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Oriental Bank of Commerce’s (OBC) Q4FY11 NII of INR 10.1 bn (down 2% Q-o-Q)
was broadly in line with our estimate. In line with expectations, NIMs contracted
12bps Q-o-Q to 2.98%, reflecting the short-term nature of liability profile, exposing
margins to higher downside risk in a rising interest rate environment. Asset quality
concerns surfaced with slippages touching a high of 3% during the quarter, part of
them explained by switch over to system-based NPL recognition. Consequently, the
bank’s credit cost came in higher at 160bps. Despite the disappointment on higher
credit cost, PAT came in line at INR 3.3 bn due to tax credit of INR 0.5 bn. Staff
expenses were down sequentially as OBC had adequately provided for retirement
cost. Loan book growth, at 15%, continues to lag industry; however, management
has guided for an impressive 25% growth in FY12.
Incremental slippages jump to 3%
After reporting minimal slippages in Q1FY11 (0.5%), OBC’s slippages have risen
consistently—Q2FY11-1.5%, Q3FY11- 2.2%, and Q4FY11- 3%. Management
highlighted that during the quarter almost 50% slippages were on account of
switch over to system-based NPL recognition. Management guided that around
INR 700 mn of INR 6.5 bn slippages are technical in nature and expect upgrades
in the coming quarter. Headline asset quality numbers deteriorated, with gross
NPLs rising 9% Q-o-Q to INR 19.2 bn (1.98%) and net NPLs rising 15% Q-o-Q to
INR 9.4 bn (0.98%). Credit costs remained at elevated level of 160bps (Q3FY11:
90bps). Restructured book remained at around INR 52.7 bn, around 5.5% of
advances.
Outlook and valuations: Operationally weak, trades at discount;
maintain ‘BUY’
In line with our expectations, OBC’s margins contracted during Q4FY11,
reflecting the (short-term) nature of liability profile, exposing margins to higher
downside risk in a rising interest rate environment. Slippages touched a high of
3% during the quarter; we believe, they have peaked at the current level.
Though we expect pressure on margins to continue, declining credit costs may
partially support earnings; given the provisions that the bank has created for
second pension option, there are likely to be limited surprises on account of
higher-than-expected retirement costs. We are lowering our FY12E PAT estimate
by 7% to factor in higher credit costs and lower margins. Despite the near-term
headwinds, the stock’s valuation at 0.9x FY12E book is attractive given the
reasonable RoEs of 16%. We maintain ‘BUY’ recommendation on the stock and
rate it ‘Sector Underperformer’ on relative returns basis.
Margin headwinds
OBC’s NIMs contracted 12bps to 2.98% on account of increase in cost of deposits, while
yield on advances (at 10.6%), CASA (24.6%), and CD ratio (70%) remained stable
sequentially. Management expects NIMs to remain at 3% plus in the future as well. With
more than 70% of deposits with maturity of less than a year, OBC benefited from strong
deposit re-pricing, with cost of funds declining 176bps in FY10. However, with hardening
of interest rates, we believe the bank is vulnerable to further margin correction. We are
building in 2.6% NIMs (cal.) over FY12-13.
Modest fee income growth
The bank’s other income grew at 14% Y-o-Y supported by higher income from recoveries
and exchange profits which offset the decline in CEB fees. Treasury profits stood at INR
262 mn.
Business momentum subdued
Post introduction of base rate in Q2FY11, the bank’s loan book growth remained subdued.
During the quarter, loan book grew 5% Q-o-Q and 15% Y-o-Y to INR 959 bn.
Management has guided for an impressive 25% loan book growth for FY12. CD ratio
stood at 69% (leaving limited scope for further expansion). CASA ratio contracted
marginally by 60bps to 24.6%. Current account balances remained flat during the
quarter, while savings account balances grew 6% Q-o-Q.
Other highlights
Staff expenses declined 13% Q-o-Q as the bank made lower provisions towards
retirement costs during the quarter. Management highlighted that the total pension
obligation towards retired employees was around INR 1.5 bn, whereas one-fifth of INR
8.5 bn, pertaining to existing employees has been provided for.
Company Description
Oriental Bank of Commerce is a mid-sized PSU bank, with the 11th largest branch
network and 10th largest asset book among Indian banks. Historically, the bank had a
strong presence in northern and western India and the merger of Global Trust Bank
(then roughly 15% of the size of OBC) provided it the southern presence. The bank has
over 1,300 branches across India, all of which are under core banking solution.
Government ownership in the bank is at minimum 51%, leaving no room for further
equity dilution. FII holding in the bank is at maximum allowed 20%.
Investment Theme
Historically, high operating efficiency had enabled strong ROAs for OBC. It is amongst
the most efficient Indian banks, with operating expense to assets ratio at 1.4%. Asset
quality has shown remarkable improvement as recoveries remain strong for FY06-08. We
expect Bank to deliver 1%+ ROA/~19% ROE over FY11-12
Key Risks
Mid size PSU banks have high risk of NPL, considering their weak risk management
system. Exposed bond book makes it vulnerable to rising interest rates.
Government holding at minimum permissible level of 51%
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce’s (OBC) Q4FY11 NII of INR 10.1 bn (down 2% Q-o-Q)
was broadly in line with our estimate. In line with expectations, NIMs contracted
12bps Q-o-Q to 2.98%, reflecting the short-term nature of liability profile, exposing
margins to higher downside risk in a rising interest rate environment. Asset quality
concerns surfaced with slippages touching a high of 3% during the quarter, part of
them explained by switch over to system-based NPL recognition. Consequently, the
bank’s credit cost came in higher at 160bps. Despite the disappointment on higher
credit cost, PAT came in line at INR 3.3 bn due to tax credit of INR 0.5 bn. Staff
expenses were down sequentially as OBC had adequately provided for retirement
cost. Loan book growth, at 15%, continues to lag industry; however, management
has guided for an impressive 25% growth in FY12.
Incremental slippages jump to 3%
After reporting minimal slippages in Q1FY11 (0.5%), OBC’s slippages have risen
consistently—Q2FY11-1.5%, Q3FY11- 2.2%, and Q4FY11- 3%. Management
highlighted that during the quarter almost 50% slippages were on account of
switch over to system-based NPL recognition. Management guided that around
INR 700 mn of INR 6.5 bn slippages are technical in nature and expect upgrades
in the coming quarter. Headline asset quality numbers deteriorated, with gross
NPLs rising 9% Q-o-Q to INR 19.2 bn (1.98%) and net NPLs rising 15% Q-o-Q to
INR 9.4 bn (0.98%). Credit costs remained at elevated level of 160bps (Q3FY11:
90bps). Restructured book remained at around INR 52.7 bn, around 5.5% of
advances.
Outlook and valuations: Operationally weak, trades at discount;
maintain ‘BUY’
In line with our expectations, OBC’s margins contracted during Q4FY11,
reflecting the (short-term) nature of liability profile, exposing margins to higher
downside risk in a rising interest rate environment. Slippages touched a high of
3% during the quarter; we believe, they have peaked at the current level.
Though we expect pressure on margins to continue, declining credit costs may
partially support earnings; given the provisions that the bank has created for
second pension option, there are likely to be limited surprises on account of
higher-than-expected retirement costs. We are lowering our FY12E PAT estimate
by 7% to factor in higher credit costs and lower margins. Despite the near-term
headwinds, the stock’s valuation at 0.9x FY12E book is attractive given the
reasonable RoEs of 16%. We maintain ‘BUY’ recommendation on the stock and
rate it ‘Sector Underperformer’ on relative returns basis.
Margin headwinds
OBC’s NIMs contracted 12bps to 2.98% on account of increase in cost of deposits, while
yield on advances (at 10.6%), CASA (24.6%), and CD ratio (70%) remained stable
sequentially. Management expects NIMs to remain at 3% plus in the future as well. With
more than 70% of deposits with maturity of less than a year, OBC benefited from strong
deposit re-pricing, with cost of funds declining 176bps in FY10. However, with hardening
of interest rates, we believe the bank is vulnerable to further margin correction. We are
building in 2.6% NIMs (cal.) over FY12-13.
Modest fee income growth
The bank’s other income grew at 14% Y-o-Y supported by higher income from recoveries
and exchange profits which offset the decline in CEB fees. Treasury profits stood at INR
262 mn.
Business momentum subdued
Post introduction of base rate in Q2FY11, the bank’s loan book growth remained subdued.
During the quarter, loan book grew 5% Q-o-Q and 15% Y-o-Y to INR 959 bn.
Management has guided for an impressive 25% loan book growth for FY12. CD ratio
stood at 69% (leaving limited scope for further expansion). CASA ratio contracted
marginally by 60bps to 24.6%. Current account balances remained flat during the
quarter, while savings account balances grew 6% Q-o-Q.
Other highlights
Staff expenses declined 13% Q-o-Q as the bank made lower provisions towards
retirement costs during the quarter. Management highlighted that the total pension
obligation towards retired employees was around INR 1.5 bn, whereas one-fifth of INR
8.5 bn, pertaining to existing employees has been provided for.
Company Description
Oriental Bank of Commerce is a mid-sized PSU bank, with the 11th largest branch
network and 10th largest asset book among Indian banks. Historically, the bank had a
strong presence in northern and western India and the merger of Global Trust Bank
(then roughly 15% of the size of OBC) provided it the southern presence. The bank has
over 1,300 branches across India, all of which are under core banking solution.
Government ownership in the bank is at minimum 51%, leaving no room for further
equity dilution. FII holding in the bank is at maximum allowed 20%.
Investment Theme
Historically, high operating efficiency had enabled strong ROAs for OBC. It is amongst
the most efficient Indian banks, with operating expense to assets ratio at 1.4%. Asset
quality has shown remarkable improvement as recoveries remain strong for FY06-08. We
expect Bank to deliver 1%+ ROA/~19% ROE over FY11-12
Key Risks
Mid size PSU banks have high risk of NPL, considering their weak risk management
system. Exposed bond book makes it vulnerable to rising interest rates.
Government holding at minimum permissible level of 51%
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