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OBC: Restructuring an overhang

May 30, 2013 | Updated on Oct 30, 2019

Oriental Bank of Commerce (OBC) declared its results for the fourth quarter of financial year 2011-2013 (4QFY12). The bank has reported 14% YoY growth in net interest income and 16% YoY rise in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows 13.6% YoY in 4QFY12 and 11% in full year FY13 on the back of 15% YoY growth in advances during the year.
  • Net interest margins (NIM) remained flattish YoY at 2.8% during FY13.
  • Net profits observed 16.2% YoY growth in 4QFY13, thanks to the tax reversals during the quarter. Further, healthy non-interest income performance boosted the profits for OBC during 4QFY13.
  • Net non-performing assets (NPA) climbed up to 2.3% of advances in FY13 from 2.2% in FY12.
  • Capital adequacy ratio stands at 12.0% (as per Basel II) as at the end of 4QFY13.

Financial performance: A snapshot
Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Interest income 42,208 45,343 7.4% 158,149 177,048 12.0%
Interest expense 31,526 33,205 5.3% 115,991 130,036 12.1%
Net Interest Income 10,682 12,138 13.6% 42,158 47,012 11.5%
Net interest margin (%)       2.8% 2.8%  
Other Income 3,438 4,617 34.3% 12,403 16,547 33.4%
Other Expense 6,580 7,290 10.8% 23,155 26,652 15.1%
Provisions and contingencies 5,344 7,588 42.0% 17,148 21,546 25.6%
Profit before tax 2,196 1,878 -14.5% 14,258 15,361 7.7%
Tax -453 -1,202 165.1% 2,842 2,081 -26.8%
Profit after tax/ (loss) 2,649 3,079 16.2% 11,416 13,280 16.3%
Net profit margin (%) 6.3% 6.8%   7.2% 7.5%  
No. of shares (m)         291.8  
Book value per share (Rs)*         403.0  
P/BV (x)         0.6  
* (Book value as on 31st March 2013)

What has driven performance in FY13?
  • The bank's profitability grew around 16% levels YoY for both the last quarter and the full year FY13. The other income show held the profits in good stead. However, had it not been for tax reversals, OBC would have reported de-growth in profitability for 4QFY13.

  • OBC recorded 15% YoY growth in advances backed by strong growth in retail credit that grew 25% YoY and healthy growth in large and mid-corporates that grew by 17% and 13% YoY respectively. The retail credit expansion comes at the right time for the bank when the industry is reeling with asset quality pressures primarily coming from large corporates. The priority sector advance portfolio grew by decent 15% YoY with direct agri credit and MSME credit reporting robust growth for FY13. The bank's CD ratio improved from 72.7% in FY12 to 74.1% in FY13.

  • The deposit mobilization has not been quite robust for the bank with 13% YoY growth in deposits that stood below industry averages during FY13. That said, the core deposits grew handsomely by 25% YoY backed by 15% YoY growth in CASA deposits. While the growth in current accounts (25% YoY growth) outpaced savings account (12% YoY growth), the CASA ratio stood at 25% for FY13 and the management has guided to increase it to 26% by FY14. Another remarkable achievement for OBC has been the consistent reduction in bulk deposits since past 3 years. The high cost deposits as a percentage of total deposits fell to 20% in FY13 from higher levels of 34% in FY11.

    While corpoarte book forms larger share, retail credit growth outshined
    (Rs m) FY12 % of total FY13 % of total Change
    Advances 1,130,500   1,301,860   15.2%
    Large corporate 575,810 50.9% 676,350 52.0% 17.5%
    SME 179,785 15.9% 209,446 16.1% 16.5%
    Agri 154,111 13.6% 178,814 13.7% 16.0%
    Retail 115,990 10.3% 145,300 11.2% 25.3%
    Deposits 1,559,650   1,758,980   12.8%
    CASA 376,280 24.1% 431,850 24.6% 14.8%
    Tem deposits 1,183,370 75.9% 1,327,130 75.4% 12.1%
    Credit deposit ratio 72.5%   74.0%    

  • Margins for FY13 stood flattish at 2.8% levels with yields and costs increasing at commensurate levels and with no substantial accretion in low-cost deposit base. That said, the decrease in high cost deposit base did arrest any fall in margins for FY13. With the bank reducing its base rate from 10.4% to 10.25% and simultaneous reduction in interest rates in term deposits for certain buckets (during 4QFY13) may keep the margins for the next quarter more or less at same levels. Having said that, the twin benefits of CASA traction and improved NII will augur well for margins during FY14 and the bank expects to expand margins to 2.9% levels by FY14.

  • Besides tax write-backs, the sturdy growth in non-interest income provided credence to the profitability of the bank during 4QFY13. The non-interest income grew at healthy 34% YoY for 4QFY13 backed by stupendous growth in treasury gains that recorded 56% YoY growth. However, core fee income disappointed with mere 4% YoY growth during 4QFY13. This is one area where the bank needs to catch up with in the forthcoming quarters.

  • Coming to the asset quality, OBC witnessed slight deterioration in assets with Gross NPAs spiking up to 3.21% in FY13 from 3.17% in FY12 and Net NPAs moving up to 2.27% in FY13 from 2.21% in FY12. 4QFY13 observed one account to the tune of Rs 5 bn turning into NPA as restructuring exercise failed. Though slippages declined by 21% YoY from Rs 13 bn in 4QFY12 to Rs 10 bn in 4QFY13, the provisions stood significantly higher (42% YoY growth) during the quarter resulting into higher provision coverage ratio of 63%. The bank intends to strengthen the balance sheet with the increased provisioning. The upgradation and recoveries did not appear to be satisfactory during FY13 and the bank needs to work upon the same.

  • Also OBC's exposure to stressed sectors cannot be overlooked. In terms of sectoral distribution of advances, the bank is exposed to the extent of 27% to industry, 19% to infrastructure and 6% to commercial real estate which incidentally form the problem areas for the bank as well. While 21% of the total advances is exposed to the infrastructure sector, 13% of the advances are towards power sector and 2% towards telecom. In addition to the same, what stands more critical is the OBC's 56% exposure to the state owned power distribution companies and 39% to the private power companies. The states of Rajasthan (31%), Uttar Pradesh (20%), Haryana (17%), Gujarat (14%) and Punjab (13%) contribute to the total power exposure of the bank and hence is worrisome. Nevertheless, that 67% of the total power exposure stands secured by State Government Guarantee provides some respite.

  • The restructured accounts stood at Rs 99 bn as on 31st March 2013, higher than the previous year. The total impaired asset (Gross NPAs + Standard Restructured Assets) works out to be a high number that stood at 11% of total advances and has been hovering around these levels since couple of quarters. That said, on YoY comparison basis, the impaired assets declined by Rs 4 bn in FY13. However, OBC witnessed heavy restructuring coming from the troubled sectors such as infrastructure that contributed as high as 53% to the total restructuring, aviation formed 12%, iron and steel 12% and textiles 6% of the total restructuring during FY13. State discoms, telecom, power generation, roads and ports were few large accounts contributing towards restructuring for the bank. The aviation exposure for OBC remains minimal with Kingfisher account at Rs 520-530 m. Going ahead, the management expects a downtrend in bad assets.

  • The capital adequacy ratio for the bank stood at 12.0% with Tier I at 9.2% as per BASEL II norms for FY13.

What to expect?
At the current price of Rs 260, the stock is valued at 0.6 times our estimated FY15 adjusted book value. While higher provisions marred OBC performance for the past two quarters of FY13, the bank is adopting conservative approach to de-risk and strengthen its balance sheet. However, the NPAs remain above 3% levels and the restructuring has surfaced from the vulnerable sectors of the economy. That said, the management expects a slowdown in bad loans going ahead and expects to beef up its recoveries. But the concerns over restructured assets continue to remain an overhang on the stock.

Margins enhancement would prove challenging as the full impact of reduction in base rates and interest rates on term deposits would come in 1QFY14. Still, the bank expects the NIMs to inch upwards to 2.9% in FY14 from current 2.8% with increasing CASA traction and improving NII performance.

The bank requires improving traction on the fee income front that contributed barely 12% to the total income of the bank at present. With loan book expansion and branch network expansion, we expect this counter to improve from here on.

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, growth and margin front do not make the stock very attractive. Despite the attractive valuations, we do not think the stock can offer returns commensurate with the risks. Hence, we would recommend investors to 'Sell' the stock as we highlighted in our September quarter performance review.

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Mar 20, 2020 (Close)


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