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OBC: Provisions eat into profits - Views on News from Equitymaster
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OBC: Provisions eat into profits
Nov 10, 2008

Performance summary
  • Interest income grows 29% YoY in 1HFY09 on the back of 30% YoY growth in advances.

  • Net interest margins improve by 0.4% due to higher yield on assets.

  • Bottomline grows by 46% YoY in 1HFY09 due to the absence of GTB write-offs. Excluding this extraordinary item, the bottomline has grown by a marginal 5% YoY.

  • Capital adequacy ratio at 12.0% (13.9% at the end of 1HFY08).

  • Net NPAs increase to 0.9% from 0.6% in 1HFY08.



Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest earned 16,456 21,518 30.8% 31,798 41,056 29.1%
Interest expense 12,462 16,302 30.8% 23,372 31,372 34.2%
Net Interest Income 3,994 5,216 30.6% 8,426 9,684 14.9%
Net interest margin (%) 2.1% 2.5%
Other Income 1,425 2,192 53.8% 2,887 4,147 43.6%
Other Expense 2,698 3,241 20.1% 5,340 6,226 16.6%
Provisions and contingencies (191) 1,976 315 2,625 733.3%
Profit before tax 2,912 2,191 -24.8% 5,658 4,980 -12.0%
Tax 551 (177) 1,292 406 -68.6%
Effective tax rate 18.9% -8.1% 22.8% 8.2%
Profit after tax/ (loss) 2,361 2,368 0.3% 4,366 4,574 4.8%
Extraordinary item** 612 - 1,225 -
Net profit 1,749 2,368 35.4% 3,141 4,574 45.6%
Net profit margin (%) 10.6% 11.0% 9.9% 11.1%
No. of shares (m) 250.5
Book value per share (Rs)* 230.6
P/BV (x) 0.7
* (Book value as on 31st March 2008)
** write off of GTB losses

What has driven performance in 2QFY09?
  • Despite being short of capital, OBC grew its advance book as well as deposits in excess of our overall estimates for FY09. While restricting its growth in retail credit to 16% YoY, OBC has adopted a more aggressive strategy for growing its corporate and SME portfolios. Having said that the bank seems to have reduced its exposure to high cost bulk deposits to fund the advances, which along with higher yields helped its net interest margins (NIMs). The bank is targeting low cost deposits to comprise 35% of deposits in FY09.

    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 468,647 611,210 30.4%
    Retail 79,201 16.9% 91,682 15.0% 15.8%
    Corporate 389,446 83.1% 519,529 85.0% 33.4%
    Deposits 691,750 873,680 26.3%
    Credit / Deposit 68% 70%

  • OBC clocked a very appreciable growth in other income this quarter despite having a relatively higher proportion of investments in the mark to market category. The same can be attributed to higher fee income generation as the bank has been able 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 products and other third party products.

  • OBC has successfully re-aligned the costs of the erstwhile GTB’s branches with itself, which led to the marginal decline in cost to income ratio. The cost to income ratio has fallen to 45% in 1HFY09 from 47% in 1HFY08. Nevertheless, the high provisioning for farm loan waiver, AS-15 provisions and mark to market losses on investments have taken a toll on the bank’s profitability.

  • The bank’s net NPAs stood at 0.9% in 1HFY09 against 0.6% in 1HFY08 indicating propensity of slippage going forward as well if the bank is not able to provide for the same.

  • The bank is targeting a business mix of Rs 2,000 bn (Rs 1,485 bn in 1HFY09) and branch network of over 1,500 branches by FY10.

What to expect?
At the current price of Rs 153, the stock is valued at 0.6 times our estimated FY11 adjusted book value. OBC’s performance in 1HFY09 has been broadly in line with our estimates. However, the bank’s low capital adequacy, inability to capitalise on its pan-India presence coupled with poor efforts on curtailing NPAs may stop it from harnessing higher asset growth and sustained profitability. Having said that, efforts at improving NIMs, generate fee income and leverage on its franchise may, however, bring better times for the bank going forward.

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