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OBC: Higher interest expense nullifies profits

Aug 1, 2011

Oriental Bank of Commerce (OBC) declared its results for the first quarter of financial year 2011-2012 (1QFY12). The bank has reported 27% YoY growth in interest income and 2% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Interest income grows 27% YoY in 1QFY12 on the back of 14% YoY growth in advances.
  • Net interest margins (NIM) see a decline from 3.3% to 2.9% in 1QFY12.
  • Net profits see a 2% YoY fall in 1QFY12, on account of higher interest costs and the new RBI provisioning norms.
  • Net non-performing assets (NPA) increased sharply to 1.1% of advances in 1QFY12 from 0.7% in 1QFY11.
  • Capital adequacy ratio at 13.6% (as per Basel II) at the end of 1QFY12.

Rs (m) 1QFY11 1QFY12 Change
Interest income 28,308 35,965 27.0%
Interest expense 17,736 25,782 45.4%
Net Interest Income 10,572 10,183 -3.7%
Net interest margin (%) 3.3% 2.9%  
Other Income 2,147 3,238 50.8%
Other Expense 4,497 5,408 20.3%
Provisions and contingencies 2,280 3,143 37.8%
Profit before tax 5,943 4,871 -18.0%
Tax 2,310 1,324  
Profit after tax/ (loss) 3,633 3,547 -2.4%
Net profit margin (%) 12.8% 9.9%  
No. of shares (m)   291.8  
Book value per share (Rs)*   337.9  
P/BV (x)   1.0  
* (Book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • OBC managed to grow its advances by 14%, which was lower than the average growth in the sector. It saw healthy loan growth in the agricultural space, and the micro, small and medium enterprises space. The bank's net interest margins however declined by 0.4% bringing the same to 2.9%. This was mainly on account of cost of funds seeing a sharp increase, due to the RBIís aggressive interest rate policy, as well as the increase in interest on savings bank accounts. The bank plans to maintain its margins around 3% for FY12. The bank plans to grow its loan book along with the sector average for FY12 (around 18%); however we have been slightly conservative with our estimates, as borrowers may shy away from higher interest rates.

    Loan growth comes in lower than sector average
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 860,982   982,160   14.1%
    Deposits 1,230,574   1,445,540   17.5%
    CASA 279,524 22.7% 324,189 22.4% 16.0%
    Tem deposits 951,051 77.3% 1,121,351 77.6% 17.9%
    Credit deposit ratio 70.0%   67.9%    

  • In line with moves coming from the competition, and post the RBI's monetary policy tightening, the bank decided to raise its interest rates. This will help offset its higher cost of funds. The bank recently hiked its base rate and benchmark prime lending rate (BPLR) by a further 0.5% to 10.75% and 15% respectively.

  • OBC saw a robust increase in other income increase, which grew by 51% YoY in 1QFY12. The bank saw a significant increase in its trading profits from treasury operations and in recovery of its written off accounts, which helped propel its other income.

  • The bank's net NPA stood at 1.1% of advances in 1QFY12 as against 0.7% in 1QFY11, thereby indicating a slippage in asset quality. OBC saw an increase in provisioning costs, along with the revised RBI guidelines. The bank has maintained a provisioning coverage ratio of 75.1%, well above the stipulated 70%. The bank has migrated all of its accounts upto Rs 1 m on to its system, only the smaller accounts are yet to be accounted. The bank does not expect much of a surprise on the NPAs front going forward. OBC, however, has significant exposure (22%) to the infrastructure space, half of which is in the power sector.

  • The bank opened 23 branches during 1QFY12. It has a branch expansion plan of 173 branches for FY12.

What to expect?
At the current price of Rs 351, the stock is valued at 0.7 times our estimated FY14 adjusted book value. OBC's performance in has been slightly below par on account of provisioning charges as well as on account of higher cost of funds. The bank's ability to improve margins is encouraging; however incremental slippages are a cause of concern, even though the bank is confident of maintaining asset quality for the year. Last year, the bank was cautious in its advance growth, and we expect growth to be moderate in FY12 as well. This is conservative compared to the bankís managementís view. The fall in NIMs will be curtailed since the bank has increased its base rate and BPLR. Having said that, on account of reasonable valuations, we maintain our positive view on the stock.

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