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OBC: NPA migration takes its toll

Nov 2, 2011

Oriental Bank of Commerce (OBC) declared its results for the second quarter of financial year 2011-2012 (2QFY12). The bank has reported 27% YoY growth in interest income and 58% YoY fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 27% YoY in 2QFY12 and in 1HFY12 on the back of 21% YoY growth in advances.
  • Net interest margins (NIM) see a decline from 3.3% to 2.8% in 1HFY12.
  • Net profits see a 58% YoY fall in 2QFY12, on account of increased provisions on non-performing assets (NPA).
  • Net non-performing assets (NPA) increased sharply to 1.9% of advances in 2QFY12 from 0.7% in 2QFY11 on account of migration of sub ten lakh accounts onto the core banking system.
  • Capital adequacy ratio at 12.6% (as per Basel II) at the end of 2QFY12.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 29,919 38,011 27.0% 58,228 73,976 27.0%
Interest expense 19,148 28,116 46.8% 36,884 53,899 46.1%
Net Interest Income 10,771 9,895 -8.1% 21,344 20,078 -5.9%
Net interest margin (%)       3.3% 2.8%  
Other Income 2,141 2,774 29.6% 4,288 6,012 40.2%
Other Expense 4,853 5,087 4.8% 9,349 10,494 12.2%
Provisions and contingencies 2,263 4,853 114.5% 4,543 7,996 76.0%
Profit before tax 5,796 2,729 -52.9% 11,740 7,600 -35.3%
Tax 1,820 1,051 -42.2% 4,130 2,375 -42.5%
Profit after tax/ (loss) 3,977 1,677 -57.8% 7,610 5,224 -31.3%
Net profit margin (%) 13.3% 4.4%   13.1% 7.1%  
No. of shares (m)         291.8  
Book value per share (Rs)*         364.3  
P/BV (x)         0.8  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • OBC managed to grow its advances by 21%, which was higher than the average growth in the sector. It saw healthy loan growth in the agricultural space, and the micro, small and medium enterprises space. Its retail book however saw muted growth on account of the high interest rate environment. The bank's net interest margins however declined by 0.5% bringing the same to 2.8%. This was mainly on account of cost of funds seeing a sharp increase, due to the RBI's aggressive interest rate policy, as well as the increase in interest on savings bank accounts. This may take a further hit on account of the savings bank deregulation and the RBI's latest rate hike. It plans to maintain its NIMs at around 2.75-2.8% for FY12, compared to a 3% guidance earlier.

  • The bank plans to grow its loan book slightly higher than the sector average for FY12 (at around 20%). Since it has already grown its loan book by over 20% in the first half, it expects a good performance in the second half of the year, which is seasonally a better half. However we have been slightly conservative with our estimates, on account of the tough credit environment.

    Loan growth comes in lower than sector average
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 875,005   1,056,111   20.7%
    Deposits 1,257,862   1,495,517   18.9%
    CASA 300,942 23.9% 327,512 21.9% 8.8%
    Term deposits 956,919 76.1% 1,168,005 78.1% 22.1%
    Credit deposit ratio 69.6%   70.6%    

  • The bank has a 22% exposure to the infrastructure sector, out of which the beleaguered power sector counts for 13% of the total. Exposure to the state government accounts for around 7.7% of the total advance book (60% of the total power sector exposure). Out of these the heaviest exposure likes in states like Rajasthan, Haryana and Punjab and Uttar Pradesh. Power distribution companies account for 4% of the total advances. SEBs are facing problems on account of power theft, technical and commercial losses and delayed tariff revision. Thus, some of these accounts may see some stress going forward and may even come under corporate debt restructuring.

  • OBC saw a robust increase in other income increase, which grew by 30% YoY in 2QFY12; it grew by over 40% YoY in 1HFY12. The bank saw an increase in its core fee income and in recovery of its written off accounts, which helped propel its other income.

  • The bank's net NPA stood at 1.9% of advances in 2QFY12 as against 0.7% in 2QFY11, thereby indicating a huge slippage in asset quality. The bank has now migrated all of its accounts on to the core banking system. The bank did not expect such a sharp rise in bad loans and plans to focus its efforts aggressively on recovery. The huge spike in NPAs was on account of migrating all the accounts below 10 lakhs onto the system, which were not effectively monitored earlier. Recovery was something that was earlier ignored by the bank staff. The bank's provisioning coverage ratio was eroded to 63.8% in 2QFY12, compared to over 81% in 2QFY11 and 75% just three months earlier in June 2011.

What to expect?
At the current price of Rs 290, the stock is valued at 0.6 times our estimated FY14 adjusted book value. OBC's performance in has been below expectations on account of provisioning charges, a spike in NPAs as well as on account of higher cost of funds. The bank's inability to maintain its margins is also a worry; and with a deregulated savings account rate and higher cost of funds to be passed on it may take a further hit. Incremental slippages are a cause of concern, even though the bank is confident of maintaining asset quality for the year by a sustained focus on recovery. High exposure to infrastructure and power are also a worrying factor. The bank plans to maintain its net NPA levels around 1% and gross NPAs at around 2%. However, in light of the dismal performance on the profit, asset quality and the NIM front we may need to revise our estimates.

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