when the yields soften further.

Envisioning future…
The bank painted a very optimistic picture about its future vision of GTB. The bank hopes to turn around GTB in FY06 and post handsome profits thereon. The following are some of OBC’s estimates for GTB.

Projections for the GTB (standalone)
(Rs bn) 9mFY05 FY05E FY06E FY07E FY08E
Deposits 46.1 48.5 57.0 67.0 80.0
Advances 20.7 25.0 35.0 42.0 50.0
Gross NPA 13.2 11.5 8.7 6 4.5
Operating profit/(loss)* (0.7) 0.1 10 17.5 22.5
Source: OBC
* Operating loss figure for 9mFY05 relates to period between 15th Aug 04 to 31st Dec 04

Our view…
The bank has received the approval for issue of 580 m shares, thereby reducing government’s stake in the bank from 66% to 51%. Going by the present share price of Rs 314, OBC is expected to mop up Rs 18 to Rs 20 bn through this issue. This will augur well for the bank’s expansion plans and the need to comply with the Basel accord.

At the current price of Rs 314, the stock is trading 2.2 times its 9mFY05 book value. Considering the vulnerability of the bank’s future performance to its ability to turnaround GTB, the bank is very overvalued at the current levels. Although, given its past record and conservative approach, we do not rule out the possibility of OBC using the GTB assets to its advantage, the management’s vision of a turnaround in GTB by FY06 however, is faced with challenges.

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