OBC: NIMs close to peak; short term deposit profile to hit costs: Edelweiss

Visit http://indiaer.blogspot.com/ for complete details �� ��


ORIENTAL BANK OF COMMERCE
NIMs close to peak; short term deposit profile to hit costs


Oriental Bank of Commerce (OBC) reported Q2FY11 NII of INR 10.7 bn (up 2%
Q-o-Q, 92% Y-o-Y), in line with our estimate, supported by stable NIMs (3.3%) and
1.2% Q-o-Q growth in loan book. PAT came in at INR 3.97 bn, ahead of our estimate
(INR 3.69 bn). Other income (ex-treasury) grew at 7.9% Q-o-Q and 8.8% Y-o-Y to
INR 2.1 bn. After declining to INR 1.2 bn (0.5% of previous quarter advances,
annualized) in Q1FY11 (1.6% in FY10), incremental slippages rose once again to INR
3.2 bn (1.5%), which is a key concern. Headline asset quality improved with gross
and net NPLs declining 2.5% and 1.5% Q-o-Q to 1.65% and 0.7%, respectively.
Provision coverage (with write offs) stood at 81.36%. The bank has provided INR 500
mn towards gratuity during the quarter.


􀂃 NIMs showing signs of fatigue
OBC’s reported NIMs remained stable sequentially at 3.3% as 25bps increase in
yield on advances and 15bps increase in yield on investments counter balanced
25bps increase in cost of deposits. Management expects NIMs to remain at 3%+
level in the future as well. With more than 70% of deposits with maturity of less
than a year, OBC benefited from strong deposit re-pricing with cost of funds
declining 176bps in FY10. However, with the expected hardening of interest
rates, we believe the bank is vulnerable to margin correction. We are building in
2.9% NIMs (cal) over FY11-12.
􀂃 Incremental slippages jump to 1.5%
After declining to INR 1.2 bn (0.5%) in Q1FY11 (1.6% in FY10), incremental
slippages rose again to INR 3.2 bn (1.5%) in Q2FY11, which is a key concern.
Loans under agri-debt waiver accounted for INR 400 mn of slippages. Headline
asset quality improved as gross NPLs declined 2.5% sequentially to INR 14.5 bn
(1.67%), primarily due to aggressive write offs of INR 2.4 bn during the quarter.
Cash recoveries stood at INR 1.2 bn. On account of higher provisioning (LLP at
102bps, FY10: 82bps), net NPLs declined 1.5% Q-o-Q to INR 6 bn (0.7%).
Provision coverage (including write offs) stood at 81.36%. Restructured book
remained stable at INR 53 bn (6% of advances); outstanding slippages in
restructured book are at 9%.
􀂃 Outlook and valuations: NIM sustainability key monitorable; maintain ‘BUY’
OBC posted robust NII and core fees income growth during the quarter. Though
NIMs remained stable, we believe they have peaked at the current level. Rise in
delinquencies is a concern. The stock is trading at 1.3x FY12E book and 7.1x
FY12E earnings. We continue to like the improvement in metrics, though
sustainability of NIMs will be a key monitorable. We maintain ‘BUY’
recommendation and rate it ‘Sector Underperformer’.