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Oriental Bank of Commerce (OBC) reported Q3FY11 NII of INR 10.3 bn (up 18% Y-o-
Y), below our estimate (INR 10.5 bn). In line with expectations, NIMs contracted
20bps Q-o-Q, to 3.1%, reflecting the short-term nature of liability profile, exposing
margins to higher downside risk in a rising interest rate environment. Asset quality
concerns surfaced, with slippages touching a high of 2.2% during the quarter. On
account of lower provisioning (provision cover down 388bps, to 77%), credit costs
came in (relatively) low at 89bps (Q2: 95bps, Q1: 129bps). During the quarter, loan
book grew 4% Q-o-Q and 15.6% Y-o-Y, to INR 908 bn. Staff expenses declined 4%
Q-o-Q, as the bank provided lower towards the retirement costs during the quarter;
it provided INR 500 mn towards gratuity during the quarter.
Incremental slippages jump to 2.2%
After declining to INR 1.2 bn (0.5%) in Q1FY11, the bank has witnessed sharp
increase in slippages over the past two quarters, touching INR 4.7 bn (2.2%) in
Q3FY11 (Q2FY11: 1.5%), which is a key concern. Management indicated that a
significant chunk of these slippages are technical in nature; it expects strong
upgrades/recoveries over the next two months. Cash recoveries (INR 1.6 bn)
picked up, while upgrades (INR 203 mn) maintained the trend set over the past
two quarters. Headline asset quality numbers deteriorated, with gross NPLs
rising 21% Q-o-Q to INR 17.6 bn (1.94%) and net NPLs rising 35% Q-o-Q to INR
8.16 bn (0.91%); provision coverage (including write offs) declined 388bps Q-o-
Q to 77%. Credit costs remained (relatively) low at 89bps (Q2: 95bps, Q1:
129bps) on account of lower loan loss provisioning. Restructured book
contracted by INR 1.2 bn Q-o-Q, to INR 51.3 bn (5.7% of advances).
Outlook and valuations: NIMs sustainability key monitorable; maintain
‘BUY’
In line with our expectations, margins contracted during the quarter, reflecting
the (short-term) nature of liability profile, exposing margins to higher downside
risk in a rising interest rate environment. Slippages touched a high of 2.2%
during the quarter; we believe, they have peaked at the current level. Though
we expect pressure on margins to continue, declining credit costs may partially
support earnings; given the provisions that bank has created for second pension
option, there are likely to be limited surprises on account of higher-thanexpected
retirement costs. Despite the near term headwinds, stock’s valuation at
0.8x FY12 book is attractive given the reasonable ROEs of 18-19%. We maintain
‘BUY’ recommendation on the stock and rate it ‘Sector Underperformer’ on
relative returns basis.
Margin headwinds
OBC witnessed 20bps contraction in NIMs, to 3.1%, on account of sharp increase in cost
of deposits (up 38bps Q-o-Q), while yield on advances (at 10.3%), CASA (25.2%) and
CD ratio (70%) remained stable sequentially. Management expects NIMs to remain at
3%+ 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 hardening of interest rates, we believe the bank is vulnerable to
further margin correction. We are building 2.8% NIMs (cal.) over FY11-12.
Modest fee income growth
The bank’s other income (ex-treasury) grew at 7% Y-o-Y (down 6% Q-o-Q), supported
by strong traction in exchange profits at INR 335 mn (up 84% Y-o-Y, 23% Q-o-Q).
Income from commission, exchange and brokerage grew only 3.7% Y-o-Y (down 9% Qo-
Q). Income from recoveries, at INR 212 mn, maintained the sequential trend. Treasury
profits stood at INR 314 mn.
Business momentum subdued
Post introduction of base rate in Q2FY11, loan book growth remained subdued for the
bank. During the quarter, loan book grew 4% Q-o-Q, 15.6% Y-o-Y to INR 908 bn.
Traction remained strong in SME (up 14.6% Q-o-Q, 63.4% Y-o-Y). Management guided
for 18% advances growth for FY11. In line with the industry trend, deposit growth (3%
Q-o-Q, 17% Y-o-Y) lagged advances growth. CD ratio stood at 70% (leaving limited
scope for further expansion). CASA ratio contracted marginally by 20bps to 25.2%.
Current account balances remained flat during the quarter, while savings account
balances grew 3% Q-o-Q.
Other highlights:
• Staff expenses declined 4.4% Q-o-Q as the bank made lower provisions towards
retirement costs during the quarter. However, the bank continued to provide (@ INR
500 mn per quarter) towards gratuity.
• Cost-income ratio stood at 39%.
• OBC currently holds INR 3.56 bn ad-hoc provisions towards second pension option.
Company Description
Oriental Bank of Commerce is a mid-sized PSU bank, with the 11th largest branch
network and 10th largest asset book among Indian banks. Historically, the bank had a
strong presence in northern and western India and the merger of Global Trust Bank
(then roughly 15% of the size of OBC) provided it the southern presence. The bank has
over 1,300 branches across India, all of which are under core banking solution.
Government ownership in the bank is at minimum 51%, leaving no room for further
equity dilution. FII holding in the bank is at maximum allowed 20%.
Investment Theme
Historically, high operating efficiency had enabled strong ROAs for OBC. It is amongst
the most efficient Indian banks, with operating expense to assets ratio at 1.4%. Asset
quality has shown remarkable improvement as recoveries remain strong for FY06-08. We
expect Bank to deliver 1%+ ROA/~19% ROE over FY11-12
Key Risks
Mid size PSU banks have high risk of NPL, considering their weak risk management
system. Exposed bond book makes it vulnerable to rising interest rates.
Government holding at minimum permissible level of 51%
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce (OBC) reported Q3FY11 NII of INR 10.3 bn (up 18% Y-o-
Y), below our estimate (INR 10.5 bn). In line with expectations, NIMs contracted
20bps Q-o-Q, to 3.1%, reflecting the short-term nature of liability profile, exposing
margins to higher downside risk in a rising interest rate environment. Asset quality
concerns surfaced, with slippages touching a high of 2.2% during the quarter. On
account of lower provisioning (provision cover down 388bps, to 77%), credit costs
came in (relatively) low at 89bps (Q2: 95bps, Q1: 129bps). During the quarter, loan
book grew 4% Q-o-Q and 15.6% Y-o-Y, to INR 908 bn. Staff expenses declined 4%
Q-o-Q, as the bank provided lower towards the retirement costs during the quarter;
it provided INR 500 mn towards gratuity during the quarter.
Incremental slippages jump to 2.2%
After declining to INR 1.2 bn (0.5%) in Q1FY11, the bank has witnessed sharp
increase in slippages over the past two quarters, touching INR 4.7 bn (2.2%) in
Q3FY11 (Q2FY11: 1.5%), which is a key concern. Management indicated that a
significant chunk of these slippages are technical in nature; it expects strong
upgrades/recoveries over the next two months. Cash recoveries (INR 1.6 bn)
picked up, while upgrades (INR 203 mn) maintained the trend set over the past
two quarters. Headline asset quality numbers deteriorated, with gross NPLs
rising 21% Q-o-Q to INR 17.6 bn (1.94%) and net NPLs rising 35% Q-o-Q to INR
8.16 bn (0.91%); provision coverage (including write offs) declined 388bps Q-o-
Q to 77%. Credit costs remained (relatively) low at 89bps (Q2: 95bps, Q1:
129bps) on account of lower loan loss provisioning. Restructured book
contracted by INR 1.2 bn Q-o-Q, to INR 51.3 bn (5.7% of advances).
Outlook and valuations: NIMs sustainability key monitorable; maintain
‘BUY’
In line with our expectations, margins contracted during the quarter, reflecting
the (short-term) nature of liability profile, exposing margins to higher downside
risk in a rising interest rate environment. Slippages touched a high of 2.2%
during the quarter; we believe, they have peaked at the current level. Though
we expect pressure on margins to continue, declining credit costs may partially
support earnings; given the provisions that bank has created for second pension
option, there are likely to be limited surprises on account of higher-thanexpected
retirement costs. Despite the near term headwinds, stock’s valuation at
0.8x FY12 book is attractive given the reasonable ROEs of 18-19%. We maintain
‘BUY’ recommendation on the stock and rate it ‘Sector Underperformer’ on
relative returns basis.
Margin headwinds
OBC witnessed 20bps contraction in NIMs, to 3.1%, on account of sharp increase in cost
of deposits (up 38bps Q-o-Q), while yield on advances (at 10.3%), CASA (25.2%) and
CD ratio (70%) remained stable sequentially. Management expects NIMs to remain at
3%+ 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 hardening of interest rates, we believe the bank is vulnerable to
further margin correction. We are building 2.8% NIMs (cal.) over FY11-12.
Modest fee income growth
The bank’s other income (ex-treasury) grew at 7% Y-o-Y (down 6% Q-o-Q), supported
by strong traction in exchange profits at INR 335 mn (up 84% Y-o-Y, 23% Q-o-Q).
Income from commission, exchange and brokerage grew only 3.7% Y-o-Y (down 9% Qo-
Q). Income from recoveries, at INR 212 mn, maintained the sequential trend. Treasury
profits stood at INR 314 mn.
Business momentum subdued
Post introduction of base rate in Q2FY11, loan book growth remained subdued for the
bank. During the quarter, loan book grew 4% Q-o-Q, 15.6% Y-o-Y to INR 908 bn.
Traction remained strong in SME (up 14.6% Q-o-Q, 63.4% Y-o-Y). Management guided
for 18% advances growth for FY11. In line with the industry trend, deposit growth (3%
Q-o-Q, 17% Y-o-Y) lagged advances growth. CD ratio stood at 70% (leaving limited
scope for further expansion). CASA ratio contracted marginally by 20bps to 25.2%.
Current account balances remained flat during the quarter, while savings account
balances grew 3% Q-o-Q.
Other highlights:
• Staff expenses declined 4.4% Q-o-Q as the bank made lower provisions towards
retirement costs during the quarter. However, the bank continued to provide (@ INR
500 mn per quarter) towards gratuity.
• Cost-income ratio stood at 39%.
• OBC currently holds INR 3.56 bn ad-hoc provisions towards second pension option.
Company Description
Oriental Bank of Commerce is a mid-sized PSU bank, with the 11th largest branch
network and 10th largest asset book among Indian banks. Historically, the bank had a
strong presence in northern and western India and the merger of Global Trust Bank
(then roughly 15% of the size of OBC) provided it the southern presence. The bank has
over 1,300 branches across India, all of which are under core banking solution.
Government ownership in the bank is at minimum 51%, leaving no room for further
equity dilution. FII holding in the bank is at maximum allowed 20%.
Investment Theme
Historically, high operating efficiency had enabled strong ROAs for OBC. It is amongst
the most efficient Indian banks, with operating expense to assets ratio at 1.4%. Asset
quality has shown remarkable improvement as recoveries remain strong for FY06-08. We
expect Bank to deliver 1%+ ROA/~19% ROE over FY11-12
Key Risks
Mid size PSU banks have high risk of NPL, considering their weak risk management
system. Exposed bond book makes it vulnerable to rising interest rates.
Government holding at minimum permissible level of 51%
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