Oriental Bank of Commerce -Nirmal bang,

Higher provisions impact performance
The bank’s operating performance for Q3FY13 was slightly below estimates. Although Net interest income improved QoQ driven by lower cost of deposits; non-interest income declined sequentially due to lower recovery from written off accounts limiting the growth in core earnings. Higher provisions (+31.3% QoQ and 58.5% YoY) lead to 8% YoY decline in net profit at Rs 326.4 cr.
The bank adopted a prudent approach and provided Rs 78 cr to account for the increased provisioning norms on restructured books from 2% to 2.75% in one shot and provided Rs 30 cr on employee wage revision.
The bank witnessed some stress on its asset quality with gross NPA witnessing an increase on sequential basis; after witnessing an improvement for last two quarters. However, the increase in slippages has been on expected lines. Going forward, with an expected improvement in the recovery efforts of the bank and control over fresh slippages (close to peaking out), Management expects Gross NPAs to show a declining trend.
The Management has so far been successful in focusing on areas like retail lending, CASA accretion leading to higher NIMs, improving the asset quality of the bank with focus on recoveries. We believe that all these efforts will yield results in the bank’s performance with an improvement in the economic scenario. We still remain concerned about the expected restructuring (~Rs 2000-2200 cr) which will come in Q4FY13. Nevertheless considering the structural improvements taking place in the balance sheet, we expect the bank’s profitability to grow at 16.0% CAGR over FY12-FY14E. At CMP, the stock is trading at 0.96x and 0.88x FY13E and FY14E Adj BVPS and 7.06x and 6.27x FY13E and FY14E EPS respectively. We recommend to HOLD the stock and BUY at dips with a target price of Rs 376 (1.0 FY14E BV) indicating potential upside of 13.9% from current levels.
NIM stood at 2.84%, being 5 bps higher on QoQ basis. Advances grew 11.7% YoY and 4.9% QoQ to Rs 123,626 cr as on December’12. Gross NPA increased 6.5% QoQ to Rs 3,690 cr whereas net NPA increased by 9.1% QoQ to Rs 2610.6 cr. Gross NPA ratio stood at 2.98% and Net NPA ratio stood at 2.14%. Slippages stood at Rs 813 cr (slippage ratio of 2.6%) in Q3FY13 The bank added Rs 741 cr to its restructured book taking the total restructured book stands at Rs 11,798 cr (9.5% of total advance book) The bank took tax reversal of Rs 4 cr in Q3FY13. Management maintained its Tax rate guidance of 20%. Capital Adequacy Ratio stood at 12.25% as on December 2012 with Tier I ratio of 9.14%.

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Valuation and Recommendation
Management has been successful in focusing on areas like retail portfolio, CASA accretion leading to improvement in NIMs, improving the asset quality of the bank with focus on recoveries. However, we remain concerned about the expected restructuring (~Rs 2000-2200 cr) in Q4FY13. We believe that an improvement in the economic scenario will lead to an improvement in the bank’s performance as well; albeit at a faster pace. Given the improvement in the bank’s earnings and the structural improvements in the balance sheet, we expect the bank’s profitability to grow at 16.0% CAGR over FY12-FY14E. At CMP, the stock is trading at 0.96x and 0.88x FY13E and FY14E Adj BVPS and 7.06x and 6.27x FY13E and FY14E EPS respectively. We recommend to HOLD the stock and BUY at dips with a target price of Rs 376 (1.0 FY14E BV) indicating further upside of 13.9% from current levels.