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OBC: Garnering non fund support - Views on News from Equitymaster
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OBC: Garnering non fund support
May 7, 2009

Performance summary
  • Interest income grows 30% YoY in FY09 on the back of 24% YoY growth in advances.
  • Net interest margins (NIM) improve by 0.2% due to higher yield on assets.
  • Bottomline grows by 156% YoY in FY09 due to the absence of GTB write-offs and 74% YoY growth in non fund based income. Excluding the extraordinary item, the bottomline has grown by 8% YoY.
  • Capital adequacy ratio at 13.0% at the end of FY09.
  • Net non-performing assets (NPA) decline to 0.7% of advances in FY09 from 1% in FY08.
  • Declares dividend of Rs 7 per share for FY09 (dividend yield 5.4%).


Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 19,105 23,481 22.9% 68,382 88,565 29.5%
Interest Expense 14,734 18,878 28.1% 51,562 68,600 33.0%
Net Interest Income 4,371 4,603 5.3% 16,820 19,965 18.7%
NIM (%) 2.1% 2.3%
Other Income 1,606 3,413 112.5% 6,167 10,713 73.7%
Other Expense 2,726 2,633 -3.4% 10,796 13,828 28.1%
Provisions and contingencies (1,001) 783 (429) 5,249
Profit before tax 4,252 4,600 8.2% 12,620 11,601 -8.1%
Tax 2,206 2,642 19.8% 4,209 2,547 -39.5%
Profit after tax / (loss) 2,046 1,958 -4.3% 8,411 9,054 7.6%
Extraordinary writeoffs** 3,040 - 4,877 -
Net profit / loss (994) 1,958 3,534 9,054 156.2%
Net profit margin (%) -5.2% 8.3% 5.2% 10.2%
No. of shares (m) 250.5 250.5
Book value per share (Rs)* 257.6
P/BV (x) 0.5
* (Book value as on 31st March 2009)
** Extraordinary writeoffs in FY08 pertained to writeoff of GTB losses

What has driven performance in FY09?
  • 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 FY09. While restricting its growth in retail credit to 15% of its advance book, OBC has adopted a more aggressive strategy for growing its corporate portfolio. 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 helped its NIM. The bank is targeting low cost deposits to comprise 35% of total deposits. It had lodged a claim of Rs 3.8 bn towards reimbursement of farm loan waiver, of which 41% (Rs 1.5 bn) was reimbursed to it in FY09.

    Growth in line with sector
    FY08 % of total FY09 % of total Change
    Advances 553,370 688,450 24.4%
    Deposits 778,570 983,690 26.3%
    Credit / deposit ratio 71% 70%

  • OBC clocked 74% YoY growth in other income in FY09 due to a relatively higher proportion of investments in the mark to market category. Also, the bank booked Rs 245 m as commission from its life insurance JV with Canara Bank and HSBC. 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.

  • OBC has successfully re-aligned the costs of the erstwhile GTB’s branches with itself and there been a reduction in cost to income ratio from 47% in FY08 to 45% in FY09. The same includes provision of Rs 1.1 bn towards employee wage revision. The bank also plans to open 100 branches during the current fiscal (FY10) which may sustain its operating cost at the current levels.

  • The bank’s net NPA stood at 0.7% of advances in FY09 as against 1.0% in FY08, thereby indicating lower slippage in asset quality. However, going forward the bank will have to be more careful as it is not in a position to provide for the same.

  • The bank wrote back income tax liability to the tune of 1.5 bn in the previous quarter pertaining to valuation of investments in the available for sale (AFS) basket. The same has reduced its effective tax rate during the nine month period.

What to expect?
At the current price of Rs 130, the stock is valued at 0.5 times our estimated FY11 adjusted book value. OBC’s performance in FY09 has been broadly in line with our estimates. However, the bank’s inability to capitalise on its pan-India presence coupled with poor efforts on increasing the proportion of low cost deposits and sustainable fee income may dampen its prospects of long term profitability. Having said that, efforts at improving NIM and improving asset quality may bring better times for the bank going forward.

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