Stock Review: ORIENTAL Bank of Commerce (OBC)

A high NII growth and improved loan book size may help Oriental Bank of Commerce grow its bottomline at a high rate.Investors with a medium- to long-term perspective can consider this stock

 

   ORIENTAL Bank of Commerce (OBC) has become one of the leading banks in the public space with a market capitalisation of around 11,400 crore. The bank has reported robust performance for the past three quarters on the back of high margins and growth from its core operating income. It was nationalised in 1980 along with other banks and was the first among its peers to come out with an initial public offering in 1994.

BUSINESS:

OBC has been primarily concentrated in the northern part of India. However, the bank is increasing its reach in other parts as well. It had a network of 1,508 branches in March 2010 and plans to add another 175 branches by the end of this fiscal. The bank acquired Bari Doab Bank and Punjab Cooperative Bank in 1997. It also merged Global Trust Bank with itself in 2004.

FINANCIALS:

OBC has reported high net profit growth for the past three quarters. Its bottom line has grown at an average 54.4% every quarter on a yearly basis. This was mainly driven by a high growth in the bank's net interest income (NII) — the difference between interest earned and expended by the bank. OBC has almost doubled its NII every quarter for the past three quarters compared to the year-ago period. The bank has managed to keep its net interest margin (NIM) at around 3.3% for the past three quarters. NIMs are a measure of the spread between the bank's borrowing and lending costs. OBC's share of low-cost deposits at 25% is much lower compared to its peers but this did not impact its margins.

   While the bank's performance was commendable, there could be some pressure on the NIMs going forward. This is because the bank's assets have an average maturity of 2.5 years and the liabilities mature every year on an average. This means that the liabilities will get re-priced faster than the assets. This might create temporary pressures in a rising interest rate scenario. The bank has an excellent record when it comes to recovery. This was also one of the reasons Global Trust Bank was merged with itself in 2004. While bad loans peaked with net nonperforming assets forming 1.3% of net advances in FY 2005, the bank managed to bring it down to 0.5% in just a year's time. While NPAs increased marginally post FY07, it has still been under 1%. There could be a possibility that the bank might have some negative surprises on the asset quality front.

   This is because all banks have to move to system-based NPA recognition by March 2011. In the case of OBC, none of the NPAs are recognised through the system as of now. However, the negative surprise, if any, might be limited as the bank's provision coverage ratio is more than adequate.

   The bank is yet to show its capability in growing loan book at a fast pace. Compared to its peers, such as Allahabad Bank, which grew its loan book by 37%, OBC posted 14.3% y-o-y advances growth in the September quarter. This was because the bank had been going slow on extending short-term loans. Going forward, the management indicated that it plans to touch 20% loan book growth by the end of this fiscal.

VALUATION:

At a price-to-book value (P/BV) of 1.5, the stock is trading much lower compared to its historical high valuations. Its peers such as Allahabad Bank are trading at P/BV of 1.7. This shows that the stock is relatively cheap. Moreover, the bank's dividend yield at 2.8% as on March 2010 is higher compared to some its peers.

   The bank ranks higher than most banks in terms of its asset utilisation. Its return on average assets is 1.1% vis-à-vis 1% averaged by Indian banks. OBC has posted a high NII growth coupled with a higher RoA in the quarter to September. This combined with a high loan book growth will allow the bank to grow its bottom line at a high rate going forward. Investors with a medium to long-term perspective can consider this stock.