OBC, one of the most efficient public sector banks in the country, has reported a disappointing topline performance for the June quarter. Bottomline growth, however, has been strong. While the topline has recorded a negative growth of 2.5%, bottomline has jumped by 38%. Significant fall in interest expenses as well as a strong growth in other income has helped the bank to redeem its bottomline performance in the June quarter.
Income from Operations
Net interest income
Operating Profit Margin (%)
Provisions and Contingencies
Profit before Tax
Profit after Tax/(Loss)
Net Profit Margin (%)
No. of Shares (m)
Diluted Earnings per share*
OBC's interest income from advances and investments have shown a decline in the June quarter. This may indicate that the bank is facing pressure from competition and falling interest rates. While details of growth or otherwise in advances are not clear, we believe that the bank is facing pressure on the same. Also, due to its large exposure to the small and medium enterprises segment, for which it reduced its lending rates recently, the bank seems to be facing pressure on yields. OBC may face increasing pressure on its spreads due to this reason. Soft interest rates have however helped the bank to reduce its interest expenses, thus more than compensating for the fall in topline. Net interest income, thus, has risen by 20% in the June quarter.
On the operational front, OBC has seen a 16% rise in employee expenses thus leading to a 15% rise in operational expenses. Despite this the bank has been able to improve its operating margins by 430 basis points. Cost to income ratio has also improved to 32% in the June quarter (41%) compared to the same period last year. Operational efficiency is likely to improve further as VRS expenses get completely written off.
OBC has seen a significant rise in its other income, seemingly due to booking of profits on the G-Sec portfolio. The bank seems to have however used a large part of these gains to significantly increase provisioning in the June quarter. Increased provisioning may also have been the result of the new 90 day NPA classification norm, that banks have to adhere to. Net NPA to advances ratio stood at 1.4% at the end of FY03.
At the current market price of Rs 181, OBC is trading at a P/E ratio of 6x its annualised 1QFY04 earnings. The stock has risen considerably in the recent past and valuations seem to be on the higher side considering the bank's PSU status. While OBC has a strong balance sheet and comparatively good quality of assets, we feel that the recent rally in the scrip was more speculative in nature. Also, while the bank has managed to achieve a strong bottomline growth, the fall in topline nevertheless remains a cause of concern. Going forward investors may need to keep a close watch on the bank's initiatives to grow business as well as handle competition.
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