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OBC: Lower provisioning effect

Jul 28, 2004

Introduction to results
Lower provisioning for NPAs has helped Oriental Bank of Commerce (OBC) to post a healthy improvement in its bottomline growth for 1QYF05. For the June quarter, while the bottomline has surged by 27%, the topline has risen by 8%. Stagnant interest expenses have helped the bank to significantly improve its net interest income and consequently its operating profit margins. Other income on the other hand continues to face pressure.

(Rs m) 1QFY04 1QFY05 Change
Income from Operations 8,003 8,653 8.1%
Other Income 1,817 998 -45.1%
Interest Expenses 4,893 4,881 -0.2%
Net interest income 3,110 3,772 21.3%
Other Expenses 1,561 1,631 4.5%
Operating Profit 1,549 2,141 38.2%
Operating Profit Margin (%) 19.4% 24.7%  l
Provisions and Contingencies 1,123 222 -80.2%
Profit before Tax 2,242 2,917 30.1%
Tax 820 1,112 35.5%
Profit after Tax/(Loss) 1,422 1,805 27.0%
Net Profit Margin (%) 17.8% 20.9%  
No. of Shares (m) 192.5 192.5  
Diluted Earnings per share* 29.5 37.5  
P/E Ratio   6.5  

What is the company's business?
Nationalised in 1980, OBC is one of the most efficient public sector banks in the country. The bank has close to 1,000 branches that are mainly concentrated in northern India. The bank is also the first public sector bank to have zero net NPAs in its books. OBC saw windfall gains in its portfolio of G-Secs and this helped the bank post strong growth in its bottomline performance in the last 3 years. Witnessing a slowdown in the wholesale (including corporate) lending market, OBC, like most other public sector banks, has chosen to concentrate on the fast growing retail market. It has met with reasonable amount of success.

What has driven the performance in 1QFY05?
Sales:  While we do not have the details of the growth in advances of the bank we believe that OBC continues to maintain the growth momentum it has shown in FY04. OBC's growth in advances in FY04, stood at over 25%. The seemingly strong growth in advances has led to the growth in the topline. We do not have details on the yields on advances and investments but we believe that these yields are falling at a slower rate than in the previous quarter. We believe that retail advances growth has been the main growth driver for OBC's advances growth.

Operating margins:  The bank's interest expenses have fallen marginally in the June quarter and this has helped improve its net interest income. While we don't not have the cost of deposits for the bank, we believe that fall in cost of deposits may not be as much as seen in the last few quarters. this means that going forward net interest margins may witness very marginal improvement or may even remain stagnant. Operating margins have improved by 350 basis points. Cost to income ratio has however risen to 34% compared to 31% in 1QFY04. This indicates that the bank has been facing pressure on this front, however operational efficiency is likely to improve further as VRS expenses get completely written off.

Net Profits:  While the breakup of other income is not available, we believe that the bank has not been able to book large profits on sale of investments as much as it did in 1QFY04 and this has led to lower other income. lower provisioning has helped the bank to improve upon its bottomline growth. Considering that the bank had reported almost nil net NPA to advances ratio in FY04, we believe that lower provisioning may not affect its asset quality much. Hence lower provisioning requirements would be beneficial for the bottomline growth of the company going forward. Also with higher recoveries going forward, the bottomline growth could be aided further.

What to expect?
At the current market price of Rs 244, OBC is trading at a P/E ratio of 6.5x its annualised 1QFY05 earnings. OBC is in the process of merging Global Trust Bank with itself and we believe this is likely to adversely impact the balance sheet of the bank. Since there is no clarity on the terms of the merger we would not like to speculate on the same, however once the details are out we will out up a detailed analysis and its impact on OBC. Investors need to adopt a cautious stance.

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Mar 20, 2020 (Close)


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