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Oriental Bank of Commerce (OBC)
Banks/Financial Institutions
Weak franchise resulting in margin pressures. OBC reported weak 3Q numbers, as
margins declined (20 bps) owing to its weaker liability franchise and higher reliance on
wholesale deposits. While we expect this trend to continue, the management is taking
prudent measures to slow down growth and is guiding for stable margins (we assume it
decline further by 25 bps). NPL increase during the quarter was unexpected, but this
tends to be lumpy in nature. Margin concerns notwithstanding, we retain ADD rating
owing to its attractive valuations at 0.8X FY2012E PBR. Revise TP to `450.
Weak franchise is hurting; we build conservative earnings; valuations attractive at 0.8X book
With CASA ratio at just 25% and wholesale deposit proportion at 28% of total deposits, OBC is
unattractively placed amongst other public banks at times of tight liquidity and rising interest rates.
This is clearly showing in its margins, as this is probably the only public bank which has seen a
sequential margin decline. The management highlighted that they have raised lending rates in the
third week of December which should provide cushion, but we believe that funding costs will rise
faster for OBC. We build in conservative margin assumptions for 4QFY11E and FY2012E. However,
over the last few quarters the bank has made enough provisions for costs/NPLs, thereby reducing
the pressure on profitability which is likely to be used as levers over the next few quarters. Even as
we believe that OBC is structurally weak at times of higher interest rates, we maintain our ADD
rating given its attractive valuations of 0.8X FY2012E PBR. We revise our TP to `450 (from `580
earlier building in higher cost of equity, owing to higher risks envisaged). At our TP, stock will
trade at 1.2X FY2012E PBR and 7X FY2012E PER for RoEs of about 16%.
Margins pressure emerges but partly due to delay in increase in lending rates
Margins for the quarter declined by 20 bps as the impact of its weak franchise is getting reflected
through steady increase in deposit costs, ahead of its peers. However, unlike other banks, OBC
delayed raising lending rates during the quarter resulting in steeper decline in margins for the
quarter. Lending yields were flat at 10.3% while cost of deposits increased by 22 bps for the
quarter, one of the largest increases sequentially. We are factoring further compression in our
margins in 4Q of about 15 bps and 25 bps in FY2012E despite the bank’s recent increase in
lending rates as the bulk deposit is yet to fully price itself closer to current market rates. The
management broadly expects margins to remain at 3% levels in FY2011E.
Slippages witness a steep rise driven mainly from restructured assets
Gross NPLs of OBC were `18 bn (1.9%) as of December 2010 representing 18% growth
over September 2010 levels. Slippages for the quarter were at 2.2%, with nearly half of
them coming from restructured assets—mainly from SME portfolio. Net NPLs increased
sharply by 35% qoq to `8.2bn on the back of lower NPL provisions. The bank provided
0.8% for loan loss provisions for the quarter. The restructured loans declined marginally to
`51 bn (6% of overall loans) while outstanding slippages from this book are at 13%.
Loan growth subdued at 16% yoy; deposits grow by 17% yoy
Loan growth for the quarter was subdued at 16% yoy and 4% qoq to `908 bn. The bank
continues to remain opportunistic in lending, focusing on margins than growth. The bank
further shed some of its low yielding short-term loans during the quarter. Deposit grew by
17% yoy (2% qoq) to `1,293 bn. CASA ratio for the quarter was maintained at 25.4%. We
are building loan growth at 18% CAGR for FY2011-13E.
Subdued non-interest income performance; fee income weaker
OBC’s non-interest income declines 3% yoy mainly due to lower treasury gains and weak
performance on fee income, a trend we witness across public banks for the quarter. Core
fee income grew by 3.3% (10% decline qoq) while treasury income was at `314 mn
compared to `510 mn in 2QFY11. Income from written-off assets declined 25% yoy to `125
mn while exchange income grew sharply by 84% yoy to `335 mn. We maintain our
cautious outlook on fee income growth for the bank at 15% CAGR for FY2012-13E.
Other highlights for the quarter
Cost-income ratio for the quarter was at 39% compared to 39% in September 2010. The
bank revised its pension liability to `11 bn from `6 bn but has already made a provision of
`4.1 bn. Gratuity liability has been estimated at `2 bn of which `1.5 bn has already been
provided. The management indicated that it is unlikely to reverse the provisions if
amortization benefit of 5 years is provided.
Capital adequacy ratio stands comfortable at 12.4% with tier-1 ratio at 9.1%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce (OBC)
Banks/Financial Institutions
Weak franchise resulting in margin pressures. OBC reported weak 3Q numbers, as
margins declined (20 bps) owing to its weaker liability franchise and higher reliance on
wholesale deposits. While we expect this trend to continue, the management is taking
prudent measures to slow down growth and is guiding for stable margins (we assume it
decline further by 25 bps). NPL increase during the quarter was unexpected, but this
tends to be lumpy in nature. Margin concerns notwithstanding, we retain ADD rating
owing to its attractive valuations at 0.8X FY2012E PBR. Revise TP to `450.
Weak franchise is hurting; we build conservative earnings; valuations attractive at 0.8X book
With CASA ratio at just 25% and wholesale deposit proportion at 28% of total deposits, OBC is
unattractively placed amongst other public banks at times of tight liquidity and rising interest rates.
This is clearly showing in its margins, as this is probably the only public bank which has seen a
sequential margin decline. The management highlighted that they have raised lending rates in the
third week of December which should provide cushion, but we believe that funding costs will rise
faster for OBC. We build in conservative margin assumptions for 4QFY11E and FY2012E. However,
over the last few quarters the bank has made enough provisions for costs/NPLs, thereby reducing
the pressure on profitability which is likely to be used as levers over the next few quarters. Even as
we believe that OBC is structurally weak at times of higher interest rates, we maintain our ADD
rating given its attractive valuations of 0.8X FY2012E PBR. We revise our TP to `450 (from `580
earlier building in higher cost of equity, owing to higher risks envisaged). At our TP, stock will
trade at 1.2X FY2012E PBR and 7X FY2012E PER for RoEs of about 16%.
Margins pressure emerges but partly due to delay in increase in lending rates
Margins for the quarter declined by 20 bps as the impact of its weak franchise is getting reflected
through steady increase in deposit costs, ahead of its peers. However, unlike other banks, OBC
delayed raising lending rates during the quarter resulting in steeper decline in margins for the
quarter. Lending yields were flat at 10.3% while cost of deposits increased by 22 bps for the
quarter, one of the largest increases sequentially. We are factoring further compression in our
margins in 4Q of about 15 bps and 25 bps in FY2012E despite the bank’s recent increase in
lending rates as the bulk deposit is yet to fully price itself closer to current market rates. The
management broadly expects margins to remain at 3% levels in FY2011E.
Slippages witness a steep rise driven mainly from restructured assets
Gross NPLs of OBC were `18 bn (1.9%) as of December 2010 representing 18% growth
over September 2010 levels. Slippages for the quarter were at 2.2%, with nearly half of
them coming from restructured assets—mainly from SME portfolio. Net NPLs increased
sharply by 35% qoq to `8.2bn on the back of lower NPL provisions. The bank provided
0.8% for loan loss provisions for the quarter. The restructured loans declined marginally to
`51 bn (6% of overall loans) while outstanding slippages from this book are at 13%.
Loan growth subdued at 16% yoy; deposits grow by 17% yoy
Loan growth for the quarter was subdued at 16% yoy and 4% qoq to `908 bn. The bank
continues to remain opportunistic in lending, focusing on margins than growth. The bank
further shed some of its low yielding short-term loans during the quarter. Deposit grew by
17% yoy (2% qoq) to `1,293 bn. CASA ratio for the quarter was maintained at 25.4%. We
are building loan growth at 18% CAGR for FY2011-13E.
Subdued non-interest income performance; fee income weaker
OBC’s non-interest income declines 3% yoy mainly due to lower treasury gains and weak
performance on fee income, a trend we witness across public banks for the quarter. Core
fee income grew by 3.3% (10% decline qoq) while treasury income was at `314 mn
compared to `510 mn in 2QFY11. Income from written-off assets declined 25% yoy to `125
mn while exchange income grew sharply by 84% yoy to `335 mn. We maintain our
cautious outlook on fee income growth for the bank at 15% CAGR for FY2012-13E.
Other highlights for the quarter
Cost-income ratio for the quarter was at 39% compared to 39% in September 2010. The
bank revised its pension liability to `11 bn from `6 bn but has already made a provision of
`4.1 bn. Gratuity liability has been estimated at `2 bn of which `1.5 bn has already been
provided. The management indicated that it is unlikely to reverse the provisions if
amortization benefit of 5 years is provided.
Capital adequacy ratio stands comfortable at 12.4% with tier-1 ratio at 9.1%.
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