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Negatives seem to be priced in…
Oriental Bank of Commerce’s (OBC) business grew below industry level at
15% YoY with NII growth tapering sequentially. NIM for FY11 was healthy
at 3.18%. However, Q4FY11 margins declined 12 bps QoQ to 2.98% due
to a sharp jump in the CoD. We expect NIM of ~2.8% in FY12E with a 50
bps hike in savings rate impacting NIM by ~10 bps. The asset quality
deteriorated sequentially as the bank migrated 97% of its loans to system
based NPA recognition. This led to NPA provisions increasing 121% QoQ,
thus denting profits. PAT was below expectations at | 334 crore (18%
QoQ dip) for Q4FY11 and | 1503 crore for FY11. We are lowering our PAT
guidance for FY12E to | 1745 crore on account of higher CoD lowering NII
growth and higher provisions. We estimate 20% CAGR in PAT due to
20% CAGR in business over FY11-13E.
Asset quality slips further…
GNPA rose 8.9% QoQ to | 1921 crore while NNPA shot up 15%
QoQ to | 938 crore in Q4FY11. Slippages were high at | 649 crore
out of which loans worth ~ | 300 crore slipped as the bank shifted
97% of its loans to CBS based NPA recognition system. PCR was
maintained at 76.8%. We are apprehensive about its declining asset
quality and given the lower GDP outlook and high interest rates,
estimate GNPA and NNPA of 2% and 0.9%, respectively, by FY13E.
Ad-hoc provision for retirement benefits save PAT from one-off hit
OBC did not face a one-off hit from opex as it had already provided
| 410 crore (| 356 crore from FY10 and | 54 crore [| 18 crore per
quarter]) out of the total requirement of | 430 crore for retirement
benefits by Q3FY11. It needs to amortise the remaining | 683.6 crore
over the next four years.
Valuation
OBC is currently trading at an attractive 0.8x its FY13E ABV, which is the
lowest across the mid-size public sector bank space. We believe the price
has already factored in most of the negatives like below industry business
growth, declining asset quality and pressure on NIM primarily due to the
50 bps hike in savings rate. We expect slippages to slow down as 97% of
loans have already migrated to system based NPA recognition. We
expect RoA of 1.1% and RoE of 16% by FY13E and believe it should at
least get a multiple of 0.9x FY13E ABV. Hence, we have arrived at a target
price of | 374 and recommend a BUY rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Negatives seem to be priced in…
Oriental Bank of Commerce’s (OBC) business grew below industry level at
15% YoY with NII growth tapering sequentially. NIM for FY11 was healthy
at 3.18%. However, Q4FY11 margins declined 12 bps QoQ to 2.98% due
to a sharp jump in the CoD. We expect NIM of ~2.8% in FY12E with a 50
bps hike in savings rate impacting NIM by ~10 bps. The asset quality
deteriorated sequentially as the bank migrated 97% of its loans to system
based NPA recognition. This led to NPA provisions increasing 121% QoQ,
thus denting profits. PAT was below expectations at | 334 crore (18%
QoQ dip) for Q4FY11 and | 1503 crore for FY11. We are lowering our PAT
guidance for FY12E to | 1745 crore on account of higher CoD lowering NII
growth and higher provisions. We estimate 20% CAGR in PAT due to
20% CAGR in business over FY11-13E.
Asset quality slips further…
GNPA rose 8.9% QoQ to | 1921 crore while NNPA shot up 15%
QoQ to | 938 crore in Q4FY11. Slippages were high at | 649 crore
out of which loans worth ~ | 300 crore slipped as the bank shifted
97% of its loans to CBS based NPA recognition system. PCR was
maintained at 76.8%. We are apprehensive about its declining asset
quality and given the lower GDP outlook and high interest rates,
estimate GNPA and NNPA of 2% and 0.9%, respectively, by FY13E.
Ad-hoc provision for retirement benefits save PAT from one-off hit
OBC did not face a one-off hit from opex as it had already provided
| 410 crore (| 356 crore from FY10 and | 54 crore [| 18 crore per
quarter]) out of the total requirement of | 430 crore for retirement
benefits by Q3FY11. It needs to amortise the remaining | 683.6 crore
over the next four years.
Valuation
OBC is currently trading at an attractive 0.8x its FY13E ABV, which is the
lowest across the mid-size public sector bank space. We believe the price
has already factored in most of the negatives like below industry business
growth, declining asset quality and pressure on NIM primarily due to the
50 bps hike in savings rate. We expect slippages to slow down as 97% of
loans have already migrated to system based NPA recognition. We
expect RoA of 1.1% and RoE of 16% by FY13E and believe it should at
least get a multiple of 0.9x FY13E ABV. Hence, we have arrived at a target
price of | 374 and recommend a BUY rating on the stock.
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