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OBC: Banking on 'extraordinary'

Jul 25, 2008

Performance summary
  • Interest income grows 27% YoY in 1QFY09.

  • Bottomline grows by 58% YoY in 1QFY09 due to the absence of GTB write-offs this quarter onwards. Excluding this extraordinary item from 1QFY08, the bottomline has grown by a marginal 10% YoY.

  • Capital adequacy ratio at 12.2% (13.9% at the end of 1QFY08).

  • Net NPAs increase to 0.9% from 1.0% in 1QFY08.

Rs (m) 1QFY08 1QFY09 Change
Interest earned 15,341 19,537 27.4%
Interest expense 10,910 15,070 38.1%
Net Interest Income 4,431 4,467 0.8%
Net interest margin (%) 2.1% 2.0%
Other Income 1,462 2,055 40.6%
Other Expense 2,642 2,985 13.0%
Provisions and contingencies 506 593 17.2%
Profit before tax 2,745 2,944 7.2%
Tax 741 739 -0.3%
Effective tax rate 27.0% 25.1%
Profit after tax/ (loss) 2,004 2,205 10.0%
Extraordinary item** 612 - -100.0%
Net profit 1,392 2,205 58.4%
Net profit margin (%) 9.1% 11.3%
No. of shares (m) 250.5
Book value per share (Rs)* 230.6
P/BV (x) 0.7
* (Book value as on 31st March 2008)
** write off of GTB losses

What has driven performance in 1QFY09?
  • Despite being short of capital, OBC grew its advance book as well as deposits in excess of our overall estimates for FY09. While restricting its growth in retail credit to 10% YoY, OBC has adopted a more aggressive strategy for growing its corporate and SME portfolios. Having said that the bank was compelled to raise high cost bulk deposits to fund the advances, which took a toll on its net interest margins (NIMs). The bank is targeting low cost deposits to comprise 35% of deposits in FY09. Nonetheless, inability in re-pricing the loans according to the higher costs may continue to impact the bank's margins going forward.

    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 451,130   560,130   24.2%
    Retail 76,241 16.9% 84,020 15.0% 10.2%
    Corporate 374,889 83.1% 476,111 85.0% 27.0%
    Deposits 645,110   832,580   29.1%
    Credit / Deposit 70%   67%    

  • OBC clocked a very appreciable growth in other income this quarter despite having a relatively higher proportion of investments in the mark to market category. The same can be attributed to higher fee income generation as the bank has been ableto leverage its collaboration with Corporation Bank and Indian Bank (that have a significant presence in the south) to propel its initiatives of offering cash management services, vending insurance products and other third party products.

  • OBC had successfully re-aligned the costs of the erstwhile GTB's branches with itself, which led to the marginal decline in cost to income ratio in FY07. The cost to income ratio has increased to 46% in 1QFY09 from 45% in 1QFY08, partially due to the AS-15 provisions. Although the cost to income ratio is amongst the lowest in public sector banks, the same is exerting pressure on the bank's margins.

  • OBC had to provide Rs 2.5 bn each in FY08 and FY09 to fully write off the GTB losses in its books. However, the bank has chosen to take the entire write off at one go in FY08 itself so as to clean up its balance sheet and avoid providing on this front going forward. Excluding this extraordinary item, the bank's bottomline has fallen by 2% YoY and the net profit margin stood at 11.3% in 1QFY09 against 13.1% in 1QFY08. The bank's net NPAs stood at 0.9% in 1QFY09 against 1.0% in 1QFY08.

  • The bank is targeting a business mix of Rs 2,000 bn (Rs 1,393 bn in 1QFY09) and branch network of over 1,500 branches by FY10.

What to expect?
At the current price of Rs 160, the stock is valued at 0.5 times our estimated FY11 adjusted book value. OBC's performance in 1QFY09 has been broadly in line with our estimates, excluding the impact of the extraordinary item. However, the bank's low capital adequacy, inability to capitalise on its pan-India presence coupled with poor efforts on the fee income side is stopping it from harnessing higher asset growth and good asset quality. Having said that, efforts at sustaining NIMs, generate fee income and leverage on its franchise may, however, bring better times for the bank going forward.

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