Oriental Bank: Provisions hit profits - Views on News from Equitymaster

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Oriental Bank: Provisions hit profits

Jun 6, 2001

Oriental Bank of Commerce (OBC) has reported a loss of Rs 84 m in the fourth quarter of FY01. The bank's profits before tax however grew by 59% in 4QFY01. The reduction in net profits was mainly on account of VRS payment of Rs 477 m and higher provisioning of Rs 1,089 m.

(Rs m)FY00FY01Change4QFY004QFY01Change
Interest Income 24,580 27,587 12.2% 6,483 7,104 9.6%
Other Income 2,214 2,677 20.9% 516 792 53.5%
Interest Expenditure 17,453 19,681 12.8% 4,689 5,074 8.2%
Operating Profit (EBDIT) 7,127 7,906 10.9% 1,794 2,030 13.2%
Operating Profit Margin (%)29.0%28.7%27.7%28.6%
Other Expenditure 4,282 5,243 22.4% 1,221 1,090 -10.8%
Profit before Tax5,0595,3415.6%1,0891,73259.1%
Provisions & Contingencies 1,672 2,526 51.0% 562 1,705 203.3%
Tax 601 786 30.9% (59) 111
Profit after Tax/(Loss) 2,786 2,029 -27.2% 586 (84)
Net profit margin (%)11.3%7.4%9.0%-1.2%
No. of Shares (eoy) 193 193 193 193
Diluted Earnings per share*14.510.512.2-
P/E (at current price)3.5-
*(annualised)

During the year the bank's deposits and advances grew by 12% and 18% respectively. Its credit to deposits ratio also rose to 46% from 42% in the previous year. Another remarkable achievement was reduction in net NPA ratio to 3.6% (3.8% in FY00). This was however due to increase in provisioning amount for non performing assets.

Operating margins of OBC continued to rise since the last two quarters. However, a significant reduction in OPM in the second quarter of the year, depressed the overall OPM for the year. Falling interest rates in the past six months has contributed in improving margins of the bank. Nevertheless, a 22% jump in other expenses depressed the net profits. Cost to income ratio of the bank increased to 50% in FY01 from 46% in the previous year. Effective tax rate was also stood higher at 15% compared to 12% in FY00.

Since the bank has provided for VRS expenses in the current year, it has not received any tax benefits. According to the newly inserted section 35DDA, tax benefits for provisioning of VRS expenses will be available only if it written off in the five years beginning from FY02. The reduction in number of employees by 809 to 13,588 is however expected to help the bank in reducing its operating costs and improve returns in the coming years. It is visible from the reduction in cost to income ratio to 39% in FY01 from 53% in the previous year.

At the current market price of Rs 37 OBC is trading at a P/E of 4 times FY01 earnings. Its price to book value ratio of 0.5x is amongst the lowest in the banking sector. The bank's initiatives in right sizing the number of employees and reduction in cost of funds is expected to improve its financial performance in the coming years.

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