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OBC: Profits tank on higher provisioning - Views on News from Equitymaster

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OBC: Profits tank on higher provisioning
May 3, 2012

Oriental Bank of Commerce (OBC) declared its FY12 (financial year 2012) results. The bank has reported 31% YoY growth in interest income and a 24% YoY fall in net profits. Here is our analysis of the results.

Performance Summary
  • Interest income grows 31% YoY in FY12 on the back of 17% YoY growth in advances.
  • Net interest margins (NIM) fall to 2.8% from 3.2% in FY11.
  • Bottom-line falls by 24% YoY in FY12, and by 20% in 4QFY12, on the back of a negligible increase in net interest income, higher operating costs and provisioning expenses.
  • Net non-performing assets (NPA) increased to 2.2% of advances in FY12 from 1% in FY11.
  • Capital adequacy ratio at 12.69% (as per Basel II) at the end of FY12, unlike its peers the bank has not gone for any capital infusion so far this year.
  • The board recommends a dividend of Rs 7.9 per share for FY12, working out to a dividend yield of 3%.


Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 32,323 42,208 30.6% 120,878 158,149 30.8%
Interest expense 22,190 31,526 42.1% 79,103 115,991 46.6%
Net Interest Income 10,133 10,682 5.4% 41,776 42,158 0.9%
Net interest margin (%)       3.2% 2.8%  
Other Income 2,998 3,438 14.6% 9,601 12,403 29.2%
Other Expense 4,702 6,580 39.9% 18,925 23,155 22.3%
Provisions and contingencies 5,605 5,344 -4.7% 12,065 17,148 42.1%
Profit before tax 2,825 2,196 -22.3% 20,386 14,258 -30.1%
Tax -512 -453   5,357 2,842  
Profit after tax/ (loss) 3,337 2,649 -20.6% 15,029 11,416 -24.0%
Net profit margin (%) 10.3% 6.3%   12.4% 7.2%  
No. of shares (m)         291.8  
Book value per share (Rs)*         361.2  
P/BV (x)         0.6  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • OBC managed to grow its advances by 17% YoY in FY12, which was slightly ahead of the average growth in the sector. The bank's net interest margins contracted by 0.4% bringing the same to 2.8%. Margins also took a hit on account of interest reversal on account of some large restructured accounts. OBC is targeting to maintain its NIMs above 3% going forward, especially from the second half of FY13. Having said that, the bank has reduced its exposure to high cost bulk deposits to fund the advances. It also plans to focus its attention on CASA (low cost deposit) accretion which should improve margins going forward. The bank expects to maintain a 16% growth in advances in FY13.

    Retail and large corporates see an increase
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 959,082   1,119,777   16.8%
    Retail 96,870 10.1% 115,991 10.4% 19.7%
    Mid Corporates 199,047 20.8% 226,736 20.2% 13.9%
    Large Corporates 480,592 50.1% 575,808 51.4% 19.8%
    Deposits 1,390,543   1,559,649   12.2%
    CASA 341,480 24.6% 376,285 24.1% 10.2%
    Tem deposits 1,049,062 75.4% 1,183,364 75.9% 12.8%
    Credit deposit ratio 69.0%   71.8%    

  • OBC saw its other income increase by 29% YoY in FY12, however for the quarter it increased by 15% on a YoY basis. The bank saw an increase in its core fee income, trading gains from its treasury operations however helped propel its other income.

  • The bank has a 22% exposure to the infrastructure sector, out of which the beleaguered power sector counts for 12.4% of the total, telecom accounts for 2.3%. Exposure to the state government accounts for around 7.4% of the total advance book (59.7% of the total power sector exposure). Out of these the heaviest exposure likes in states like Rajasthan, Haryana, Gujarat, Punjab and Uttar Pradesh. Distribution companies (discoms) account for 4% of the total advances. This is by far the worst performing segment of the power sector. State electricity boards have been bleeding losses and have even of late stopped making payments to leading power producer NTPC. They are facing problems on account of power theft, technical and commercial losses and delayed tariff revision. Some of these accounts may see some stress going forward and may even come under corporate debt restructuring as mentioned below. However, some state electricity boards have including Tamil Nadu have increased their tariffs which may help going forward.

  • The bank's net NPA stood at 2.2% of advances in FY12 as against 1.9% in 3QFY12 and 1% in FY11, thereby indicating a slippage in asset quality. Migration to the system driven recognition of NPAs has led to further slippages since it takes into account any accounts whose payments are outstanding as of a particular date. Four major accounts slipped into the NPA category during the quarter including a media group company (Rs 4.6 bn), Kingfisher Airlines, a hospitality account in Udaipur (Rs 600 m) and a PSU account (Rs 1.8 bn). The bank’s provisioning coverage ratio stood at 61.5% in FY12, the same was over 75% last year. The bank expects to increase its provisioning coverage ratio to above 70% in FY13.

  • Restructuring of accounts took a toll on the company's accounts as Rs 66 bn was restructured during the year including major accounts like Air India (Rs 16 bn), Rajasthan discom (Rs 19 bn) and Haryana discom (Rs 10 bn). The bank expects some further restructuring over the next few quarters including Moserbaer (Rs 4 bn) and two other discoms i.e. UP and Punjab.

  • In line with moves coming from the competition, and post the Reserve Bank of India's (RBI) monetary policy easing, the bank changed its base rate from 10.65% to 10.5% and its benchmark prime lending rate (BPLR) from 15% to 14.75%.

  • Capital adequacy stood at 12.7% in FY12 from 14.2% in FY11. The bank has not gone for any capital infusion this year, hoping to take advantage of the same when the time is right.

What to expect?
At the current price of Rs 233, the stock is valued at 0.6 times our estimated FY14 adjusted book value. OBC's performance in has been below par on account of provisioning charges, a spike in NPAs, restructurings as well as on account of higher cost of funds.

The bank's inability to maintain its margins is a worry; however it intends to try and maintain the same at around 3% from 1HFY13 onwards. Easing of the RBI's monetary policy stance should help in efforts to maintain margins and the bank has also been reducing its dependence on bulk deposits. Incremental slippages are a cause of concern, even though the bank is confident of sustaining asset quality for the year by a sustained focus on recovery. The bank has fast tracked its efforts on the same. Exposure to infra and power and the spike in restructured assets is also worrying. OBC expects some further pressure on the restructuring front, with few accounts still susceptible to slippages.

While the heavily discounted valuations of the bank do suggest that the stock could offer reasonable upsides over the next two to three years, the fact that there is very little comfort on the NPA and margin front do not make the stock very attractive. The target price has been revised to around Rs 390 from FY14 perspective. However, we would recommend investors to ‘BUY' the stock at current levels or lower, provided their exposure to it is less than 2 to 3% of overall portfolio. Also do keep track of the bank’s quarterly performance on the asset quality front.

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