OBC: Met management; Business growth remains strong; NIMs to remain at ~3%; Buy
We interacted with the management of OBC (OBC IN, Mkt Cap US$2.5b, CMP Rs459, Buy) for insights about the bank’s performance. Management remains confident of achieving 22-23% business growth, RoA of 1% and RoE of 20-21%. Key highlights:
- Loan growth remains strong; confident of achieving 22%+ business growth in FY11. Retail and SME will be key loan growth drivers.
- Remains confident of maintaining margins at 3%+ despite sharp rise in interest rates and higher proportion of liabilities getting repriced in one year.
- No negative surprise expected on asset quality and slippages expected to remain within manageable levels.
- RoA to improve to 1% (0.9% in FY10) and RoE to 20-21% from ~17% in FY10. We model in RoA of ~1% and RoE of ~19% in FY11-12.
Loan growth to remain strong
- In absolute terms, while systemic loan book has remained largely flat over Jun-10, OBC is witnessing strong traction despite Rs10-12b of repayments of loans which were under base rate. Bank expects 20%+ loan growth in 1HFY11 driven by SME and retail segment.
- Bank remains confident of achieving 22% loan growth and 23% deposits growth in FY11, expecting strong pick-up in loan demand post monsoon. Pick-up in capex activities and higher demand for busy season working capital would result in better loan growth.
- On the liability side, CASA remains a key focus area. The bank expects to improve CASA ratio by 100bp every year reaching ~28% by end of FY11, which in our view is an ambitious target.
- Overall, we model in 21% loan growth, 22% deposits growth and 24% CASA ratio in our estimates.
Valuation and view
- OBC has done well over the last 4-5 quarters in terms of improving its operating parameters led by improving margins (due to comfortable liquidity situation in the system) and strong fee income growth.
- The management focus remains to grow in line with industry and continue to strengthen its liability franchise. It has utilized its strong operating profits to build cushion against any negative shock.
- We expect the bank to report PAT CAGR of 25% over FY10-12. EPS for FY11 is expected to be Rs58 and for FY12 Rs71. BV will be Rs338 in FY11 and Rs394 in FY12. ABV will be Rs313 in FY11 and Rs366 in FY12. RoAs would improve to ~1% and ROEs would be ~19% in FY11-12.
- Maintain Buy with target price of Rs510 (1.3x PBV FY12).
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