Advances growth continue to be sluggish. OBC's growth is in line with that of the industry. In terms of average advances, which include the impact of short-term advances, OBC's growth may even be better than that of the industry. This is reflected in the growth of net interest income of the bank, which is above average.

If there is an aspect of OBC's performance that is not encouraging, it is the sluggish growth in deposits.

However, the fact that demand deposits are continuing to grow mitigates the impact to a large extent since that will reduce the cost of deposits and boost profitability.

Growth to continue

In the next six months, growth in profits is expected to continue on account of these factors:

The net interest margins have expanded compared to end-March 2003. With cost of deposits continuing to decline and the proportion of low-cost deposits rising, growth in net interest income is likely even if advances growth is sluggish.

The growth in advances due to rising credit demand will only add to it. In addition, with net NPAs already at zero level, recoveries of bad loans will add to the bottomline.

In addition, yield on government securities have continued to decline and the scope for booking treasury profits is high. This should ensure that OBC maintains robust growth in profits in the second half of the fiscal.

Demanding valuations

The valuations are, however, quite demanding. The stock price is now trading at twice its book value. The dividend yield of the stock is also low at less than 2 per cent.

These valuations are on the high side if we consider that profit growth beyond March 2004 could be sluggish. The sluggish deposit growth reported by OBC for some time now is a cause for concern in this regard.

The story of expanding net interest margins is unlikely to continue beyond March 2004. This could considerably lower profit growth if deposit growth remains slack. Importantly, the valuation of stocks of other public sector banks are less demanding and these banks are also likely to catch up with OBC in terms of profitability parameters sooner or later.

As such, booking profits now appears prudent. However, the recommendation to book profits does not take into account the possible return of capital to the government. That issue is mired in a lot of uncertainty.

The recommendation will change if the Government accepts return of capital at par.

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