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OBC: Margins stay relatively steady

Jul 30, 2012

Oriental Bank of Commerce (OBC) declared its results for the first quarter of financial year 2012-2013 (1QFY13). The bank has reported 19% YoY growth in interest income and 10% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Interest income grows 19% YoY in 1QFY12 on the back of 16% YoY growth in advances.
  • Net interest margins (NIM) see a marginal decline from 2.9% to 2.8% in 1QFY13.
  • Net profits see a 10% YoY rise in 1QFY13, on despite higher interest costs. This was mainly on lesser provisioning and an appreciable increase in other income.
  • Net non-performing assets (NPA) increased sharply to 2.05% of advances in 1QFY13 from 1.1% in 1QFY12. However, this has come off, over the 2.2% levels seen at the end of FY12.
  • Capital adequacy ratio at 12.3% (as per Basel II) at the end of 1QFY13.

Rs (m) 1QFY12 1QFY13 Change
Interest income 35,965 42,872 19.2%
Interest expense 25,782 31,613 22.6%
Net Interest Income 10,183 11,258 10.6%
Net interest margin (%) 2.9% 2.8%  
Other Income 3,238 4,084 26.1%
Other Expense 5,408 6,377 17.9%
Provisions and contingencies 3,143 3,321 5.7%
Profit before tax 4,871 5,644 15.9%
Tax 1,324 1,730  
Profit after tax/ (loss) 3,547 3,914 10.4%
Net profit margin (%) 9.9% 9.1%  
No. of shares (m)   291.8  
Book value per share (Rs)*   377.2  
P/BV (x)   0.6  
* (Book value as on 30th June 2012)

What has driven performance in 1QFY13?
  • OBC managed to grow its advances by 16%, which was in line with the average growth in the sector. It saw healthy loan growth in the large corporate and the retail space. The bank's net interest margins declined by 0.1% bringing the same to 2.8%. The bank however plans to maintain its margins around 3% for FY13. Having said that, the bank has reduced its exposure to high cost bulk deposits to fund its advances. It also plans to focus its attention on CASA (low cost deposit) accretion which should improve margins going forward. The bank expects to maintain a 16% growth in advances in FY13.

    Deposit growth continues to lag...
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 982,160   1,138,963   16.0%
    Deposits 1,445,540   1,581,519   9.4%
    Bulk deposits 471,796 32.6% 414,780 26.2% -12.1%
    CASA 337,548 23.4% 379,902 24.0% 12.5%
    Tem deposits 1,107,993 76.6% 1,201,616 76.0% 8.4%
    Credit deposit ratio 67.9%   72.0%    

  • OBC saw a robust increase in other income, which grew by 26% YoY in 1QFY13. The bank saw an increase in fee income; however it saw a loss on its treasury portfolio.

  • The bank has a 22.8% exposure to the infrastructure sector, out of which the beleaguered power sector counts for 13.3% of the total, telecom accounts for 2.4%. Exposure to the state government accounts for around 7.8% of the total advance book (58.7% of the total power sector exposure). Out of these the heaviest exposure likes in states like Rajasthan, Haryana, Uttar Pradesh, Gujarat, and Punjab. Distribution companies (discoms) account for 5.6% of the total advances. State electricity boards have been bleeding losses and have even of late stopped making payments to leading power producer <>NTPC. They are facing problems on account of power theft, technical and commercial losses and delayed tariff revision. However, some state electricity boards have increased their tariffs which may help matters going forward.

  • The bank's net NPA stood at 2.05% of advances in 1QFY13 as against 2.2% in FY12 and 1.1% in 1QFY12, thereby indicating a slippage in asset quality. However, this has improved slightly over the quarter, however there could be a few more slippages going forward. The bank’s provisioning coverage ratio stood at 61.5% in FY12, this has increased to 64.4% at the end of 1QFY13. The bank expects to increase its provisioning coverage ratio to above 70% in FY13. It also expects to close the year with 1.75% in net NPAs.

  • Restructuring of accounts took a toll on the company's accounts as Rs 20 bn was restructured during the quarter, a major chunk of this came from the UP discom (Rs 12.8 bn) being restructured. Large, chunky accounts including Air India and a number of SEBs now account for over 50% of the Rs 109.5 bn restructured book. The Punjab SEB still needs to be restructured, which may take place next quarter, amounting to Rs 10 bn or so more.

  • Capital adequacy stood at 12.3% in 1QFY13, with Tier 1 capital at 9.9%. The bank had not gone for any capital infusion in FY12; however it may need an infusion sometime this year.

What to expect?
At the current price of Rs 233.3, the stock is valued at 0.6 times its trailing twelve months book value. We will update our analysis on the stock shortly. OBC's performance in has been below par on account of a spike in NPAs, major restructuring as well as on account of higher cost of funds. The bank's inability to maintain its margins is a worry; however it intends to try and maintain the same at around 3% from 1HFY13 onwards. Easing of the RBI's monetary policy stance should help in efforts to maintain margins and the bank has also been reducing its dependence on bulk deposits and is focusing on CASA accretion. Incremental slippages are a cause of concern, even though the bank is confident of sustaining asset quality for the year by a sustained focus on recovery. The bank has improved its asset quality over the quarter. Exposure to infra and power and the spike in restructured assets is worrying, however most of the chunky accounts have been taken care of.

While the heavily discounted valuations of the bank do suggest that the stock could offer reasonable upsides over the next two to three years, the fact that there is very little comfort on the NPA and margin front do not make the stock very attractive. Hence, we would recommend investors to 'Hold' on to the stock, provided their exposure to it is less than 2 to 3% of overall portfolio. They should abstain from buying more of it even at the current discounted levels. Also do keep track of the bank’s quarterly performance on the asset quality front.

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