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Oriental Bank of Commerce (ORBC.BO): Initiate with Neutral
Investment view
We initiate coverage on Oriental Bank of Commerce (OBC) with a Neutral
rating and a Camelot-derived 12-month target price of Rs290 based on
12-m fwd P/B of 0.8X. Low profitability (FY12-14E average ROA of 0.6%
relative to the PSU average of 0.9%) driven by its lower margin and fees,
and asset quality issues have led the stock to de-rate. While valuations
are not demanding, in our view (currently trades at 0.68X 12m fwd. P/B
vs. historical average of 0.8X and 6.7X P/E 12m fwd. vs historical average
of 1X) the stock is unlikely to re-rate unless we see improvement on all
these fronts. We expect OBC to show earnings growth of 3% CAGR over
FY11-14E on account of: a) volumes growth of about 18% CAGR; b)
stable NIMs; and c) higher credit costs at 1% versus 0.7% over the past
three years.
Core drivers of growth
OBC in our view faces headwinds to earnings growth due to: a) slower
loan growth (18% CAGR over FY11-14 vs. 20.8% for banks under
coverage), b) continued pressure on asset quality (we build in higher
slippages at 2.9%) and c) higher MTM losses in 2HFY13 given that 10-
year government bond yields are at about 8.8%. Higher exposure to
infrastructure-related sectors, which are under pressure, will further
affect growth momentum. On the positive side, aggressive rate cuts by
the RBI of 150bps in FY13 will likely lead to a) concerns on NPLs receding
and b) respite on margins as OBC has about 30% of deposits in the bulk
category.
Valuation
OBC is currently trading at 0.9x 12-m forward adjusted (for net NPLs and
15% of restructured assets) P/B against an average ROA of 0.62% over
FY12-14E. Our Camelot model gives a P/B of 1X, implying a price target
of Rs290. Concerns on potential slippages and change in management in
three months will restrict the re-rating, in our view.
Risks to the investment case
Key upside risks to our estimate are: a) aggressive cuts by the RBI earlier
than anticipation, b) marked improvement in asset quality.
Downside risks include: a) prolong slowdown in economy and b) higher
interest rates to further affect asset quality.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Sector report
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of Commerce (ORBC.BO): Initiate with Neutral
Investment view
We initiate coverage on Oriental Bank of Commerce (OBC) with a Neutral
rating and a Camelot-derived 12-month target price of Rs290 based on
12-m fwd P/B of 0.8X. Low profitability (FY12-14E average ROA of 0.6%
relative to the PSU average of 0.9%) driven by its lower margin and fees,
and asset quality issues have led the stock to de-rate. While valuations
are not demanding, in our view (currently trades at 0.68X 12m fwd. P/B
vs. historical average of 0.8X and 6.7X P/E 12m fwd. vs historical average
of 1X) the stock is unlikely to re-rate unless we see improvement on all
these fronts. We expect OBC to show earnings growth of 3% CAGR over
FY11-14E on account of: a) volumes growth of about 18% CAGR; b)
stable NIMs; and c) higher credit costs at 1% versus 0.7% over the past
three years.
Core drivers of growth
OBC in our view faces headwinds to earnings growth due to: a) slower
loan growth (18% CAGR over FY11-14 vs. 20.8% for banks under
coverage), b) continued pressure on asset quality (we build in higher
slippages at 2.9%) and c) higher MTM losses in 2HFY13 given that 10-
year government bond yields are at about 8.8%. Higher exposure to
infrastructure-related sectors, which are under pressure, will further
affect growth momentum. On the positive side, aggressive rate cuts by
the RBI of 150bps in FY13 will likely lead to a) concerns on NPLs receding
and b) respite on margins as OBC has about 30% of deposits in the bulk
category.
Valuation
OBC is currently trading at 0.9x 12-m forward adjusted (for net NPLs and
15% of restructured assets) P/B against an average ROA of 0.62% over
FY12-14E. Our Camelot model gives a P/B of 1X, implying a price target
of Rs290. Concerns on potential slippages and change in management in
three months will restrict the re-rating, in our view.
Risks to the investment case
Key upside risks to our estimate are: a) aggressive cuts by the RBI earlier
than anticipation, b) marked improvement in asset quality.
Downside risks include: a) prolong slowdown in economy and b) higher
interest rates to further affect asset quality.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Sector report
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