Despite a sluggish economic environment, Oriental Bank of Commerce (OBC) has reported a double digit growth both in profits and interest income for the second quarter of the year. A sharp rise in operating margins aided the bank in reporting better than expected financial performance.
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Provisions & Contingencies
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During the quarter, most of the banks reported a better than expected growth in earnings led by a substantial growth in other income. Banks are now focusing on fee based income including brokerage, commission, forex and fees from cash management services to improve their total revenue base. The shift in focus to this revenue stream is due to the fact that they are less risky compared to traditional fund based lending. OBC's other income to total income ratio rose to 11% in 2QFY01 compared to 7% in 2QFY00.
Lower cost of funds pushed up the bank's operating margins to 32%, a rise of over 550 basis points. With this the bank's profits margins are now in line with one of the best in the sector. However, it will be a challenging task for the bank to sustain its margins at higher levels, in falling interest rate scenario.
A successful launch of VRS in the previous year helped the bank in reducing its cost to income ratio to 40% from 49% in 2QFY01. Out of the total VRS cost of Rs 901 m, the bank provided Rs 477 m in the previous year and the balance would be provided in the current year. A reduction in employee cost would improve the bank's cashflow in the coming years which could be deployed in expanding the business. A triple digit growth in provision figure, however, trimmed the earnings growth of the bank in the current quarter.
At the current market price of Rs 32, OBC is trading at a P/E of 2x FY02 projected earnings. Its price to book value ratio of 0.3x is amongst the lowest in the banking sector. During the quarter the bank raised Rs 2 bn Tier II capital in order to augment the capital adequacy ratio (CAR) for future expansion plan. As on March '01, the bank's CAR stood at 11.8%. If the bank continues to improve earnings quality with good growth in business volumes, it would be able to sustain double digit growth. However, its slow absorption of technology is likely to keep its valuations on the lower side.
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