Weak qtr; low dilution risk offers comfort -OBC :: HDFC Securities

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Weak qtr; low dilution risk offers comfort OBC’s disappointing net earnings (down 91%) were on the back of twin impact of: (1) de-recognition income of Rs 1.4bn booked on gain of sale to ARCs in H1FY15 and (2) similar quantum of MTM hit to value security receipts at Re 1. Core-earnings growth of 5% was in line, though a bumper treasury gain (Rs 2bn) led to 5% beat in operating profits. Loan growth further moderated to ~6%, though the negative surprise was faster consumption in capital (Tier-I down 26bps QoQ). Asset quality performance was weak with G/NNPA up 15/12% QoQ. Despite 12% QoQ rise in credit cost, PCR declined 160bps to 57%. The earlier aggressive income recognition policy came back to haunt the bank, which surprisingly coincided with the first quarterly result of the bank’s new MD & CEO. Factoring weak 3Q earnings and looming fear of income de-recognition of another Rs 2.8bn in FY16E, we cut our PAT/ABV estimate by 24/21% and 24/20% for FY16/17E respectively. We believe growth and NIM improvement remains a key challenge for the bank from a near to medium term perspective. Our positive stance on the stock is driven by the bank’s relatively better capital position (low dilution risk vis-à-vis peers) and macro recovery insight. Maintain BUY with revised TP of Rs 306/sh (0.9x FY17E ABV).  Gross stressed additions increased QoQ to Rs 34.5bn (ann. 9.8% vs. 4.8%) with incremental slippages (Rs 7.3bn) from the restructured pool. Combination of poor upgrades & recoveries of Rs 2.8bn and higher slippages of Rs 13.4bn (ann. 3.8% vs. 2.8% QoQ) led to 15% QoQ rise in GNPA (5.4%). Management guided for gross stressed addition Rs 30bn in 4Q as well. With rising instances of failed restructuring cases and high share of corporate book, we revise marginally upward our slippage estimates to avg. 2.7% over FY16-17E.  NII (Rs 12.9bn, +5% YoY) was in line with estimates, driven by better than expected NIM performance though loan growth was muted. Despite interest income reversal of Rs 900mn, NIM (2.7%) was up 6bps QoQ benefitting from the decline in cost of funds. High treasury gain offset muted fee income (Rs 2bn, +4.5% YoY). The bank reported a loss at PBT level owing to high credit cost and cumulative impact of Rs ~2.8bn towards income de-recognition. However, a tax writeback of Rs 273mn resulted in PAT of merely Rs 196mn

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