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Oriental Bank of Commerce
Negatives priced-in; Riskreturn positive; Buy
„Cut PO to Rs415, but maintain Buy, as negatives priced-in
We cut our PO on OBC to Rs415 to factor in the ~4/6% earnings cut for
FY12E/13E post weak 4Q earnings driven by a sharp rise in slippages (new
NPLs). However, we maintain our Buy on OBC, as 1) risk-return still appears
attractive with RoEs of +16% in FY12 (low on recent Govt. capital infusion) rising
to +17.5% in FY13; 2) stock correction by +9-10% in last few days post results
factors in the weak 4Q earnings and; 3) almost ~50% of slippages in 4Q are from
OBC adopting online NPL recognition system. We believe OBC trading at 0.9x
FY12 book can trade-up to 1.1x FY12 book on RoEs of +16% In FY12 (net profit
growth sustaining at +25% in FY12/13) and asset quality still being manageable
(cover at +75%).
4Q: Earnings weak on margins, pension hit fully absorbed
OBC reported earnings of Rs3.3bn, a mere 5% yoy growth and 11% below est.
Top line was also weak (2% yoy) as OBC increased its loans by only ~18% and
margins were down 29bps yoy (12bps qoq), to 3.0%. Margin decline was partly
owing to reversal of int. income recognized earlier on NPLs. CASA down ~60bps
yoy to <25%; core fee (CEB) grew 3% yoy. Tier 1 at 11.2% post recent Rs17.4bn
capital infusion by the Govt. 4Q pension charge of only Rs200mn, as OBC had
provided ~Rs4bn in 9MFY11.
Slippages rise as OBC goes online (NPL recognition system)
OBC’s slippages rose to Rs6.5bn in 4Q (vs. 4.7bn in 3Q). The rise was partly due
to shift towards system based NPL recognition which led to slippages of ~Rs3bn
(of Rs6.5bn). OBC recognized all accounts above Rs1mn. But mgmt, confident of
~Rs500-600mn recovery from this Rs3bn in 1QFY12 itself. We are still factoring in
net NPL formation (net of recoveries) at Rs10bn in FY12 vs. Rs11bn in FY11.
Price objective basis & risk
ORBC (ORBCF)
We set our PO on OBC at Rs415. We maintain our Buy on OBC, as 1) risk-return
still appears attractive with RoEs of +16% in FY12 (low on recent Govt. capital
infusion) rising to +17.5% in FY13, 2) stock correction by +9-10% in last few days
post results factors in the weak 4Q earnings and, 3) almost 50% of slippages in
4Q are from OBC adopting online NPL recognition system. We believe OBC
trading at 0.9x FY12 book can trade-up to 1.1x FY12 book on RoEs of 16% In
FY12 (net profit growth sustaining at +25% in FY12/13) and asset quality still
being manageable (cover at +75%). Our PO is based on Gordon multiples
(assuming RoE of 16% and CoE of 14%) to factor in rising macro headwinds. Key
risks are higher share of wholesale deposits (+35-40% of total) can lead to a
sharp spike in funding costs and volatility leading to margins pressure and a
sharp rise in NPLs and inability to manage growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce
Negatives priced-in; Riskreturn positive; Buy
„Cut PO to Rs415, but maintain Buy, as negatives priced-in
We cut our PO on OBC to Rs415 to factor in the ~4/6% earnings cut for
FY12E/13E post weak 4Q earnings driven by a sharp rise in slippages (new
NPLs). However, we maintain our Buy on OBC, as 1) risk-return still appears
attractive with RoEs of +16% in FY12 (low on recent Govt. capital infusion) rising
to +17.5% in FY13; 2) stock correction by +9-10% in last few days post results
factors in the weak 4Q earnings and; 3) almost ~50% of slippages in 4Q are from
OBC adopting online NPL recognition system. We believe OBC trading at 0.9x
FY12 book can trade-up to 1.1x FY12 book on RoEs of +16% In FY12 (net profit
growth sustaining at +25% in FY12/13) and asset quality still being manageable
(cover at +75%).
4Q: Earnings weak on margins, pension hit fully absorbed
OBC reported earnings of Rs3.3bn, a mere 5% yoy growth and 11% below est.
Top line was also weak (2% yoy) as OBC increased its loans by only ~18% and
margins were down 29bps yoy (12bps qoq), to 3.0%. Margin decline was partly
owing to reversal of int. income recognized earlier on NPLs. CASA down ~60bps
yoy to <25%; core fee (CEB) grew 3% yoy. Tier 1 at 11.2% post recent Rs17.4bn
capital infusion by the Govt. 4Q pension charge of only Rs200mn, as OBC had
provided ~Rs4bn in 9MFY11.
Slippages rise as OBC goes online (NPL recognition system)
OBC’s slippages rose to Rs6.5bn in 4Q (vs. 4.7bn in 3Q). The rise was partly due
to shift towards system based NPL recognition which led to slippages of ~Rs3bn
(of Rs6.5bn). OBC recognized all accounts above Rs1mn. But mgmt, confident of
~Rs500-600mn recovery from this Rs3bn in 1QFY12 itself. We are still factoring in
net NPL formation (net of recoveries) at Rs10bn in FY12 vs. Rs11bn in FY11.
Price objective basis & risk
ORBC (ORBCF)
We set our PO on OBC at Rs415. We maintain our Buy on OBC, as 1) risk-return
still appears attractive with RoEs of +16% in FY12 (low on recent Govt. capital
infusion) rising to +17.5% in FY13, 2) stock correction by +9-10% in last few days
post results factors in the weak 4Q earnings and, 3) almost 50% of slippages in
4Q are from OBC adopting online NPL recognition system. We believe OBC
trading at 0.9x FY12 book can trade-up to 1.1x FY12 book on RoEs of 16% In
FY12 (net profit growth sustaining at +25% in FY12/13) and asset quality still
being manageable (cover at +75%). Our PO is based on Gordon multiples
(assuming RoE of 16% and CoE of 14%) to factor in rising macro headwinds. Key
risks are higher share of wholesale deposits (+35-40% of total) can lead to a
sharp spike in funding costs and volatility leading to margins pressure and a
sharp rise in NPLs and inability to manage growth.
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