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Core operating performance improving
Valuations compelling; Buy
Over the past two years, OBC's core operating performance has improved, with margins up to 3.2%
in FY11 from 2.2% in FY09, and earnings CAGR of 29% over FY09-11. However, asset quality issues
and concerns over margin sustainability are weighing on the stock. The stock has corrected by 27%
during FY12YTD, underperforming Bankex by 8%. We expect OBC to deliver earnings CAGR of 15%,
driven by operating leverage and lower credit cost. The stock trades at 0.7x FY12E and 0.6x FY13
BV, with RoA of 0.9% and RoE of 14-16% over FY11-13E. Valuations are attractive and coupled with
3.5%+ dividend yield, offer favorable risk-reward ratio. Buy, with a target price of INR440.
Expected fall in interest rates a key trigger: OBC will be a key beneficiary of the stable/declining
interest rates due to high proportion of wholesale bulk deposits (30%+) on its balance sheet. Expected
moderation in cost of funds and lower strain in asset quality will provide cushion to margins. Further
utilization of excess liquidity in the balance sheet (CD ratio at 68%) and capital infusion of INR17b at the
end of 4QFY11, will help margins. We model in ~30bp decline in FY12 and flat NIM in FY13.
Asset quality to improve in 2HFY12: Over FY10-11, OBC reported stress on asset quality, led by
slippages from restructured portfolio, and transition to system-based NPA recognition. We expect the
trend to continue in 2QFY12, as the bank transits its remaining portfolio to system-based NPA recognition
(88% of loans up to INR1m have been covered up to 1QFY12). However, upgrades and recoveries will also
pick up in 2HFY12, resulting in lower credit cost. We model in credit cost of 0.8-0.9% over FY12/13.
Loan growth to be in line with industry average: OBC has been reducing its dependence on low
margin bulk business and has been shedding short-term corporate loans in order to maintain / improve
margins and profitability. For FY12, the bank is targeting 18-20% loan growth driven by PSL, retail (housing
loans) and SME segments. We are model in loan CAGR of 18% over FY12-13.
Conservative pension provisioning: OBC is one of the most conservative in terms of its provision
policies for AS-15, with discount rate of 8.5% (in-line with peers) and salary escalation at 6% (highest
amongst peers). Both these factors will create buffer in case of revision in actuarial parameters for pension
accounting (if standardized).
Business growth and asset quality to improve; Cost/income among the best
Focus on profitability has led to moderation in
balance sheet growth in FY11. We expect
business growth to improve and model in loan
growth of 18% and deposit growth of 16% for
FY12.
Reduction in proportion of bulk business and
lower interest rate has led to improvement in
margin over the past two years. OBC will be a
key beneficiary of stabilizing/ declining interest
rate, with 30%+ of bulk deposits in its balance
sheet.
Improvement in core operating performance and
improved efficiency has led to decline in core
cost to income ratio. We expect opex growth
of ~18% over FY11-13.
Over FY10-11, OBC reported stress on asset
quality, led by slippages from restructured
portfolio, and transition to system-based NPA
recognition. However, strong recoveries and
upgradations will to lead to improvement in asset
quality.
1QFY12: CD Ratio at 68%, room for improvement; asset quality remains under pressure
Reported margins were largely stable QoQ (a
positive surprise) in 1QFY12 at 2.9%. While
cost of deposits increased 68bp, this was offset
by 78bp increase in yield on loans. The
management guided margins of 2.9-3% for
FY12.
OBC has created excess liquidity in the balance
sheet, with CD ratio moderating to 68% in
1QFY12. Improvement in CD ratio could
further provide cushion to margins.
Slippage ratio for 1QFY12 stood at 1.58%.
Shifting to system-based NPA recognition for
loans above INR1m in1QFY12 contributed to
incremental slippages. The bank still has 12%
of its portfolio (below INR1m) not classified
under CBS-based NPA recognition, which could
lead to higher slippage in 2QFY12. However,
in 2HFY12, higher up-gradations and recoveries
could lead to positive surprises.
Fee income growth moderates on a higher base.
We model in fee income growth of 15% for
FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Core operating performance improving
Valuations compelling; Buy
Over the past two years, OBC's core operating performance has improved, with margins up to 3.2%
in FY11 from 2.2% in FY09, and earnings CAGR of 29% over FY09-11. However, asset quality issues
and concerns over margin sustainability are weighing on the stock. The stock has corrected by 27%
during FY12YTD, underperforming Bankex by 8%. We expect OBC to deliver earnings CAGR of 15%,
driven by operating leverage and lower credit cost. The stock trades at 0.7x FY12E and 0.6x FY13
BV, with RoA of 0.9% and RoE of 14-16% over FY11-13E. Valuations are attractive and coupled with
3.5%+ dividend yield, offer favorable risk-reward ratio. Buy, with a target price of INR440.
Expected fall in interest rates a key trigger: OBC will be a key beneficiary of the stable/declining
interest rates due to high proportion of wholesale bulk deposits (30%+) on its balance sheet. Expected
moderation in cost of funds and lower strain in asset quality will provide cushion to margins. Further
utilization of excess liquidity in the balance sheet (CD ratio at 68%) and capital infusion of INR17b at the
end of 4QFY11, will help margins. We model in ~30bp decline in FY12 and flat NIM in FY13.
Asset quality to improve in 2HFY12: Over FY10-11, OBC reported stress on asset quality, led by
slippages from restructured portfolio, and transition to system-based NPA recognition. We expect the
trend to continue in 2QFY12, as the bank transits its remaining portfolio to system-based NPA recognition
(88% of loans up to INR1m have been covered up to 1QFY12). However, upgrades and recoveries will also
pick up in 2HFY12, resulting in lower credit cost. We model in credit cost of 0.8-0.9% over FY12/13.
Loan growth to be in line with industry average: OBC has been reducing its dependence on low
margin bulk business and has been shedding short-term corporate loans in order to maintain / improve
margins and profitability. For FY12, the bank is targeting 18-20% loan growth driven by PSL, retail (housing
loans) and SME segments. We are model in loan CAGR of 18% over FY12-13.
Conservative pension provisioning: OBC is one of the most conservative in terms of its provision
policies for AS-15, with discount rate of 8.5% (in-line with peers) and salary escalation at 6% (highest
amongst peers). Both these factors will create buffer in case of revision in actuarial parameters for pension
accounting (if standardized).
Business growth and asset quality to improve; Cost/income among the best
Focus on profitability has led to moderation in
balance sheet growth in FY11. We expect
business growth to improve and model in loan
growth of 18% and deposit growth of 16% for
FY12.
Reduction in proportion of bulk business and
lower interest rate has led to improvement in
margin over the past two years. OBC will be a
key beneficiary of stabilizing/ declining interest
rate, with 30%+ of bulk deposits in its balance
sheet.
Improvement in core operating performance and
improved efficiency has led to decline in core
cost to income ratio. We expect opex growth
of ~18% over FY11-13.
Over FY10-11, OBC reported stress on asset
quality, led by slippages from restructured
portfolio, and transition to system-based NPA
recognition. However, strong recoveries and
upgradations will to lead to improvement in asset
quality.
1QFY12: CD Ratio at 68%, room for improvement; asset quality remains under pressure
Reported margins were largely stable QoQ (a
positive surprise) in 1QFY12 at 2.9%. While
cost of deposits increased 68bp, this was offset
by 78bp increase in yield on loans. The
management guided margins of 2.9-3% for
FY12.
OBC has created excess liquidity in the balance
sheet, with CD ratio moderating to 68% in
1QFY12. Improvement in CD ratio could
further provide cushion to margins.
Slippage ratio for 1QFY12 stood at 1.58%.
Shifting to system-based NPA recognition for
loans above INR1m in1QFY12 contributed to
incremental slippages. The bank still has 12%
of its portfolio (below INR1m) not classified
under CBS-based NPA recognition, which could
lead to higher slippage in 2QFY12. However,
in 2HFY12, higher up-gradations and recoveries
could lead to positive surprises.
Fee income growth moderates on a higher base.
We model in fee income growth of 15% for
FY12.
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