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Oriental Bank: Getting ambitious

Dec 14, 2000

After the NYSE listing of ICICI Bank last year, Oriental Bank of Commerce is looking at an overseas listing. It is the ninth largest public sector bank in India with a network of 900 branches having a strong presence in the North Indian states.During the past three years, Oriental Bank (OBC) has reported excellent growth in revenues (a CAGR of 30%). However, its profit grew at a slower rate (a CAGR of 15%) due to pressure on operating margins and increase in provisions and contingencies. The bank with an asset base of over Rs 300 bn and deposits of Rs 270 bn is considered as one of the most profitable public sector bank in India.

During the first half of the current year the bank reported a disappointing growth in the profits. The lower growth in the profits was mainly on account of more than proportionate increase in interest expenditure. OBC expects to achieve an earnings growth of a marginal 8% during the year.

Financial Snapshot
(Rs m)1HFY001HFY01Change
Interest Income 11,789 13,808 17.1%
Total Income 12,887 14,895 15.6%
Operating Profit 4,681 4,959 5.9%
Other Expenses 2,055 2,278 10.8%
Profits before tax 2,626 2,681 2.1%
Provisions & Contingencies 1,086 1,127 3.8%
Profits after tax 1,540 1,554 0.9%
Equity shares (m) 193 193  
Operating profit margins30.4%28.0% 
NPM11.9%10.4% 
EPS (Rs)16.016.1 

The bank has a high exposure (70% to 80%) to relatively smaller sized companies. Loans to this segment are more susceptible to becoming non-performing loans if the economic recovery is delayed. The percentage of large corporate clients accounts for 35% of OBCs clients. However, it is much less than what other state owned banks have. The banks focus to increase business exposure with large corporates will enable it to increase its fee-based income in future.

Comparative Analysis
ParticularsOBCSBIBOICorporation
Bank
CAR12.7%11.5%10.6%12.8%
NPAs as a % of net advances3.8%6.4%8.6%1.9%
Interest spread as a % of total assets2.9%2.7%2.3%2.7%
ROA1.1%0.8%0.3%1.5%
Business/employee (Rs m) 21.8 11.1 13.6 20.8
Profits/employee (Rs m) 0.2 0.1 0.0 0.2

At the current market price of Rs 37 OBC is trading at a P/E multiple of 2.4 times its FY01 projected earnings and a Price/Book value ratio of 0.4 times. The current valuations of the bank are relatively lower than other public sector banks (PSBs). Nevertheless, the bank compares well in terms of productivity ratios and other parameters with the other PSBs. It has one of the highest capital adequacy ratios (CAR) and interest spread among its peers. The reasons for lower valuations of the bank could be attributed to slower earnings growth and increasing non-performing assets. OBC is also lagging behind in terms of adoption of latest technology.

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