Oriental Bank of Commerce:: TP: INR415 Buy:: Motilal oswal,

Oriental Bank of Commerce (OBC) reported 80% YoY growth in 2QFY13 PAT to INR3b, 9% below our estimate. Inline
NII (stable NIM QoQ at 2.8%) and 13% higher than estimated non-interest income led to 4% higher than
estimated operating profit. However, higher provision of INR4.6b and tax rate of 34.5% (expected 30%) led to
lower than estimated PAT. Key highlights:
 Bank restructured INR5.3b in 2QFY13, as a result outstanding (o/s) restructured loans increased to INR115b
(9.7% of loans). Excluding government entities (SEB and Air India), o/s restructured loans was at 4.8% of loans.
 GNPA was stable (+3% QoQ), led by higher write-offs; slippages were INR6.5b v/s INR7b in 1QFY13.
 Momentum from recoveries from written-off accounts remains strong at INR1.4b v/s INR260m in 1QFY13.
 Management guidance for FY13: (1) NIM of 2.85% (3% for 4Q) v/s 2.79% in 1HFY13, (2) GNPA of 2.8% (2.92% in
2Q) and NNPA of 1.75% (2.04% in 2Q), (3) PCR of 70% (64.5% in 2Q) and (4) Loan growth of 16%.
Valuation and view: Reduction in high cost deposits and easing interest rate in the system are likely to be margin
accretive for OBC. Management’s focus to strengthen its balance sheet even at the cost of growth is a step in the
right direction. Restructuring pipeline of INR25b over the next couple of quarters and a challenging macro
environment will keep asset quality under pressure. However, valuations at 0.7x FY14E BV discount this. Buy.

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Valuation and view
Reduction in high cost deposits and easing interest rates are likely to be margin
accretive for OBC. While there would be some pressure on yield on loans, margins
should expand 5/10bp over FY13/14. The management’s focus to strengthen balance
sheet even at the cost of growth is a step in the right direction, in our view.
During the quarter, accretion of fresh slippages declined and the management expects
to improve asset quality (GNPA) hereon. While the restructuring pipeline of INR25b
over the next couple of quarters and the challenging macro environment may lead to
volatility in slippages, we believe that the concerns are largely priced-in.
Though our operating profit estimate for FY13 remains unchanged, we downgrade
our earnings estimate by 5% to factor in higher provisions on restructured loans.
In 1HFY13, the tax rate stood at 32.8%. The management has guided tax of 20% for
FY13, implying a much lower tax rate for 2HFY13. We model a tax rate of 27.5% for
2HFY13. We expect OBC to report an EPS of INR48 for FY13 and INR57 for FY14. We
estimate BV at INR417 for FY13 and INR461 for FY14. We expect the bank to report an
RoA of ~0.7% and RoE of 12/13% over FY13/14.
We maintain OBC as our top pick among mid-cap state-owned banks, given (a) the
management’s focused strategies to improve the health of the balance sheet even at
the cost of growth, (b) higher capitalization, with tier-I ratio of ~10%, (c) top
management continuity till September 2014, and (d) attractive valuations. The stock
trades at 0.8x FY13E BV and 0.7x FY14E BV. Maintain Buy.