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Oriental Bank of Commerce (ORBC.BO)
3Q11: Mixed Results, but Stock Looks Cheap
3Q11 profits up 41%, in line with estimates — OBC’s 3Q11 profits were up 41%
yoy and were in line with our estimates. Operationally, it was a mixed quarter with
pre-provisioning profits (excluding trading gains) up 30% yoy. Net interest margins
sustained at over 300bps in 3Q11, loan growth was steady but was offset by a
sharp increase in NPLs (+21% qoq). Quantitatively, the quarter was in line with
estimates, but was offset by softening fundamentals, especially in asset quality.
Maintain Buy with Rs400 target, as stock correction appears overdone — Our
EVA-based target price is revised up to Rs400, factoring in 1-6% lower earnings
but offset by rolling forward to Mar 12. We also reduce our benchmark valuation
multiples to 1.0x 1Yr Fwd (1.1x earlier). The stock has already corrected sharply
(down 37% from peak) and is now trading relatively cheaply at 0.7x FY12E P/BV.
We believe downside risks from current levels are low and potential returns could
be high if its strategy, execution and environment remain stable.
P&L: NIMs decline, fees tepid but costs contained — OBC’s net interest
margins declined 20bps qoq (310bps now) and its modest funding mix suggests
further pressure is likely (we believe it should sustain close to 270bps). Fee
income growth has been volatile, and was tepid in 3Q11 (+7% yoy). While the top
line was weaker, costs were contained, lending support to overall profitability.
Steady loan growth, funding still weak, but asset quality key concern —
OBC’s loan growth has remained steady at 16% yoy, driven more by retail and
SME segments. Funding mix remains modest (25% CASA), and is reliant on
wholesale funding and should be under pressure near term. The key concern was
however on asset quality – NPLs were up 21% qoq, slippages increased sharply
to over 2% p.a. and credit costs remained close to 1% p.a. OBC’s loan book is
relatively more exposed to SME/ mid corporate segments, and remains vulnerable
to any slowdown in overall economic activity and will require a continuous watch
Oriental Bank of Commerce
Valuation
Our target price of Rs400 is based on CIRA's EVA model, which captures longterm business value, and is a standard valuation measure for our India Banking
coverage. We factor in a risk-free rate of 8.0% and long-term loan loss
estimates of 100bps. We benchmark our target price on a 1.0x 1yr Fwd PBV, a
30-40% discount to the ‘best of breed' Government banks that translates into a
fair value of Rs402. We believe a valuation discount to peer banks is justified
due to the quality and structure of OBC's businesses and franchise issues on
the funding front. We prefer to use EVA as our primary methodology, as we
believe it adjusts well for the relatively dynamic cost of capital and captures well
the long-term value of the business.
Risks
We rate OBC Medium Risk, in line with our quantitative risk-rating system,
which tracks 260-day share price volatility. Downside risks to our target price for
OBC include: a) Sharp rise in asset quality deterioration given its higher risk
asset book and a still uncertain economic environment; b) Further erosion in its
funding franchise; and c) Sharp increase in interest rates could erode the bond
portfolio and raise deposit mobilization costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce (ORBC.BO)
3Q11: Mixed Results, but Stock Looks Cheap
3Q11 profits up 41%, in line with estimates — OBC’s 3Q11 profits were up 41%
yoy and were in line with our estimates. Operationally, it was a mixed quarter with
pre-provisioning profits (excluding trading gains) up 30% yoy. Net interest margins
sustained at over 300bps in 3Q11, loan growth was steady but was offset by a
sharp increase in NPLs (+21% qoq). Quantitatively, the quarter was in line with
estimates, but was offset by softening fundamentals, especially in asset quality.
Maintain Buy with Rs400 target, as stock correction appears overdone — Our
EVA-based target price is revised up to Rs400, factoring in 1-6% lower earnings
but offset by rolling forward to Mar 12. We also reduce our benchmark valuation
multiples to 1.0x 1Yr Fwd (1.1x earlier). The stock has already corrected sharply
(down 37% from peak) and is now trading relatively cheaply at 0.7x FY12E P/BV.
We believe downside risks from current levels are low and potential returns could
be high if its strategy, execution and environment remain stable.
P&L: NIMs decline, fees tepid but costs contained — OBC’s net interest
margins declined 20bps qoq (310bps now) and its modest funding mix suggests
further pressure is likely (we believe it should sustain close to 270bps). Fee
income growth has been volatile, and was tepid in 3Q11 (+7% yoy). While the top
line was weaker, costs were contained, lending support to overall profitability.
Steady loan growth, funding still weak, but asset quality key concern —
OBC’s loan growth has remained steady at 16% yoy, driven more by retail and
SME segments. Funding mix remains modest (25% CASA), and is reliant on
wholesale funding and should be under pressure near term. The key concern was
however on asset quality – NPLs were up 21% qoq, slippages increased sharply
to over 2% p.a. and credit costs remained close to 1% p.a. OBC’s loan book is
relatively more exposed to SME/ mid corporate segments, and remains vulnerable
to any slowdown in overall economic activity and will require a continuous watch
Oriental Bank of Commerce
Valuation
Our target price of Rs400 is based on CIRA's EVA model, which captures longterm business value, and is a standard valuation measure for our India Banking
coverage. We factor in a risk-free rate of 8.0% and long-term loan loss
estimates of 100bps. We benchmark our target price on a 1.0x 1yr Fwd PBV, a
30-40% discount to the ‘best of breed' Government banks that translates into a
fair value of Rs402. We believe a valuation discount to peer banks is justified
due to the quality and structure of OBC's businesses and franchise issues on
the funding front. We prefer to use EVA as our primary methodology, as we
believe it adjusts well for the relatively dynamic cost of capital and captures well
the long-term value of the business.
Risks
We rate OBC Medium Risk, in line with our quantitative risk-rating system,
which tracks 260-day share price volatility. Downside risks to our target price for
OBC include: a) Sharp rise in asset quality deterioration given its higher risk
asset book and a still uncertain economic environment; b) Further erosion in its
funding franchise; and c) Sharp increase in interest rates could erode the bond
portfolio and raise deposit mobilization costs.
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