Buy Oriental Bank of Commerce ::Gaining strength from consolidation… 􀂃 ICICI Securities,

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Gaining strength from consolidation…
􀂃 Story so far…
• OBC is a mid-sized PSB with government stake of 58%, network
of 1633 branches with a strong presence in North India and
Maharashtra
• Total business size of | 2,35,893 crore with a market share of
2.4% in advances and 2.5% in deposits
• The bank expanded its business mix at a CAGR of 25% over
FY06-10 before slowing down growth in FY11 to control its asset
quality. During the consolidation phase, the bank has shored up
its margins above 3% and improved its RoA above 1% in FY11
• The worst seems to be over for the bank’s asset quality as it has
shifted ~97% of its loans to system based NPA recognition,
leading to increased GNPA and provisioning
• It is one of the few PSBs, which had minimum impact of one-off
provisions due to retired employees on its P&L as ad-hoc
provisions were in place depicting management foresight
􀂃 Going ahead
• We expect a pick-up in business growth (in line with the industry)
in the coming years post consolidation. The bank doubled its
balance sheet size over FY05-09 growing at a CAGR of 20%. If we
peg the average business growth at average industry growth rate
of ~19% CAGR over the next cycle i.e. FY09-13E, we estimate the
bank will double its balance sheet size to approximately | 2,25,000
crore by FY13E
• NIM will be stable at ~3% for the bank as it is growing its
exposure to small and micro enterprises
• We anticipate incremental slippages will slow down and asset
quality will be maintained with GNPA of 2% and NNPA of 0.9% in
the coming years
• Strong recovery post legacy issues will help improvement in
return ratios, RoA at 1% & RoE at 18-20% on a consistent basis
Valuation
OBC has a favourable risk reward ratio as it is available at an attractive 1x
FY11 ABV. We believe that, going forward, a pick up in business growth
and maintained margins would lead to stronger core business
performance. With a slowdown in incremental slippages, lower credit
costs would boost the bottomline. This would lead to a long term RoA of
~1% and RoE of ~18%. Hence, we recommend the stock as a top pick
among peers.