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OBC: Technology orientation holds key - Views on News from Equitymaster
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  • Jul 8, 2002

    OBC: Technology orientation holds key

    Oriental Bank of Commerce (OBC) is one of the few public sector banks, which has the best productivity parameters and has managed to achieve commendable growth in loan portfolio in FY02. The bank’s valuations are however, affected by its PSU nature and lack of proactive strategies in launching new products.

    While its PSU peers posted a single digit growth in advances, OBC’s advances jumped by 28% in FY02. OBC has a diversified loan portfolio with small and medium enterprise accounting for major portion of its lending. Its aggressive foray into the housing finance market has increased the proportion of housing finance to 9% of total loan portfolio in FY02 from 4% in the previous year. The bank has also increased its exposure in commodity sector to 13% (4% in FY01) foreseeing the revival in commodity prices. In the last five years, OBC’s advances have increased at a CAGR of 22%. It is expected to grow at a similar rate in the coming years, as the bank sees strong growth opportunity in service sector apart from retail finance.

    However, loans to medium corporates are more susceptible to becoming non-performing loans if the economic recovery is delayed. This is reflected from a 12% jump in gross NPAs in FY02. Part of this increase could be due to shifting to 90 days norm for recognizing NPAs from the earlier 180 days. Aggressive provisions by the bank, nevertheless reduced its net NPAs to loan assets ratio from 3.6% in FY01 to 3.2% currently.

    The bank’s sub-PLR lending would also pressurize its net interest margins (NIM), which stood at 3.4% in FY02. With increasing competition in the market, NIMs are expected to come down to below 3% in the next three years.

    While the bank recorded a 23% growth in net interest income in FY02, fee based income jumped by 77% (16% of total income). The bank is however, unlikely to maintain this kind of growth rates in the coming years. This is due to the reason that profits from sale of investments which accounted for 60% of total fee based income, were of an extraordinary nature due to a sharp rise in bond prices. Excluding this gain, fee-based income grew by only 5% in FY02. OBC’s forex income, which forms 8% of total fee based income has remained stagnant over the last five years. Revenues from cash management services also witnessed a CAGR of 9% in the last five years, indicating the constant loss of market share. The bank’s fee based income is expected to rise at a CAGR of 8% in the next three years, as aggressiveness of private sector banks and quality of services provided by them is likely to affect OBC’s growth rates.

    Detailed financials of the bank
    The bank has managed a strong growth in business, supported by its branch network and IT initiatives. OBC has well spread network, whereby 28% of its branches are in urban areas and an equal number in rural areas. It is planning to strengthen its presence in Karnataka and Kerala where business opportunities are emerging, by opening more branches. It also aims to expand its operations in gulf countries to tap the NRI customers.

    Productivity parameters
    Particulars OBC Corp. Bank SBI HDFC Bank UTI Bank
    Revenues/employee (Rs m) 2.2 1.7 1.4 0.8 0.8
    Net profits/employee (Rs m) 0.2 0.3 0.1 4.6 6.9
    Business/employee (Rs m) 31.4 26.8 18.4 65.4 105.3

    OBC has computerized 86% of its total business (78% of total 960 branches), which is in line with its public sector peers in the banking sector. The bank has planned to invest Rs 2.8 bn in technology in FY03. It has earmarked Rs 420 m for setting up of 200 ATMs across the country. It plans to set up a central data warehouse at a total estimated cost of Rs 2 bn. The implementation of the above IT initiatives are likely to give a further edge to OBC which is rated number one amongst the public sector banks on the parameters of business growth, profitability and productivity per employee. However, to get the premier valuations on the stock markets the bank needs to catch up with the efficiency level of private sector peers. This will be achieved once the technology is fully integrated.

    At the current market price of Rs 45, OBC is trading at a P/E of 2.4x FY03 expected earnings and price to book value ratio of 0.6x. Re-rating in the bank’s valuations are highly linked to the technology implementation and ability to maintain healthy growth in business performance.

    Comparative valuations
    Particulars OBC Corp. Bank SBI HDFC Bank UTI Bank
    Mkt. Price (Rs) 45 117 242 214 39
    P/e - FY02 (x) 2.7 5.4 5.2 20.2 5.5
    PBR - FY02 (x)* 0.7 0.9 1.4 3.1 1.7
    ROA (%) 1.1% 1.4% 0.9% 1.5% 1.1%
    NPA to advances (%) 3.2% 2.3% 5.6% 0.5% 3.3%



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