Oriental Bank of Commerce (OBC)

 

 

OBC is back on fast track after absorbing the losses of Global Trust Bank. However, the stock has gone up already. Investors should keep a check on its price and accumulate it on dips

 

HAVING absorbed all the losses of Global Trust Bank (GTB) last year, Oriental Bank of Commerce is back on the growth trajectory. Substantial improvements in operations make it a worthy candidate for investment. Since its stock price has already gone up, investors may accumulate it on dips.

BUSINESS:

Oriental Bank of Commerce (OBC) was one of the premier public sector banks. This becomes evident by its performance in the first half of the current decade. The bank's profit more than trebled in a span of just three years from FY01 to FY04.

   However, the dream run didn't last long. The bank had to merge with GTB in FY05. GTB was an ailing bank with huge accumulated losses. So a merger with an ailing bank meant that OBC had to absorb those huge losses. For the next few years, the bank did not see any growth at all. In fact, its profit fell from Rs 726 crore in FY05 to Rs 353 crore in FY08. Its stock traded at a discount to its book value for the most part of the years it was trying to absorb GTB losses. When a stock trades at less than its book value, it means that investors are not actually sure of what exactly its assets are worth. So it was not only the bank's financials but also its reputation among investors, which took a beating due to its merger with GTB.

   OBC finally managed to absorb all GTB's losses by the end of FY09. Since then, the bank is back on the track. For instance, its loan book grew by 22% in FY10 compared to 17% growth in the industry credit. The bank grew its deposits by roughly the same rate. Its profit too has started growing, as it jumped by 27% in FY10.

   Meanwhile, the bank improved its net interest margin (NIM) to 3.3% in the March 2010 quarter from 1.9% a year ago. This is one of the sharpest improvements seen in NIM in the banking industry. NIM is a measure of difference between lending rate and borrowing rate. Given that 3% NIM is considered to be benchmark level in Indian banks, OBC has already reached this milestone. The bank has maintained a strict check on its asset quality. Net non-performing assets (NPA) formed less than 1% of net advances in FY10. This is amongst the best asset quality in the sector. Its provision coverage stood at 77% in FY10 as against minimum 70% advised by Reserve Bank of India (RBI). The bank is rapidly building strength to strength every quarter. It's growing at higher than industry rate. Its asset quality is one of the best. It has given thrust on expanding its presence. The bank opened 107 more branches in FY10. This will help it in improving the share of low-cost current account and savings account (CASA) deposit. That, in turn, will help it to further strengthen its NIM.

VALUATIONS:

The stock has more than trebled since the current rally started on March 9, 2009. In the same timeframe, the Bank Nifty index has shot up by 278%. Clearly, OBC's stock has outperformed its benchmark. Meanwhile, Nifty (a much broader index) has not even doubled in the current rally. Compared to Nifty, OBC's stock performance looks even more stupendous.

   The stock is now trading at a price of Rs 340, which is much higher compared to its book value of Rs 292. The bank has clearly shed the weight of its not-so-pleasant past, when it used to trade at a discount to its book value. The important question is what should investors do with the stock? We think that at current levels, its stock price has factored in the improvements brought in by the management. From hereon, it can give return if it continues to outperform the industry. But since the stock price has already risen, the gains will be limited. The investors should keep a check on its price and accumulate it on dips. More importantly, the perception of OBC should change from that of a bank struggling to absorb losses to a bank, which is constantly improving and has the ability to outgrow the industry.