Oriental Bank is staying slim

INVESTMENT COUNTER / PENNY WISE

Oriental Bank of Commerce (OBC) is an odd one among public sector banks in the country - it has zero non-performing assets (NPAs)!

Analysts are impressed by the fact that the bank maintains zero NPA levels even after complying with the 90-day NPA-provisioning norm. The scrip amply reflects the bank's stellar status - it gained 356.2 per cent over the past one year to current levels of Rs 347. But are zero NPAs enough reason to be bullish on the stock?

Analysts swear it is not just that. There are several other reasons why the stock price could rise further.

OBC happens to be one of a few banks that operate at low cost-to-income ratios. The bank's employee strength - 13507 as on March 31, 2003 - is lower than other banks that are smaller in size.

PRUNING FLAB
OBC has the lowest cost-to-in come ratio among its peers
(for Dec 03  quarter, in %)
OBC	0.63
Corporation Bank	0.65
HDFC Bank	0.66
Bank of Baroda	0.67
Dena Bank	0.68
Canara Bank	0.69
Karnataka Bank	0.70
Indian Overseas Bank	0.70
Bank of India	0.71
Allahabad Bank	0.71
Andhra Bank	0.72
IDBI Bank	0.74
UCO Bank	0.76
ICICI Bank	0.78
UTI Bank	0.92

Also, the loan portfolio of the bank seems well-balanced with 18 per cent loans in the retail sector and the rest in priority and wholesale segments. Analysts believe that a renewed thrust on retail lending will provide an additional boost to the bank.

The bank's financials seem to be in good shape. Margins look especially healthy - the bank has been consistently improving its margins by limiting cost of operations.

In the quarter ended December 31, 2003, OBC's net interest margins improved to 45.6 per cent from 36.7 per cent in the corresponding period last year. For the year ended March 31, 2003, net interest margins rose to 36.57 per cent from 31.97 per cent in the year-ago period (interest income remained stagnant at Rs 2447.26 crore). 

Financials
(Rs crore)	Q304	Q303	% Chg
Interest earned	832.69	808.00	3.06
Interest expended	452.96	511.50	-11.44
Net interest margin (%)	45.60	36.70	-
Operating profit	369.09	337.85	9.25
OPM (%)	37.34	33.81	-
Net profit	152.22	121.57	25.21
NPM (%)	15.40	12.17	-
EPS (Rs)	7.91	6.31	-
Trailing 12-month EPS (Rs)	-	29.97	-

"High margins are on the back of low interest expenses," says an analyst. Interest expenses declined 11.4 per cent to Rs 452.96 crore in the third quarter on back of lower interest rates. Operating margins recorded a jump from 33.81 per cent to 37.34 per cent in the same period, signifying better efficiency in cost management.

For the year, the metric stood at 30.32 per cent, up from 26.1 per cent in the previous period. The bank's net profit increased 25.2 per cent to Rs 152.22 crore in the third quarter (a rise of 42.5 per cent to Rs 456.95 crore for the year).

Again, though incremental additions to gross NPAs are increasing, aggressive provisioning (the bank provides 112 per cent as provisions) helped the bank reduce NPAs to zero per cent.

The bank already seems geared for the Basel II norms which require banks to maintain a higher capital adequacy ratio (CAR) of 12.5 per cent. OBC had a CAR of 14.59 per cent as on December 31, 2003, against a minimum CAR of 9 per cent stipulated by the RBI.

But then keeping its distinguished position as a zero-NPA bank will be a big challenge for OBC. The moot question is: Can OBC afford to provide for its NPAs as aggressively in future, too? Analysts say the management is competent enough to keep NPAs under check, even if it is not zero.

"Control over incremental bad loans is the biggest challenge for OBC. But assuming that the management will remain pro-active in terms of recovery, it is not really cause for worry" says an analyst.

Some analysts point to the decline in the proportion of fee-income in total income as a cause for concern. "With increase in competition, the bank's spreads may shrink if fee-based income does not increase," says an analyst with a domestic brokerage.

In the past four years (1999-2003) the bank's fee-based income as proportion of total income has declined from 4.8 per cent to 3.9 per cent.

Analysts expect a return of equity (RoE) of 25 per cent for FY04 and a growth of 20 per cent thereafter. But that is not what makes them bullish. The real clincher, analysts say (and are perhaps betting on), will be a merger.

A merger will enhance the bank's future prospects considerably, they say. OBC has its presence mainly in the northern, north-eastern and western regions; so a merger with a bank with a significant presence in the south will be a boon.

Valuations may look stretched at the current levels but being a growth story OBC can well be considered a good long-term bet.

Foreign institutional investors (FIIs) have hiked their stake in the bank from around 12 per cent in December 2003 to 18 per cent currently (maximum FII investment allowed is 20 per cent), possibly as a reaction to the recent surge in the domestic economy. The bank's stock price is already trading more than twice its book value.

"Internationally, good banks quote nearly two times their book value and OBC has already reached that stage," says an analyst tracking the sector.

But there is still steam left as the bank expects a 20 per cent growth in the next two years. OBC's strategy to maintain zero per cent NPAs should also give the stock more ground.

Currently, the stock trades at 11.19 times its FY04 earnings for an EPS of Rs 31 and 9.38 times its FY05 earnings for an EPS of Rs 37.