Oriental Bank of Commerce – 2QFY2011 Result Update- Angel Broking

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 Oriental Bank of Commerce – 2QFY2011 Result Update

Angel Broking maintains a Neutral on Oriental Bank of Commerce.

Oriental Bank of Commerce (OBC) posted net profit growth of 46.8% yoy and

9.5% qoq to `398cr, in line with our estimates of `402cr. Robust operating

performance along with a stable asset quality was the key highlight of the result.

Strong core performance: During 2QFY2011, business growth stood at

15.6% yoy, driven by advances growth of 14.2% yoy and deposits growth of

16.6% yoy. While on a sequential basis, advances posted a marginal increase of

0.7% and deposits grew by 2.2%. Reported NIM in 2QFY2011 declined

marginally by 4bp to 3.3% due to a 25bp qoq increase in cost of deposits,

partially offset by higher yield on advances. Non-interest income (excluding

treasury) posted moderate growth of 8.8% yoy to `214cr, led by CEB (up 14.6%

yoy) and forex (up 70.0% yoy). Operating expenses grew by 7.9% qoq and 34.4%

yoy to `485cr, driven by 40.5% yoy growth in employee expenses and 27.0% yoy

rise in other operating expenses. The bank’s CAR stood at 12.8%, with tier-I

capital of 9.4% (forming 73.4% of the total CAR). In 2QFY2011, OBC’s gross

NPAs fell by 2.5% qoq and net NPAs declined by 1.5% qoq. Slippages for the

quarter were high at ~`320cr (1.5%) compared to `114cr (0.5%) in 1QFY2011.

Slippages from restructured accounts were also high (in line with management’s

guidance) at ~`97cr, taking cumulative slippages from restructured book to

`470cr (~8.9% of restructured advances). NPA provision coverage ratio

(including technical write-offs) improved to ~81% from 80.4% in 1QFY2011.

Outlook and valuation: In light of the bank’s improved near-term NIM and asset

quality, we have upgraded our FY2012E target P/ABV multiple for OBC to 1.3x.

However, at the CMP, the stock is trading at 1.4x FY2012E ABV. Moreover, NIMs

are likely to witness pressure in the coming quarters as deposit rates increase.

Hence, keeping in mind OBC’s relatively lower sustainable RoAs because of its

weak deposit mix (low CASA of 25%) and low fee income, we maintain Neutral

on the stock.

Investment arguments

Low operating costs owing to urban-centric business

OBC’s strong balance sheet growth was funded largely by bulk deposits, which

resulted in substantial compression in NIM (70bp) during FY2007–09. However,

during FY2010, NIM improved by 40bp to 2.4%, largely driven by deposit

repricing benefit. Structurally, the bank’s low margins are compensated by its low

opex/average assets. In fact, at FY2010 opex level of 1.3% of average assets, the

bank’s cost efficiency was amongst the highest compared to its peers, partly

because of its urban-centric branch network and corporate-focused business.

Good asset quality attributable to large corporate credit book

Corporate credit comprised a substantial 45% of the bank’s credit book at the end

of FY2010. Consequently, asset quality was relatively under control, with slippages

at 1.6% in FY2010. Thus, low credit cost coupled with low operating costs, to an

extent, compensate for the bank’s structurally low NIM.

Modest CASA franchise and fee income

OBC is relatively more exposed to NIM pressure in a rising interest rate

environment on account of bulk deposits comprising a substantial 23% of deposits

at the end of 1QFY2011 and CASA ratio being one of the lowest amongst peers

(25.4%). The bank’s fee income, at 0.6% of average assets in FY2010, was also

one of the lowest amongst PSU banks.

Outlook and valuation

In light of the bank’s improved near-term NIM and asset quality, we have

upgraded our FY2012E target P/ABV multiple for OBC to 1.3x. However, at the

CMP, the stock is trading at 1.4x FY2012E ABV. Moreover, NIMs are likely to

witness pressure in the coming quarters as deposit rates increase. Hence,

considering OBC’s relatively lower sustainable RoAs because of its weak deposit

mix (low CASA of 25%) and low fee income, we maintain a Neutral rating on

the stock.