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OBC: Profits see a provisioning dampener - Views on News from Equitymaster
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OBC: Profits see a provisioning dampener
Apr 30, 2011

Oriental Bank of Commerce (OBC) declared its FY11 (financial year 2011) results. The bank has reported 18% YoY and 32% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows 18% YoY in FY11 on the back of 15% YoY growth in advances.
  • Net interest margins (NIM) improve from 2.6% to 3.2% in FY11.
  • Bottomline grows by 32% YoY in FY11, but by only 5.2% in 4QFY11, on the back of higher provisioning expenses.
  • Net non-performing assets (NPA) increased to 1% of advances in FY11 from 0.9% in FY10.
  • Capital adequacy ratio at 14.2% (as per Basel II) at the end of FY11, post a capital infusion from the government.
  • The board recommends a dividend of Rs 10.4 per share for FY11, working out to a dividend yield of 3%.

Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 26,855 32,323 20.4% 102,571 120,878 17.8%
Interest expense 16,961 22,190 30.8% 73,497 79,103 7.6%
Net Interest Income 9,894 10,133 2.4% 29,074 41,776 43.7%
Net interest margin (%)       2.6% 3.2%  
Other Income 2,654 2,998 13.0% 12,001 9,601 -20.0%
Other Expense 4,779 4,702 -1.6% 16,860 18,925 12.2%
Provisions and contingencies 4,174 5,605 34.3% 8,160 12,065 47.9%
Profit before tax 3,595 2,825 -21.4% 16,055 20,386 27.0%
Tax 425 -512   4,708 5,357  
Profit after tax/ (loss) 3,170 3,337 5.2% 11,347 15,029 32.4%
Net profit margin (%) 11.8% 10.3%   11.1% 12.4%  
No. of shares (m)         291.8  
Book value per share (Rs)*         325.1  
P/BV (x)         1.1  
* (Book value as on 31st March 2011)

What has driven performance in FY11?
  • OBC managed to grow its advances by 15%, which was lower than the average growth in the sector and marginally higher than our estimates for the bank for full year FY11. The bank's net interest margins improved by 0.6% bringing the same to 3.2% for FY11 and marginally higher than the sector average. The bank intends to maintain its NIMs above 3% going forward. Having said that, OBC seems to have reduced its exposure to high cost bulk deposits to fund the advances, which along with higher yields also helped its NIMs.

    Growth comes in lower than sector average
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 834,893   959,082   14.9%
    Deposits 1,202,576   1,390,543   15.6%
    CASA 300,230 25.0% 341,480 24.6% 13.7%
    Tem deposits 902,346 75.0% 1,049,063 75.4% 16.3%
    Credit deposit ratio 69.4%   69.0%    

  • OBC saw its other income drop by 20% YoY in FY11. 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 1% of advances in FY11 as against 0.9% in FY10, thereby indicating a slippage in asset quality. The bank has successfully complied with RBI's mandate of 70% coverage ratio, the provisioning coverage stood at 76.8% in FY11.

  • In line with moves coming from the competition, and post the RBI's monetary policy tightening, the bank changed its base rate from 9.5% to 10% and its benchmark prime lending rate (BPLR) from 13.75% to 14.25%.

  • A total of Rs 3.2 bn was charged to income statement in FY11 on pension expenditure for both retired employees as well as 20% of the liability for currently serving employees. The pension liability carried forward in the balance sheet to be adjusted over the next four years amounted to Rs 6.8 bn. A further liability on account of the revised gratuity for employees also needs to be adjusted. These are likely to impact profits going forward as well.

  • Capital adequacy stood at 14.2% in FY11 from 12.5% in FY10, post a preferential issue to the government. The bank allotted 41.2 m shares of Rs 10 each at a premium of Rs 412.1 per share to the government. As a result, the promoterís holding increased to 58% from 51.1%. OBC also raised a sum of Rs 3 bn through Tier-I Bonds and Rs 2 bn by way of Tier II Bonds during the year.

What to expect?
At the current price of Rs 346, the stock is valued at 0.8 times our estimated FY13 adjusted book value. OBC's performance in FY11 was broadly in line with our estimates in terms of asset growth; however the bank managed to beat our estimates in terms of profit growth. The bank's ability to improve margins is encouraging; however incremental slippages are a cause of concern. More importantly it has caught up with its peers in terms of return ratios, but it came in lower than the sector average in terms of advance growth. We maintain our positive view on the stock. ResearchPro subscribers can view latest updates here.

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Feb 22, 2018 03:37 PM


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