X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
OBC: More restructuring in pipeline - Views on News from Equitymaster
StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

OBC: More restructuring in pipeline
Nov 9, 2012

Oriental Bank of Commerce (OBC) declared its results for the second quarter of financial year 2012-2013 (2QFY13). The bank has reported 16% YoY growth in interest income and 80% YoY growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Interest income grows 16% YoY in 2QFY13 and 17.6% YoY in 1HFY12 on the back of a 12.5% YoY growth in advances.
  • Net interest margins (NIM) stay steady at 2.8% in 1HFY13.
  • Net profits see an 80% YoY increase in 2QFY12, on account decreased provisioning on non-performing assets (NPA) and growth in net interest income (NII).
  • Net non-performing assets (NPA) increased marginally to 2.04% of advances in 1HFY13 from 1.9% in 1HFY12.
  • Capital adequacy ratio at 12.06% (as per Basel II) at the end of 2QFY13.

Standalone performance summary
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 38,011 44,146 16.1% 73,976 87,017 17.6%
Interest expense 28,116 32,575 15.9% 53,899 64,188 19.1%
Net Interest Income 9,895 11,571 16.9% 20,078 22,830 13.7%
Net interest margin (%)       2.8% 2.8%  
Other Income 2,774 4,068 46.6% 6,012 8,152 35.6%
Other Expense 5,087 6,427 26.3% 10,494 12,804 22.0%
Provisions and contingencies 4,853 4,599 -5.2% 7,996 7,920 -1.0%
Profit before tax 2,729 4,614 69.1% 7,600 10,258 35.0%
Tax 1,051 1,592 51.4% 2,375 3,322 39.8%
Profit after tax/ (loss) 1,677 3,022 80.2% 5,224 6,936 32.8%
Net profit margin (%) 4.4% 6.8%   7.1% 8.0%  
No. of shares (m)         291.8  
Book value per share (Rs)*         389.1  
P/BV (x)         0.8  
* (Book value as on 30th September 2012)

What has driven performance in 1HFY13?
  • OBC managed to grow its advances by 12.5%, which was lower than the average growth in the sector. It however saw healthy loan growth in the retail and agri space. The bank's net interest margins stayed steady at 2.8%. This was mainly on bulk deposits coming down, despite the reduction in the base rate. The management expects NIMs to be around 2.85% for FY13.

  • The bank plans to grow its loan book at around the sector average for FY13 (at around 16%). However since for the first half the book has only growth by 12.5% this may be a bit of a challenge. However since the second half performance is usually better, the management is confident that the performance will improve going forward.

    Loan growth comes in lower than sector average
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 1,056,110   1,188,440   12.5%
    Deposits 1,495,520   1,641,750   9.8%
    CASA 341,820 22.9% 396,210 24.1% 15.9%
    Tem deposits 1,153,700 77.1% 1,245,540 75.9% 8.0%
    Credit deposit ratio 70.6%   72.4%    

  • OBC saw a robust increase in other income, which grew by 47% YoY in 2QFY13; it grew by around 36% YoY in 1HFY13. The bank saw a marginal increase in its core fee income, however the recovery in its written off accounts helped propel the other income figure.

  • The bank has a 21.8% 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 (57.7% of the total power sector exposure). Out of these the heaviest exposure likes in states like Rajasthan, Haryana, Uttar Pradesh, Gujarat and Punjab. Distribution companies (discoms) account for 5.4% of the total advances. This is by far the worst performing segment of the power sector. State electricity boards have been bleeding losses and have even of late stopped making payments to leading power producer NTPC. They are facing problems on account of power theft, technical and commercial losses and delayed tariff revision. The government has come out with a bailout plan for these discoms involving the lenders and the various state governments; however the terms are still not fully finalized and may only be seen in the coming quarters. For OBC discoms currently contribute Rs 41.6 bn to restructured accounts, with Rajasthan (Rs 19.4 bn), UP (Rs 12.8 bn), and Haryana (Rs 9.3 bn). The Punjab discom is also set for restructuring next quarter.

  • The bank's net NPA stood at 2.04% of advances in 1HFY13 as against 1.9% in 1HFY12. In June, the net NPAs stood at 2.05% and 2.2% in March, thus asset quality has been seeing improved traction. Recovery was something that was earlier ignored by the bank staff, however the bank has now improved its efforts on the same. The bank's provisioning coverage ratio improved to 64.5% in 1HFY13, compared to 63.8% in 1HFY12. However the restructuring pipeline of Rs 25 bn over the next two quarters and the challenging macro environment may lead to increased slippages. Most of the bank's Gross NPAs (52%) are in the priority sector loan category which may be prone to further slippages if the economic situation doesn't improve.

  • Capital adequacy stood at 12.06% in 1HFY13, with Tier 1 capital at 9.7%. The bank had not gone for any capital infusion in FY12; however it may need an infusion sometime this year which may depress returns further.

What to expect?
At the current price of Rs 316, the stock is valued at 0.8 times its FY15 adjusted book value. OBC's performance in has been good this quarter on account of an improvement in asset quality since March 12. However major restructurings of Rs 25 bn are still in the offing. The bank has also been able to keep its NIMs steady despite lower yields. Easing of the RBI's monetary policy stance should help in efforts to maintain margins and the bank has also been reducing its dependence on bulk deposits and is focusing on CASA accretion. Incremental slippages are a cause of concern, even though the bank is confident of sustaining asset quality for the year by a focus on recovery. The bank has improved its asset quality over the quarter. Exposure to infra and power and the spike in restructured assets is worrying.

While the heavily discounted valuations of the bank do suggest that the stock could offer reasonable upsides over the next two to three years, the fact that there is very little comfort on the NPA and margin front do not make the stock very attractive. Hence, we would recommend investors to 'Sell' the stock as we highlighted in our September performance review.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

ORIENTAL BANK SHARE PRICE


Feb 22, 2018 (Close)

TRACK ORIENTAL BANK

  • Track your investment in ORIENTAL BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

ORIENTAL BANK 5-YR ANALYSIS

COMPARE ORIENTAL BANK WITH

MARKET STATS