Like in the June quarter, lower provisioning for NPAs has helped Oriental Bank of Commerce (OBC) to post a healthy improvement in its bottomline growth for 2QYF05. For the September quarter, while the bottomline has surged by 32%, the topline has risen by a marginal 6%. However, unlike the previous quarters, there has been a lackluster improvement in the bank's net interest income. This may indicate that the bank has not been able to significantly reduce its interest expenses during 2QFY05. There has been a significant drop in OBC's other income, and this has limited the bottomline growth.
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)
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The zero net NPA bank
Nationalised in 1980, OBC is one of the most efficient public sector banks in the country. The bank has over 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. Recently, post the liquidation of Global Trust Bank (GTB), OBC has merged the operations of GTB with itself.
What has driven the performance in 1QFY05?
Advances growth strongOBC continues to maintain the growth momentum in advances it has shown in FY04. OBC's growth in advances in 2QFY05, stood at over 30%. The strong growth in advances has however not led to a similar 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 faster rate than in the previous quarter. We believe that retail advances growth has been the main growth driver for OBC's advances growth. No details for the same are available at the current moment.
Operating margins take a hit
The bank's interest expenses have risen marginally in the September quarter and this has led to a marginal rise in net interest income. Unlike the previous quarters the bank's interest expenses have risen in the September quarter, indicating a downward rigidity in the same. This means that going forward net interest margins may remain stagnant or may even witness a decline. Operating margins have also improved only marginally. Cost to income ratio has however risen to sharply to 37% compared to 26% in 2QFY04. This indicates that the bank has been facing pressure on this front. With an employee wage revision around the corner, we believe that public sector banks, including OBC, may face a pressure on the operating margins.
Lower provisioning saves day
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 the previous quarters 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. Also with higher recoveries going forward, the bottomline growth could be aided further. The net NPA to advances ratio is still nil indicating the strong asset quality of the bank.
What to expect?
At the current market price of Rs 239, OBC is trading at a price to adjusted book value ratio of 1.7 times. 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. However considering the strong fundamentals of OBC we believe that the adverse impact would be a short-term affair. The bank continues to show continuous improvement in its core operations and this is likely to enthuse investors. However we would like to reiterate that the benefits of the merger with GTB will only occur over a period of time and hence investors have to be patient.
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