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For 3QFY2011, Oriental Bank of Commerce (OBC) posted healthy net profit
growth of 41.1% yoy and 2.7% qoq to `408cr, in line with our estimates of
`410cr. Modest operating performance along with asset-quality pressures was the
key highlight of the result. However, post the sharp correction in the stock price,
we recommend Buy on the stock.
Moderate business growth with deteriorating asset quality: During 3QFY2011,
business growth was moderate at 3.6% qoq, with advances and deposits growing
by 4.7% qoq (15.6% yoy) and 2.8% qoq (16.8% yoy), respectively. Reported NIM
in 3QFY2011 declined by 20bp to 3.1% due to a 22bp qoq increase in cost of
deposits and flat yield on advances and investments. Non-interest income
(excluding treasury) posted moderate growth of 7.0% yoy to `200cr. Operating
expenses grew marginally by 0.4% qoq (down 0.1% yoy) to `487cr. The bank’s
CAR stood at 12.4%, with tier-I capital of 9.1%. During 3QFY2011, OBC’s Gross
NPAs and Net NPAs increased considerably by 21.1% and 34.5% qoq,
respectively. Slippages for the quarter were high at `473cr (2.2%) compared to
`320cr (1.5%) in 2QFY2011. Slippages from restructured accounts were also high
at `93cr, taking cumulative slippages from the restructured book to `563cr
(~11.0% of restructured advances). NPA provision coverage ratio (including
technical write-offs) declined to 77.4% in 3QFY2011 from 81.0% in 2QFY2011.
Outlook and valuation: Post correction, at the CMP, the stock is trading at 0.8x
FY2012E ABV. Even though NIMs are likely to witness pressure in the coming
quarters as deposit rates increase, looking at the cheap valuations,
we recommend Buy on the stock with a Target Price of `393.
Moderate business growth
During 3QFY2011, business growth stood at moderate 3.6% qoq (16.3% yoy),
driven by advances growth of 4.7% qoq (15.6% yoy) to `90,801cr and deposits
growth of 2.8% qoq (16.8% yoy) to `1,29,335cr. The bank’s CD ratio increased
sequentially to 70.2% from 68.9% in 2QFY2011. Growth in advances was driven
by the SME segment (grew by strong 56% yoy) and the retail segment (grew by
17.8% yoy). Even agricultural advances showed healthy traction of 16.7% yoy.
CASA deposits posted moderate growth of 2.0% qoq and 20.5% yoy to `32,588cr.
Consequently, the CASA ratio declined to 25.2% in 3QFY2011 from 25.4% in
2QFY2011.
During the quarter, the bank’s reported NIM declined by 20bp to 3.1% qoq due to
a decline in CASA ratio, an increase in cost of deposits from 5.86% in 2QFY2011
to 6.08% in 3QFY2011 and yield on advances and investments being flat
sequentially. Consequently, the bank’s NII declined by 4.4% qoq (up 18.0% yoy) to
`1,030cr. We expect the bank to witness relatively higher downward pressure on
NIMs as deposit rates increase in the coming quarters.
Non-interest income declines yoy
OBC’s non-interest income declined by 2.6% yoy (up 8.1% qoq) to `231cr due to
a 38.1% yoy decline in treasury income to `31cr and a 25.0% yoy decline in
recoveries to `16cr in 3QFY2011. However, non-interest income (excluding
treasury) registered moderate growth of 7.0% yoy to `200cr, driven by profit from
forex transactions (up 76.3% yoy). Treasury income was strong sequentially.
CEB income was lower by 9.5% sequentially despite the 4.7% qoq increase in
advances compared to marginal 0.7% qoq growth in advances in 2QFY2011.
Asset quality deteriorated
In 3QFY2011, OBC’s absolute Gross NPAs increased considerably by 21.1%
sequentially to `1,764cr and net NPAs increased by 34.5% qoq to `816cr. As a
result, Gross NPA and Net NPA ratios deteriorated to 1.94% (1.67% in 2QFY2011)
and 0.91% (0.70% in 2QFY2011), respectively. Slippages for the quarter were
high at `473cr (2.2%) compared to `320cr (1.5%) in 2QFY2011. Slippages from
restructured accounts were also high at `93cr, taking cumulative slippages from
the restructured book to `563cr (~11.0% of restructured advances). The bank has
cumulatively restructured advances worth ~`5,133cr (5.7% of advances and
59.5% of net worth). The bank’s NPA provision coverage ratio (including technical
write-off) reduced to 77.4% from 81.0% in 2QFY2011.
Stable operating expenses
Operating expenses remained stable at `487cr, increasing by marginal 0.4% qoq
(down 0.1% yoy), in line with estimates. Employee costs increased marginally by
0.25% qoq. The cost-to-income ratio deteriorated to 38.6% from 37.6% in
2QFY2011; while on a yoy basis, the cost-to-income ratio improved substantially
from 43.9% in 3QFY2010. In respect of second pension, the bank holds an adhoc
provision of `357cr pending final actuarial valuation.
Comfortable capital adequacy
The bank’s CAR stood at 12.4%, with tier-I capital of 9.1% (forming 73.4% of the
total CAR). With the government holding already at the minimum permissible level
of 51%, the bank has requested the government for capital infusion of `1,000cr,
which appears high in our view. During 9MFY2011, the bank raised `300cr via
perpetual tier-I bonds and `200cr via tier-II bonds. The bank still has adequate
headroom to raise tier-II capital, indicated by the higher proportion of tier-I capital
to CAR.
Investment arguments
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
(25.2%). 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
Post correction, at the CMP, the stock is trading at 0.8x FY2012E ABV. Even though
NIMs are likely to witness pressure in the coming quarters as deposit rates
increase, looking at the cheap valuations, we recommend Buy on the stock with a
Target Price of `393.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce – 3QFY2011 Result Update
Angel Broking recommends a Buy on Oriental Bank of Commerce with a Target Price of Rs. 393.
For 3QFY2011, Oriental Bank of Commerce (OBC) posted healthy net profit
growth of 41.1% yoy and 2.7% qoq to `408cr, in line with our estimates of
`410cr. Modest operating performance along with asset-quality pressures was the
key highlight of the result. However, post the sharp correction in the stock price,
we recommend Buy on the stock.
Moderate business growth with deteriorating asset quality: During 3QFY2011,
business growth was moderate at 3.6% qoq, with advances and deposits growing
by 4.7% qoq (15.6% yoy) and 2.8% qoq (16.8% yoy), respectively. Reported NIM
in 3QFY2011 declined by 20bp to 3.1% due to a 22bp qoq increase in cost of
deposits and flat yield on advances and investments. Non-interest income
(excluding treasury) posted moderate growth of 7.0% yoy to `200cr. Operating
expenses grew marginally by 0.4% qoq (down 0.1% yoy) to `487cr. The bank’s
CAR stood at 12.4%, with tier-I capital of 9.1%. During 3QFY2011, OBC’s Gross
NPAs and Net NPAs increased considerably by 21.1% and 34.5% qoq,
respectively. Slippages for the quarter were high at `473cr (2.2%) compared to
`320cr (1.5%) in 2QFY2011. Slippages from restructured accounts were also high
at `93cr, taking cumulative slippages from the restructured book to `563cr
(~11.0% of restructured advances). NPA provision coverage ratio (including
technical write-offs) declined to 77.4% in 3QFY2011 from 81.0% in 2QFY2011.
Outlook and valuation: Post correction, at the CMP, the stock is trading at 0.8x
FY2012E ABV. Even though NIMs are likely to witness pressure in the coming
quarters as deposit rates increase, looking at the cheap valuations,
we recommend Buy on the stock with a Target Price of `393.
Moderate business growth
During 3QFY2011, business growth stood at moderate 3.6% qoq (16.3% yoy),
driven by advances growth of 4.7% qoq (15.6% yoy) to `90,801cr and deposits
growth of 2.8% qoq (16.8% yoy) to `1,29,335cr. The bank’s CD ratio increased
sequentially to 70.2% from 68.9% in 2QFY2011. Growth in advances was driven
by the SME segment (grew by strong 56% yoy) and the retail segment (grew by
17.8% yoy). Even agricultural advances showed healthy traction of 16.7% yoy.
CASA deposits posted moderate growth of 2.0% qoq and 20.5% yoy to `32,588cr.
Consequently, the CASA ratio declined to 25.2% in 3QFY2011 from 25.4% in
2QFY2011.
During the quarter, the bank’s reported NIM declined by 20bp to 3.1% qoq due to
a decline in CASA ratio, an increase in cost of deposits from 5.86% in 2QFY2011
to 6.08% in 3QFY2011 and yield on advances and investments being flat
sequentially. Consequently, the bank’s NII declined by 4.4% qoq (up 18.0% yoy) to
`1,030cr. We expect the bank to witness relatively higher downward pressure on
NIMs as deposit rates increase in the coming quarters.
Non-interest income declines yoy
OBC’s non-interest income declined by 2.6% yoy (up 8.1% qoq) to `231cr due to
a 38.1% yoy decline in treasury income to `31cr and a 25.0% yoy decline in
recoveries to `16cr in 3QFY2011. However, non-interest income (excluding
treasury) registered moderate growth of 7.0% yoy to `200cr, driven by profit from
forex transactions (up 76.3% yoy). Treasury income was strong sequentially.
CEB income was lower by 9.5% sequentially despite the 4.7% qoq increase in
advances compared to marginal 0.7% qoq growth in advances in 2QFY2011.
Asset quality deteriorated
In 3QFY2011, OBC’s absolute Gross NPAs increased considerably by 21.1%
sequentially to `1,764cr and net NPAs increased by 34.5% qoq to `816cr. As a
result, Gross NPA and Net NPA ratios deteriorated to 1.94% (1.67% in 2QFY2011)
and 0.91% (0.70% in 2QFY2011), respectively. Slippages for the quarter were
high at `473cr (2.2%) compared to `320cr (1.5%) in 2QFY2011. Slippages from
restructured accounts were also high at `93cr, taking cumulative slippages from
the restructured book to `563cr (~11.0% of restructured advances). The bank has
cumulatively restructured advances worth ~`5,133cr (5.7% of advances and
59.5% of net worth). The bank’s NPA provision coverage ratio (including technical
write-off) reduced to 77.4% from 81.0% in 2QFY2011.
Stable operating expenses
Operating expenses remained stable at `487cr, increasing by marginal 0.4% qoq
(down 0.1% yoy), in line with estimates. Employee costs increased marginally by
0.25% qoq. The cost-to-income ratio deteriorated to 38.6% from 37.6% in
2QFY2011; while on a yoy basis, the cost-to-income ratio improved substantially
from 43.9% in 3QFY2010. In respect of second pension, the bank holds an adhoc
provision of `357cr pending final actuarial valuation.
Comfortable capital adequacy
The bank’s CAR stood at 12.4%, with tier-I capital of 9.1% (forming 73.4% of the
total CAR). With the government holding already at the minimum permissible level
of 51%, the bank has requested the government for capital infusion of `1,000cr,
which appears high in our view. During 9MFY2011, the bank raised `300cr via
perpetual tier-I bonds and `200cr via tier-II bonds. The bank still has adequate
headroom to raise tier-II capital, indicated by the higher proportion of tier-I capital
to CAR.
Investment arguments
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
(25.2%). 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
Post correction, at the CMP, the stock is trading at 0.8x FY2012E ABV. Even though
NIMs are likely to witness pressure in the coming quarters as deposit rates
increase, looking at the cheap valuations, we recommend Buy on the stock with a
Target Price of `393.
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