Oriental Bank of Commerce (OBC)
Banks/Financial Institutions
No respite from loan impairment. OBC delivered a weak performance with earnings
declining 8% yoy (28% yoy at PBT level) primarily on the back of high provisions. Loan
impairment was high on slippages (from power sector) and fresh restructuring. We
retain our REDUCE rating (TP reduced to `280 from `325 earlier) as we expect (1)
return ratios to remain weak factoring high provisions for loans and wage settlement
and (2) weak revenue growth to continue on the back of slower loan growth and
negligible NIM expansion.
NII growth disappoints, loan impairments remain high
4QFY13 was another weak quarter led by high tax reversals (tax rate - 64%), weak NII growth (1%
qoq) and high loan impairments (6% annualized). Earnings increased 16% yoy, while PBT declined
15% yoy driven by higher provisions. Overall provisions increased 42% yoy on high investment
depreciation (`485 mn) and an additional `700 mn provision for wage revisions, while NPL
provisions increased 10% yoy. NPLs increased 20 bps qoq primarily from corporate loans.
Restructured loans declined 120 bps qoq to 7.7% of loans on the back of repayments/new
guidelines. Loan book grew 15% yoy while margins remained flat at 2.8%.
Return ratios likely to remain weak; retain REDUCE
Return ratios are likely to remain subdued (RoEs at 12% and RoAs at 0.7-0.8%) on high credit
costs and weak revenue growth. Revenue growth is expected to struggle on the back of lower
loan growth and limited expansion in margins. Growth is likely to be challenging given the strong
focus of the bank in corporate segment and the relatively inflexible business model for retail.
Operating costs are expected to increase on the back of higher provisions for new wage
settlement. We build credit costs at 1.4% of loans on the back of high proportion of corporate
loans, increasing provision coverage. Maintain REDUCE rating and TP of `280 (from `325 earlier)
which implies 0.8X (12M forward) book and 6X EPS.
NIM stable at 2.8% qoq; broadly expected to remain at current levels
Margins remained stable qoq at 2.8% as yield on investments is yet to show any improvement,
while costs of funds remained stable (declined 19 bps over past 3 quarters). The lending spread for
the bank declined 10 bps yoy to 3.9% in FY2013 with a high share of the decline led by high
interest rate reversals. The bank’s high exposure to SEB could be a key concern as yields on new
loans/investments are at a substantial discount to what had been contracted earlier. Investment
spreads increased 50 bps qoq in FY2013 and are expected to increase from here, as the bank is
gradually building a high-yielding investment portfolio. We expect margins to remain broadly
stable over FY2013-15E.
Loan impairment high at 6%; repayments lower restructured loans
The quarter saw no respite in fresh delinquencies, 6% on an annualized basis – 3.4% of
fresh slippages and 2.6% of fresh restructuring. Gross NPLs increased 13% qoq on an
absolute level, 20 bps qoq to 3.2% of loans despite 1% write-offs for the quarter. Of the
fresh slippages, ~40% is from a single corporate account which has been restructured under
the CDR process while the bank reported it as an NPL since the promoter failed to meet
certain commitments. Of the remaining slippages, 24% is from restructured loans.
Standard restructured loans declined to `99 bn, 7.7% of loans, from `110 bn in Q3FY13
(8.9% of loans) despite 2.6% of fresh restructuring during the quarter on the back of high
repayments (one state electricity board repaid `5 bn of loans), while `10 bn of loans were
moved out of the restructured category based of satisfactory performance (from 2 years of
first repayment).
We remain cautious on the asset quality as the bank has high proportion of corporate loans
which tend to be chunky in nature. We factor in slippages at 2.6% over FY2014-15E and
credit costs to remain at 1.4% to factor high slippages/restructuring, improvement in
provision coverage and dynamic provisions.
Loan growth at 15% yoy; pick-up in loans to large and mid-corporate segments
Overall loans grew 15% yoy led by strong growth in retail loans (11.3% of total loans
compared to 10.3% as of FY2012). Loans to large and mid-corporate segments, which had
slowed to 11% yoy over the past 2 quarters, picked up at 16% yoy, while SME loans grew
17% yoy.
Exposure to infrastructure declined 50 bps qoq to 21%, largely driven by decline in loans in
the power sector (60 bps qoq) while exposures to other segments, telecom and roads/ports,
remained stable at 2% and 4% respectively. Within power, the share of loans to private
sector remained stable qoq at 5% while exposure to Central and State Governments
declined to 7.7% from 8.2% in December. We are building loan growth at 13-14% CAGR
for FY2014-15E.
Deposits grew 13% yoy (4% qoq) driven by growth in current deposits, which increased
24% yoy while saving deposits increased 12% yoy. Overall CASA ratio improved 70 bps qoq
to 25%. The proportion of bulk deposits decreased to 20% from 28% as of FY2012.
Other highlights for the quarter
Non-interest income grew 34% yoy led by 55% yoy growth in treasury income and 27%
yoy increase in fee income. Income from loan recovery increased to `1.2 bn compared to
`955 mn in 3QFY12 ands `300 mn in 4QFY12.
Cost-income ratio for the quarter stands at 44% compared to 42% in the previous
quarter on the back of lower revenue growth. Operating expense growth has been 5%
higher than expected (11% qoq growth) while total income grew 6% qoq. The bank
made higher provisions for wage revision at `700 mn during the quarter (`300 mn
provision taken in 3QFY13).
The bank reversed provision for tax in the current quarter, benefit accruing based on the
Catholic Syrian Bank judgment. The benefits of the judgment, already taken over the past
two years, have now been extended to previous four years.
No comments:
Post a Comment