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OBC: On firmer footing - Views on News from Equitymaster

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OBC: On firmer footing

Mar 2, 2007

Performance summary
Oriental Bank of Commerce (OBC) recently declared its results for the third quarter and nine months ended December 2006. Notwithstanding the pressure on net interest margins (visible in players across the sector) the bank has clocked a modest growth in assets and complemented it with higher fee income. While lower provisioning requirement (due to NPA recoveries) and tax incidence have lent buoyancy to the bank’s net profit margins, the bank has also successfully rationalised its operating costs.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Income from operations 10,498 13,137 25.1% 30,443 37,312 22.6%
Other Income 1,262 1,329 5.3% 3,938 4,595 16.7%
Interest Expense 6,548 8,924 36.3% 18,421 24,862 35.0%
Net Interest Income 3,950 4,213 6.7% 12,022 12,450 3.6%
Net interest margin (%)       2.9% 2.9%  
Other Expense 2,224 2,476 11.3% 6,862 7,327 6.8%
Provisions and contingencies 309 81 -73.8% 1,660 820 -50.6%
Profit before tax 2,679 2,985 11.4% 7,438 8,898 19.6%
Tax 632 549 -13.1% 2,077 1,801 -13.3%
Profit after tax/ (loss) 2,047 2,436 19.0% 5,361 7,097 32.4%
Extraordinary item** 612 612 0.0% 1,837 1,837 0.0%
Net profit 1,435 1,824 27.1% 3,524 5,260 49.3%
Net profit margin (%) 13.7% 13.9%   11.6% 14.1%  
No. of shares (m) 250.5 250.5   250.5 250.5  
Diluted earnings per share (Rs)* 22.9 29.1   18.8 28.0  
P/E (x)         7.1  
* (trailing 12 months)
** write off of GTB losses

Getting the best out of the worst
OBC has the repute of being one of the most efficient public sector banks in the country. The bank’s credit portfolio is skewed towards corporate segment (81%). Of the retail portfolio (19%), housing loans comprise 75%. As against most of its peers, OBC has not been able to capitalise on the credit boom during FY05 primarily on account of having lower CAR post Global Trust Bank (GTB) acquisition. The bank, which was also the first public sector bank to have zero net NPAs, no longer has the tag to its credit. At the time of amalgamation, erstwhile GTB had 104 branches with 1 m customers and 1,209 employees. It had a negative networth of Rs 8.1 bn, a negative capital adequacy ratio and cumulative losses of Rs 10.8 bn. However, OBC has done its best in using GTB to its advantage and has reduced the effective cost of ‘acquisition’. At the end of December 2006, the bank had 1,233 branches and 601 ATMs.

What has driven performance in 3QFY07?
Cautious stance: Keeping up with its repute of being risk averse, OBC made an appreciable attempt to capture the buoyant demand for incremental credit this quarter, albeit at a relatively moderate pace as compared to some of its peers. As a result, while the overall credit disbursals clocked a growth of 25% YoY, the growth in retail credit was restricted to single digits and the share of the latter to total credit was brought down from 19% in 9mFY06 to 17% in 9mFY07. At the same time, the growth in the bank’s home loan portfolio was 17% YoY, nearly at half the rate of growth clocked by the sector (38% YoY).

The bank has set a target of 25% YoY growth in advances and 20% YoY growth in deposits for the current fiscal. Low cost deposits (comprising 30% of total deposits) grew by 22% YoY, in line with the growth in the deposit book (23% YoY). Also, due to the bank’s cautious approach towards accepting high cost bulk deposits, it has been able to sustain net interest margins (NIMs) at 2.9%, despite absence of returns on cash reserve ratio (CRR) and lower yield on investments due to the shift to Treasury Bills.

Ensuring profitable growth…
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Advances 331,822   414,897   25.0%
Retail 63,155 19.0% 68,773 16.6% 8.9%
Corporate 268,667 81.0% 346,124 83.4% 28.8%
Deposits 494,206   607,059   22.8%
CASA 150,272 30.4% 183,332 30.2% 22.0%
Term deposits 343,934 69.6% 423,727 69.8% 23.2%
Credit deposit ratio 67.1%   68.3%    

Fees substitute treasury: Fee income (grew by 50% YoY) has shown a remarkable improvement and comprised 21% of the bank’s total income in 9mFY07, against 15% in the corresponding period of the previous fiscal. This has helped it circumvent losses in other income due to poor results on the treasury front. Going forward, the bank hopes to leverage its collaboration with Corporation Bank and Indian Bank (that have a significant presence in the south) to propel its initiatives of offering cash management services, vending insurance products and other third party products The potential risk on the treasury side has also reduced, albeit marginally. The bank has 33% of its investment portfolio in the HTM (held to maturity) basket and a tolerance level (provisions for rise in 10 year G-Sec yield) upto 8.0% (10 year G-Sec yield is currently at 7.6%) in the AFS portfolio.

GTB costs evened out: OBC seems to have successfully re-aligned the costs of the erstwhile GTB’s branches with itself, as is evident in the marginal decline in cost to income ratio. The bank expects the cost to income ratio to stabilise at 42% in the coming quarters. This will be amongst the lowest in public sector banks.

Breakup of operating expenses
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Employee expenses 3,645 53.1% 3,947 53.9% 8.3%
Other operating expenses 3,217 46.9% 3,380 46.1% 5.1%
Total operating expenses 6,862   7,327   6.8%
Cost / Income 44%   42%    

Provisioning bliss: OBC has lived up to its commitment of improving its asset quality and has pared its net NPAs further (0.5% in 3QFY07 from 1.0% in 3QFY06). This has been aided by recoveries to the tune of Rs 7 bn made in the nine-month period. Of this, while the recoveries from the GTB NPAs were to the tune of Rs 2 bn, the rest were out of OBC’s own delinquencies. The total cash recovery was to the tune of Rs 4 bn. The bank expects further recoveries by the end of FY07. We have not factored these in our estimations. The said recoveries have considerably reduced the provisioning requirements for the bank.

What to expect?
At the current price of Rs 187, the stock is attractively valued at 0.8 times our estimated FY09 adjusted book value. OBC’s performance in the current quarter reinstates our belief that the bank will be able to emerge successful in competing with the best banks in the sector in the longer term. The bank’s comfortable capital adequacy (CAR 13.1%), ability to capitalise on its pan-India presence coupled with good quality appraisal will enable it harness higher asset growth and good asset quality. While the provision write backs on account of NPA recoveries may continue to aid margins, propensity to interest rate risks on the treasury books continues to be high. At the current valuations, however, the possible downsides to the stock remain limited.

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Mar 22, 2019 11:17 AM


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