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Oriental Bank of Commerce Rs 343
Asset quality concerns – A Key earning risk
We recently met the management of the bank and the key highlights of our interaction are as
follows:
Credit to grow in line with systemic growth
The management expects loan book to expand by 20% in FY12 against 13.9% in FY11. Credit to
deposit ratio is likely to be maintained at 70% in FY12. Fee income is expected to grow in line
with the loan growth in the current fiscal.
Margin to be maintained at 3.0%
The recent hike of 50bps in savings deposit rate will impact its margin by 15bps. The bank is
confident of passing on any rise in cost of funds in order to protect its margin. About Rs 6,000
crore of deposits are likely to mature in June 2011 indicating near term margin pressure.
However, the bank aims to maintain its margin close to 3% during FY12 nonetheless weak
liability franchise.
Delinquencies- key earnings risk
The gross NPA and net NPA stood at 1.98% and 0.98% respectively in FY11. The size of
restructured asset book is 5.5% of loans, out of which 9.86% have slipped into NPA. The
management targets 1.80% gross NPA and 0.75% net NPA for this fiscal. By June 2011, entire
NPA recognition would be system based except agriculture loans. It aims to recover Rs 100
crore per month (Rs 1,000-1,200 crore in FY12).
Well capitalized for growth
The bank does not require equity capital and is adequately capitalized to grow for another two
years. Its CAR stands at 12.5% while tier I pegs at 9.3%. Further, it has headroom to raise Rs
~5,000 as tier II capital.
Other highlights
The management is expecting cost to income ratio to remain below 40% in FY12 while ROA and
ROE is expected at 1% plus and 20% respectively during this fiscal.
It also plans to add 125 new branches in this fiscal.
Change in management: Mr. Nagesh Pyadh, CMD of the bank is likely to retire in February
2012. Mr. SL Bansal, current ED of United Bank of India is expected to replace him.
Valuation & Recommendation
At Rs 343, the stock is trading at 5.6x FY12 earnings and 0.86x FY12 Adjusted book. We are
cautious on mid size public sector banks due to growth moderation and asset quality concerns.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce Rs 343
Asset quality concerns – A Key earning risk
We recently met the management of the bank and the key highlights of our interaction are as
follows:
Credit to grow in line with systemic growth
The management expects loan book to expand by 20% in FY12 against 13.9% in FY11. Credit to
deposit ratio is likely to be maintained at 70% in FY12. Fee income is expected to grow in line
with the loan growth in the current fiscal.
Margin to be maintained at 3.0%
The recent hike of 50bps in savings deposit rate will impact its margin by 15bps. The bank is
confident of passing on any rise in cost of funds in order to protect its margin. About Rs 6,000
crore of deposits are likely to mature in June 2011 indicating near term margin pressure.
However, the bank aims to maintain its margin close to 3% during FY12 nonetheless weak
liability franchise.
Delinquencies- key earnings risk
The gross NPA and net NPA stood at 1.98% and 0.98% respectively in FY11. The size of
restructured asset book is 5.5% of loans, out of which 9.86% have slipped into NPA. The
management targets 1.80% gross NPA and 0.75% net NPA for this fiscal. By June 2011, entire
NPA recognition would be system based except agriculture loans. It aims to recover Rs 100
crore per month (Rs 1,000-1,200 crore in FY12).
Well capitalized for growth
The bank does not require equity capital and is adequately capitalized to grow for another two
years. Its CAR stands at 12.5% while tier I pegs at 9.3%. Further, it has headroom to raise Rs
~5,000 as tier II capital.
Other highlights
The management is expecting cost to income ratio to remain below 40% in FY12 while ROA and
ROE is expected at 1% plus and 20% respectively during this fiscal.
It also plans to add 125 new branches in this fiscal.
Change in management: Mr. Nagesh Pyadh, CMD of the bank is likely to retire in February
2012. Mr. SL Bansal, current ED of United Bank of India is expected to replace him.
Valuation & Recommendation
At Rs 343, the stock is trading at 5.6x FY12 earnings and 0.86x FY12 Adjusted book. We are
cautious on mid size public sector banks due to growth moderation and asset quality concerns.
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