OBC: `Zero`ing on NPAs

Oriental Bank of Commerce (OBC), has managed to pull of a first in the public sector banking domain, by reporting a zero net NPA level in the September quarter. That apart, the performance of the bank in the September quarter has been almost similar to the June quarter. While the topline has declined by 1%, the bottomline has improved by a strong 44% on a YoY basis. For 1HFY04 also, the story is similar, with the topline falling marginally and the bottomline growing by a healthy 41% on a YoY basis.

OBC's interest income from investments has shown a decline in the September quarter. This seems to be mainly due to the fact that the bank may be booking profits on its G-Sec portfolio, and reinvesting at a lower yield. While interest income from advances has risen marginally, we believe that due to the gradually increasing exposure to the low yielding home loans market and low industrial credit offtake, growth from this revenue stream may be subdued going forward. This may mean sluggish topline growth going forward. For FY04, while we had projected a topline growth of 3% for OBC, the company seems to have underperformed the same. While details of growth or otherwise in advances are not clear, we believe that the bank is facing competitve pressures on this front. The bank clearly seems to be facing pressure on yields.

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 21% in the September quarter. On the operational front, the bank has been able to improve its operating margins by 510 basis points. Cost to income ratio has also improved to 29% (33%) in the September quarter 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 September quarter. We had projected net NPAs to advances ratio at 0.9% for FY04. Since the bank now has zero net NPAs, we may see higher bottomline growth in the next two quarters, due to lower provisioning requirements. The bank's growth in bottomline despite the strong growth in provisioning is commendable.

At the current market price of Rs 235, OBC is trading at a price to book ratio of over 2.1x. The stock has risen considerably in the recent past. The bank seems to have achieved success in its efforts to shrug off the PSU bank image. While OBC has a strong balance sheet and good quality of assets, we feel that, at this price, future growth may have been already factored in the stock price. Also, while the bank has managed to achieve a strong bottomline growth, the fall in topline nevertheless remains a cause of concern. Investors must also keep in mind the fact that a significant part of its bottomline growth may have come about due to strong growth in other income, mainly due to booking of profits on the G-Sec portfolio. Hence, when these profits dry up, such high bottomline levels may not be sustainable.