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Asset quality pressures
For 4QFY11, OBC’s net profit of Rs3.3bn (up 5% YoY) was below our
estimates due to higher NPL provisioning. Loan growth of 15% YoY
continues to lag sector growth and reflects on management’s focus on
maintaining NIMs as the bank has a lower CASA ratio than Tier I PSU
banks. The key negative surprise was in high slippages with delinquency
ratio rising to 3.1% of previous year’s loans. As management focuses on
improving CASA ratio, we believe that bank’s loan growth will lag sector.
Maintain O-PF with price target Rs400 based on 1x forward adjusted PB.
Pressure on NIMs caps loan growth
During 4QFY11, OBC’s NII growth of 2% YoY was among the lowest within
peers as its loan growth of 15% was offset by 29bps YoY contraction in NIMs.
Deposit cost pressure for OBC is higher than Tier I PSU banks as its CASA
ratio of 25% is relatively lower and duration of liabilities is shorter than that
of assets (leading to repricing pressures). We believe that this will put
pressure on bank’s deposit costs and impact its margins and/or constrain loan
growth. The 2nd liability is estimated at Rs11bn, of which Rs4.3bn has been
provided till FY11 (including write-off of liability on retired employees); the
balance will be provided over next four years.
Asset quality continues to disappoint
During 4QFY11, fresh slippages rose sharply and the delinquency ratio was at
3.1% of previous year’s loans, higher than the levels in recent quarters. As
per management, nearly half of the slippages in 4Q resulted from shifting to a
computerised method of recognising NPLs; from Mar-11 onwards 97% of
loans have been transitioned to this system of NPL recognition and rest would
move by Jun-11. Higher slippages led to higher NPL provisioning pressure
that suppressed earnings growth.
Trades at discount to peers
Over next 2-3 years, management plans to improve OBC’s deposit franchise
and margins. Therefore, OBC’s loan growth is likely to lag sector growth. We
expect OBC’s loans to grow at 17% Cagr over FY11-13 and earnings will grow
at Cagr of 16%. The capital infusion by the government has improved Tier I
CAR to 11%. Valuations are at a discount to peers, but we believe that
improvement in CASA ratio and asset quality trends are a key to re-rating.
Our target price of Rs400 is based on 1x price to forward adjusted book.
Maintain O-PF.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asset quality pressures
For 4QFY11, OBC’s net profit of Rs3.3bn (up 5% YoY) was below our
estimates due to higher NPL provisioning. Loan growth of 15% YoY
continues to lag sector growth and reflects on management’s focus on
maintaining NIMs as the bank has a lower CASA ratio than Tier I PSU
banks. The key negative surprise was in high slippages with delinquency
ratio rising to 3.1% of previous year’s loans. As management focuses on
improving CASA ratio, we believe that bank’s loan growth will lag sector.
Maintain O-PF with price target Rs400 based on 1x forward adjusted PB.
Pressure on NIMs caps loan growth
During 4QFY11, OBC’s NII growth of 2% YoY was among the lowest within
peers as its loan growth of 15% was offset by 29bps YoY contraction in NIMs.
Deposit cost pressure for OBC is higher than Tier I PSU banks as its CASA
ratio of 25% is relatively lower and duration of liabilities is shorter than that
of assets (leading to repricing pressures). We believe that this will put
pressure on bank’s deposit costs and impact its margins and/or constrain loan
growth. The 2nd liability is estimated at Rs11bn, of which Rs4.3bn has been
provided till FY11 (including write-off of liability on retired employees); the
balance will be provided over next four years.
Asset quality continues to disappoint
During 4QFY11, fresh slippages rose sharply and the delinquency ratio was at
3.1% of previous year’s loans, higher than the levels in recent quarters. As
per management, nearly half of the slippages in 4Q resulted from shifting to a
computerised method of recognising NPLs; from Mar-11 onwards 97% of
loans have been transitioned to this system of NPL recognition and rest would
move by Jun-11. Higher slippages led to higher NPL provisioning pressure
that suppressed earnings growth.
Trades at discount to peers
Over next 2-3 years, management plans to improve OBC’s deposit franchise
and margins. Therefore, OBC’s loan growth is likely to lag sector growth. We
expect OBC’s loans to grow at 17% Cagr over FY11-13 and earnings will grow
at Cagr of 16%. The capital infusion by the government has improved Tier I
CAR to 11%. Valuations are at a discount to peers, but we believe that
improvement in CASA ratio and asset quality trends are a key to re-rating.
Our target price of Rs400 is based on 1x price to forward adjusted book.
Maintain O-PF.
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