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Oriental Bank: Apparent slowdown - Views on News from Equitymaster
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  • May 19, 2003

    Oriental Bank: Apparent slowdown

    Oriental Bank (OBC), the public sector banking giant, has reported a lackluster growth in topline for the March quarter, while net profits have grown by a significant 87% on a YoY basis. The robust performance of the bank in the March quarter has been mainly effected due to a considerably reduction in provisioning in the same period. For FY03, the bank has reported a moderate 8% growth in topline while bottomline has grown by 43%.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Income from Operations 8,067 8,457 4.8% 30,405 32,947 8.4%
    Other Income 1,910 1,359 -28.9% 4,739 5,410 14.2%
    Interest Expenses 5,404 4,985 -7.8% 20,684 20,899 1.0%
    Net interest income 2,663 3,473 30.4% 9,721 12,048 23.9%
    Other Expenses 710 1,524 114.7% 5,289 5,827 10.2%
    Operating Profit 1,953 1,948 -0.2% 4,432 6,221 40.4%
    Operating Profit Margin (%) 24.2% 23.0%   14.6% 18.9%  
    Provisions and Contingencies 2,507 1,025 -59.1% 3,477 3,666 5.4%
    Profit before Tax 1,356 2,282 68.3% 5,694 7,965 39.9%
    Tax 718 1,087 51.4% 2,489 3,396 36.4%
    Profit after Tax/(Loss) 638 1,195 87.3% 3,206 4,570 42.6%
    Net Profit Margin (%) 7.9% 14.1%   10.5% 13.9%  
    No. of Shares (m) 192.5 192.5   192.5 192.5  
    Diluted Earnings per share* 13.3 24.8   16.7 23.7  
    P/E Ratio         4.9  

    While the performance has been good at the bottomline level, topline growth of the bank in FY03 had been slowing down progressively in the last two quarters. The yield on advances have been falling due to the RBI's policy of soft interest rates, which is one of the reasons for the lower topline growth. OBC's peers have offset the decrease in realisations (yields) by getting aggressive on volumes (advances). However, we feel that OBC has not been able to grow its advances in an aggressive manner. Net interest income growth has been mainly affected due to a marginal rise in interest expenses compared to topline growth. Lower interest expenses indicate that the net interest margins may have improved. Falling interest rates have enabled banks to source funds at a cheaper cost. This has been a salient feature of almost all the results that have been announced by banks so far.

    The bank's performance in FY03 has been encouraging. However, the March quarter results indicate a slowdown in the bank's pace of growth. In the March quarter, topline growth has been rather subdued and bottomline growth has been mainly driven by lower provisioning. Also, operating margins of the bank have taken a hit in the March quarter. This is mainly due to higher operating expenses. Operating margins for FY03, however, have improved by 430 basis points.

    Income breakup
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Interest on advances 3,931 3,861 -1.8% 14,159 15,356 8.5%
    Income from investments 3,928 3,832 -2.4% 15,375 16,030 4.3%
    Interest on balance 146 197 34.8% 808 884 9.4%
    Total 8,006 7,890 -1.4% 30,342 32,271 6.4%

    Robust expansion in the bank's operating margins have led to considerable improvement in the net profit. This improvement in margins has been mainly affected due to a significant improvement in net interest income due to falling interest expenses. Hence despite the rise in operating expenses, the bank has been able to improve upon its margins. This is also evident from the improvement in the bank's cost to income ratio. Cost to income ratio has improved in FY03 to 33% compared to 37% in FY02. Other PSU and private banks have been aggressively increasing their reach across the country in order to capture a larger chunk of the market. OBC's fall in operating expenses may indicate that this aggressive initiative to expand its reach by setting up infrastructure (i.e.branches and ATMs) may be missing.

    Oriental Bank had managed to increase its provisioning considerably in 9mFY03. This, however, was not the case for the March quarter where provisioning actually fell by 59%. Due to this, provisioning for the whole year has risen marginally by 4%. However, we must point out that for OBC, NPAs are not as much of a concern as for other public sector banks. The bank's net NPAs stood at 3.6% of the total customer assets in FY02. We believe that in FY03, due to the increased provisioning, the bank is likely to have reduced this ratio further. Going forward the bank may not have to provide so aggressively for NPAs and this is likely to help it in improving bottomline growth.

    At the current market price of Rs 117, OBC is trading at a price to book value ratio of 1x. The stock has risen considerably in the last one month and valuations seem to be on the higher side considering this is a public sector bank. the bank has also announced that it is likely to pay back Rs 500 m to the government, this had buoyed sentiment regarding this stock. While the bank has a strong balance sheet and comparatively good quality of assets, we feel that the rally in this scrip was not mainly driven by fundamentals. Hence the sustainability of the stock at this price looks doubtful going forward. Also while the bank has managed to achieve a high level of computerisation, networking of various branches still remains low and hence going forward the bank could incur additional costs to increase networking.

    However the biggest concern regarding the bank's prospects going forward is the fact that the bank's advances growth seem to be slowing down. We believe that this may be due to increased competition from other public sector as well as private sector peers. Going forward investors may want to carefully look in to the strategy of the bank to boost growth, before they make any investment decisions, especially considering the fact that the bank is mainly concentrated in the western and northern regions of the country.



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