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OBC: ‘Recovery’ boost
Nov 7, 2006

Performance summary
Oriental Bank of Commerce (OBC) declared its results for the second quarter and half year ended September 2006. The impact of the GTB merger that was so far draining OBC’s bottomline has finally proved to be benign for the latter, given the buoyancy lent to the bank’s net margins by the NPA recoveries. This is despite the fact that the bank continued to face pressure on NIMs. Better asset growth and cost rationalisation, however, signal positive prospects for the bank.

Rs (m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from operations 10,069 12,822 27.3% 19,945 24,175 21.2%
Other Income 1,720 1,579 -8.2% 2,675 3,266 22.1%
Interest Expense 6,027 8,695 44.3% 11,872 15,938 34.2%
Net Interest Income 4,042 4,128 2.1% 8,073 8,237 2.0%
Net interest margin (%)       2.9% 2.5%  
Other Expense 2,502 2,566 2.6% 4,639 4,852 4.6%
Provisions and contingencies 326 (738)   1,351 739 -45.3%
Profit before tax 2,935 3,879 32.2% 4,758 5,912 24.3%
Tax 669 771 15.2% 1,445 1,252 -13.4%
Profit after tax/ (loss) 2,266 3,108 37.2% 3,313 4,660 40.7%
Extraordinary item** 612 612 0.0% 1,224 1,224 0.0%
Net profit 1,654 2,496 50.9% 2,089 3,436 64.5%
Net profit margin (%) 16.4% 19.5%   10.5% 14.2%  
No. of shares (m) 250.5 250.5   250.5 250.5  
Diluted earnings per share (Rs)* 26.4 39.8   16.7 27.4  
P/E (x)         9.5  
* (trailing 12 months)
** write off of GTB losses

Getting the best out of the worst
OBC has the repute of being one of the most efficient public sector banks in the country. The bank’s credit portfolio is skewed towards corporate segment (81%). Of the retail portfolio (19%), housing loans comprise 75%. As against most of its peers, OBC has not been able to capitalise on the credit boom during FY05 primarily on account of having lower CAR post Global Trust Bank (GTB) acquisition. The bank, which was also the first public sector bank to have zero net NPAs, no longer has the tag to its credit. At the time of amalgamation, erstwhile GTB had 104 branches with 1 m customers and 1,209 employees. It had a negative networth of Rs 8.1 bn, a negative capital adequacy ratio and cumulative losses of Rs 10.8 bn. However, OBC has done its best in using GTB to its advantage and has reduced the effective cost of ‘acquisition’.

What has driven performance in 2QFY07?
Asset growth – Mix retained: Clocking a growth of 29% YoY in its advance book in 1HFY06, OBC manifested the fact that the bank has caught up well with its peers in the sector after a temporary blip. While the bank made no change in its asset mix keeping the proportion of retail assets at 19% (grew by 26% YoY), its mortgage loan portfolio (grew 27% YoY) comprised as much as 73% of the total retail advances portfolio. The bank has set a target of 25% YoY growth in advances and 20% YoY growth in deposits for the current fiscal. Low cost deposits (comprising 30% of total deposits) grew by 29% YoY, although the deposit book as a whole grew by 21% YoY.

The bank attributed the 40 basis points compression in net interest margins (NIMs at 2.5% in 1HFY07) to the rise in cost of deposits, absence of returns on CRR and lower yield on investments due to the shift to Treasury Bills. However, since the bank has stopped accepting bulk deposits and is concentrating on its CASA base besides repricing its incremental advances above 9%, it expects NIMs to recover from these levels (FY07E target 3%). Our NIM estimation for the current fiscal is 2.7%.

Growth at a faster clip…
(Rs m) 1HFY06 % of total 1HFY07 % of total Change
Advances 300,415   386,500   28.7%
Retail 56,657 18.9% 71,453 18.5% 26.1%
Corporate 243,758 81.1% 315,047 81.5% 29.2%
Deposits 493,622   597,814   21.1%
CASA 141,085 28.6% 182,000 30.4% 29.0%
Term deposits 352,537 71.4% 415,814 69.6% 17.9%
Credit deposit ratio 60.9%   64.7%    

Fees – Anchoring to MOU hopes: Fee income (grew by 29% YoY) comprised a marginal 8% of the bank’s total income in 1HFY07. The bank, however, hopes to leverage its collaboration with Corporation Bank and Indian Bank (that have a significant presence in the south) to propel its initiatives of offering cash management services, vending insurance product and other third party products The potential risk on the treasury side has also reduced, albeit marginally. The bank has 33% of its investment portfolio in the HTM (held to maturity) basket. Of the AFS portfolio (duration 3.7 years), 20% is T Bills (not to be marked to market) and the rest has a tolerance level (provisions for rise in 10 year GSec yield) upto 8.0% (10 year G Sec yield currently at 7.6%).

Rationalising costs: The bank seems to have successfully re-aligned the costs of the erstwhile GTB’s branches with itself, as is evident in the marginal decline in cost to income ratio. The bank expects the cost to income ratio to stabilise at 42% in the coming quarters.

Breakup of operating expenses
(Rs m) 1H06 % of total 1H07 % of total Change
Employee expenses 2,527 54.5% 2,644 54.5% 4.7%
Other operating expenses 2,112 45.5% 2,208 45.5% 4.5%
Total operating expenses 4,639   4,852   4.6%
Cost / Income 44%   42%    

GTB recoveries boost margins: OBC has lived up to its commitment of improving its asset quality and has pared its net NPAs further (0.5% in 2QFY07 from 0.8% in 2QFY06). This has been aided by recoveries to the tune of Rs 5 bn made in this quarter. Of this, while the recoveries from the GTB NPAs were to the tune of Rs 2 bn, the rest were out of OBC’s own delinquencies. The bank expects another recovery of Rs 800 m by the end of FY07. We have not factored these in our estimations. The GTB NPA legacy has reduced from 13.4 bn (when it was taken over) to Rs 9 bn currently.

What to expect?
At the current price of Rs 246, the stock is trading at 1.1 times our estimated FY08 adjusted book value. We maintain our positive view on the stock, as we believe that the bank’s capital adequacy (CAR 13.3%), ability to capitalise on its pan-India presence coupled with good quality appraisal will enable it harness higher asset growth and good asset quality. While the provision write backs on account of NPA recoveries may continue to aid margins, propensity to interest rate risks on the treasury books continues to be high. At the current valuations, however, the possible downsides to the stock remain limited.

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