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Analyst meet excerpts: OBC - Views on News from Equitymaster
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Analyst meet excerpts: OBC
Jun 8, 2005

Oriental Bank of Commerce recently had its analyst meet to discuss the impact of GTB on its books and the future prospects of the bank. Following are the key excerpts of the same:

Business growth in FY05
Advance book:  Despite enduring the GTB hit, OBC witnessed 29% growth in its advance book during FY05. Of this, the retail book (20% of non food credit) grew by 19% YoY. This was primarily propelled by the 16% growth in mortgage loans (76% of retail portfolio). Also, the low cost deposits that account for 28% of the total deposits have grown by 32% YoY. This has helped the bank pare its cost of deposits by 70 basis points. However, the pressure on yields has pruned the bank’s NIM (net interest margin) from 4.1% in FY04 to 3.2% in FY05. Although, on a standalone basis (i.e. without considering GTB’s assets), the NIM comes to 3.5% in FY05.

Treasury:  On the other income side, while the same has dipped by 30% YoY in FY05, the 24% rise in fee income (40% of non interest income) has partially cushioned the 53% drop in treasury earnings. The improvement in fee income can also be attributed to the forex income garnered from GTB branches. The bank has booked depreciation on investments of Rs 1.1 bn in FY05 and 2.5 bn in 1QFY06. However, since just 21% of the investments are in the HTM category, going forward the bank remains largely exposed to interest rate risks. According to the bank, with an increase in the G-Sec yields beyond 7.8% will cause the bank to take a hit in its treasury book.

NPAs:  Post GTB merger, the bank is carrying gross NPAs to the tune of Rs 25 bn in its books, of which NPAs of 12 bn have been inherited from GTB’s books. The gross NPA to advances figure has notched up from 6% of advances in FY04 to 9% of advances in FY05. The net NPA figure stood at 1% of advances at the end of FY05 (0% in FY04). The bank has also managed to recover Rs 6.8 bn of bad assets in FY05. Most of the other NPAs have been provided for and going forward, any recoveries on this front will filter in into the bottomline.

GTB impact

Erstwhile GTB Aug-04 Mar-05 Change %
Advances (Rs m) 24,860 20,570 -17.3%
Deposits (Rs m) 51,831 75,523 45.7%
Accumulated losses (Rs m) 12,377 13,297 7.4%
Since its acquisition by OBC, the erstwhile GTB branches have booked losses of Rs 920 m in FY05. 50% of this is due to the incremental depreciation on GTB’s assets that were not charged earlier as per the prudential norms. However, the incremental low cost deposits that were garnered from these branches have helped economise OBC’s cost of funds.

Of the total accumulated losses of Rs 12.3 bn, the bank has been allowed to charge one-fifth of the amount every year in its books. Thus, in commencement of the process the bank has booked losses of Rs 2.4 bn in FY05. However, the tax benefits accruing from the same (to the tune of Rs 3 bn) have already been accounted for in this fiscal.

Outlook FY06
Target FY06
  FY05 FY06E YoY growth
Advances (Rs m) 252,992 336,479 33%
Deposits (Rs m) 478,503 574,204 20%
Cost of deposits 4.90% 4.30%  
Net interest margin 3.20% 3.50%  
Cost / income ratio 39% 33%  
Gross NPAs (Rs m) 25,000 20,000 -20%
The bank hopes to grow its advance book by 33% in FY06. For this, the bank already has sanctions of Rs 20 bn in hand. Despite the pressure on cost of deposits, the bank intends to grow its deposit book by 20% and bring down the cost of deposits from 4.9% in FY05 to 4.3% in FY06. Also, the extraordinary rise in operating overheads due to employee costs, high rentals and depreciation write-offs of erstwhile GTB will be marginalized from FY06 onwards. In tune with its repute of maintaining asset quality, the bank hopes to bring down the net NPA to advances levels to zero, once again in FY06.

Our view
The bank has capital adequacy ratio of over 12% post the public issue in FY06. While the same does not seem to be sufficient to support the requisite credit growth and meet Basel requirements, the bank may have to resort to Tier II borrowings or preference issues for the same. Going forward, the bank will have to write off GTB losses o the tune of Rs 2.4 bn from its books every year, for the next 4 years and to that extent, will pare its bottomline. Not to mention the possibility of treasury losses pruning bottomline looms large.

However, given its proactiveness in maintaining asset quality and long term growth prospects the valuations of the bank look attractive. At the current price of Rs 220, the bank is trading 1.3 times its FY06E adjusted book value. Notwithstanding the fact that the bank needs some more time to swallow the sour ‘GTB’ pill, we reiterate our stand that the bank is one of our preferred plays from the long-term perspective.

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