Oriental Bank of Commerce - Lackluster Quarter; Result Update Q3FY15 ::Edelweiss

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

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Oriental Bank of Commerce's (OBC) TP: INR355 Buy:: Motilal oswal,

Oriental Bank of Commerce's (OBC) reported PAT for 4QFY13 grew 16% YoY
(declined 6% QoQ) to INR3.1b (7% below our estimate). Key highlights:
 NII grew 14% YoY (flat QoQ) to INR12.1b (5% below our estimate). Reported
NIM was flat QoQ at 2.8% v/s our expectation of 10bp QoQ improvement.
 Slippages were INR10.4b (v/s INR8.1b in 3QFY13). These included one large
account of INR4.6b, which was earlier expected to be restructured. Adjusted
for this, gross slippages were ~INR6b, better than the guidance of INR7b-8b.
 Incremental restructuring in 4QFY13 was at INR8b (v/s guidance of INR13b).
 Other highlights: (1) Loans grew 5% QoQ and 15% YoY, (2) CASA ratio and
proportion of bulk deposits was stable QoQ at 23.9% and 20%, respectively,
(3) Provision on employee expense increased to INR200m per month
(factored 20% wage hike) v/s INR150m per month in 3QFY13, (4) While PBT
was 58% below estimate, Nil tax rate v/s expectation of 26.9% helped PAT.
 Management guidance for FY14: (1) NIM of 2.9% v/s 2.8% in FY13, (2) GNPA
and NNPA to be contained at 2.9% and 2%, respectively v/s 3.2% and 2.3% in
FY13 and (3) PCR (including technical write-off) of 68%+ v/s 63% in FY13.
Valuation and view: Reduction in high cost deposits and easing interest rate in
the system are likely to be beneficial for OBC in perspective of NIM. During the
quarter, though accretion of fresh slippages was higher QoQ, adjusted for one
large account, which was expected to be restructured, it was lower than
management guidance. OBC is likely to report RoA of ~0.8% and RoE improvement
from ~11% in FY12 to 14% in FY15. Maintain Buy.

Oriental Bank of Commerce: No respite from loan impairment ::Kotak Sec

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.

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%.

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.

OBC: Target Price Rs 351: Nirmal Bang

Results above expectation; improving asset quality
The bank reported good results for Q2FY13 with control over slippages, improving provision coverage ratio and reducing bulk deposits. In a challenging environment, the bank has been able to post good results backed by an improvement in asset quality which is encouraging. 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.
Earlier, the bank had witnessed significant deterioration in the asset quality. However, going forward, with a significant improvement in the recovery efforts of the bank and control over fresh slippages, Gross NPAs have started showing an improving trend.
The new management so far been successful in bringing about a meaningful change in the banks overall performance. The determination to deliver what has been committed makes it stand apart from other PSU banks. Management has identified some focus areas which includes focus on retail portfolio, improving CASA ratio and thereby improving the NIMs, improving the asset quality of the bank with focus on recoveries.
Going forward, we believe that all such efforts will lead to an improvement in the bank’s overall performance. However, we remain concerned about the expected restructuring (~Rs 2500 cr) in Q3FY13. Nevertheless, 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 23.1% CAGR over FY12-FY14E.
At CMP, the stock is trading at 0.9x and 0.79x FY13E and FY14E Adj BVPS and 6.66x and 5.21x FY13E and FY14E EPS respectively. We recommend to HOLD the stock and BUY at dips with a target price of Rs 351 (0.9x FY14E BV) indicating potential upside of 13.7% from current levels. NIM for the quarter stood at 2.79%, being 15 bps higher on YoY basis. Advances grew 12.7% YoY and 3.4% QoQ to Rs 117,821.4 cr driven by retail (14.5% YoY), large corporate (11.6%) & mid corporate (9.0% YoY). Gross NPA of the bank increased by 2.6% QoQ to Rs 3465.6 cr whereas net NPA increased by 3.8% QoQ to Rs 2393.4 cr. Gross NPA ratio stood at 2.92% while Net NPA ratio stood at 2.04%. The bank added Rs 529 cr to its restructured book of which Rs 329 cr was fresh addition and balance Rs 200 cr was Rs 200 cr was extension of working capital loan to existing accounts. The total restructured book stands at Rs 11,483 cr (9.8% of total advance book)- one of the highest in the industry Tax rate during the quarter came in higher at 35%. Management maintained its Tax rate guidance of 20% as it highlighted that higher tax in Q2 is due to the buffer being created. Capital adequacy ratio stands at 12.06% with Tier 1 ratio at 9.7%

Angel Broking - Oriental Bank of Commerce - RU4QFY2012 - Result Updates :PDF Link

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Oriental Bank of Commerce - RU4QFY2012

Buy OBC -Realigning business strategy: :: Motilal Oswal

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Realigning business strategy: Focus on qualitative growth
NPA management, recoveries to be key focus area
 De-bulking of balance sheet, with change in branch banking strategy to improve
operating parameters
 To improve CASA ratio by capitalizing on strong foothold in CASA-rich northern states
- targets CASA ratio of 25% by CY12 as against 22% as at the end of CY11
 Credit monitoring and NPA recovery to be key focus area
 To increase granularity in loan portfolio by increasing focus on SME and retail portfolio
We met the new CMD of Oriental Bank of Commerce (OBC), Mr SL Bansal to gain
insights into the bank’s strategies and its roadmap under the new leadership.
Our key takeaways:
De-bulking the balance sheet - A key requirement for improving operating
parameters: In the last few years, strong loan growth and focus on bulk business
led to a decline in OBC’s CASA ratio and impacted margins. As a strategy, Mr
Bansal intends to de-bulk the balance sheet. Accordingly, only select branches
would focus on the wholesale business while the others would focus on the
retail, SME and mid-corporate segments. In the process of realignment of its
balance sheet, the bank is willing to grow moderately.
Improving CASA ratio - To leverage strong foothold in CASA-rich northern region:
OBC’s CASA ratio has been lower among state-owned banks at ~22% as against
the industry average of ~30%. As at December 2011, the bank had ~1,750 branches, with very strong presence in
the CASA-rich northern region. The management is planning various initiatives to improve CASA ratio and to
leverage upon its strong foothold in the CASA-rich belt. Shedding of bulk deposits would also help to improve
CASA ratio. The management targets CASA ratio of 25% by the end of CY12 as compared to 22% in December 2011.
NPA management and recoveries - A key focus area: Recoveries from NPAs and strengthening of credit appraisal
at all levels to improve asset quality would be OBC’s key focus areas. Moreover, with the help of technology,
credit monitoring processes should advance considerably. The management is also considering providing
preemptive restructuring of assets where the borrower has been temporarily impacted by economic slowdown.
Valuation and view - Maintain Buy: We expect near-term margins to be under pressure due to (1) tight liquidity
conditions, (2) lower CASA ratio, and (3) higher proportion of deposits at preferential rates. However, we believe
the new management’s focus to improve the balance sheet, even at the cost of growth, is a step in the right
direction. Though core operating parameters are under pressure, a strong management at the helm of affairs
and low valuations are comforting. We expect OBC to report RoA of 0.7% and RoE of ~12% over FY12/13. The stock
trades at 0.7x FY12E and 0.6x FY13E BV. Maintain Buy.

Oriental Bank of Commerce - Risk reward favorable; upgrade to Buy; company update; upgrade to Buy; : Edelweiss PDF link

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Oriental Bank of Commerce (OBC IN, INR 255, upgrade to Buy)

We had downgraded our recommendation on Oriental Bank of Commerce (OBC) to ‘REDUCE’ in August 2011 (refer our note ‘Banking - Macro challenges getting serious’ dated August 29, ‘11) fearing earnings downgrade due to its vulnerability to asset quality risk (chunky power exposure to SEBs) and margin pressure (short term/wholesale dependant borrowing profile). Since then, consensus has revised earnings down 25% and the stock has also underperformed Bankex by 26%. At 0.7x FY13E adjusted book, we believe the risk-reward has turned favorable—given our view that wholesale rates will settle at lower levels in FY13 and slippages are close to peaking out (higher credit cost already built into consensus estimate). Hence, we upgrade our recommendation to ‘BUY’ with a TP of INR 337 (0.9x FY13 ABV).

Buy Oriental Bank of Commerce; Target :Rs 310:ICICI Securities

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B a c k   o n   t r a c k   p o s t   a b y sm a l   Q 2 F Y 1 2 …
Oriental Bank of Commerce (OBC) beat our estimates with PAT of | 354.2
crore (I direct estimate: | 265.1 crore). NIM was back on track at 2.9%
from 2.6% in Q2FY12 as NII grew 10.7% YoY and 15.2% QoQ to | 1140
crore (I direct estimate: | 1060.7  crore). The bank clocked 21.9% YoY
credit growth to | 110698 crore, which the management has guided shall
be maintained at 20% in FY12E. Non-interest income growth was strong
with 27.6% YoY and 6.4% QoQ growth to | 295.3 crore. C/I ratio jumped
373 bps YoY to 42.4% as operating expenses grew 24.8% YoY. GNPA
and NNPA ratio were stable at 2.9% and 1.9%, respectively. However,
outstanding restructured assets mounted 47.7% QoQ to | 6086 crore.
ƒ NIM back on track with sharp uptick of 26 bps QoQ to 2.9%...
NIM was back on track at 2.9% in Q3FY12 after NIM had dropped to
2.6% in Q2FY12 due to interest income reversal. YoA rose 58 bps
QoQ to 12.2% while CoD inched up 22 bps QoQ to 7.9%. Priority
sector lending in Q4FY12E and rising CoD would keep a check on
the NIM. The management has guided NIM of 2.9% in Q4FY12E.
ƒ Stressed assets may remain high…
Stressed asset (GNPA + restructured) stood at 8.4% of credit in
Q3FY12 compared to 6.9% in Q2FY12. GNPA increased 3.9% QoQ
to | 3232 crore. Incremental slippages for the quarter were | 699
crore with agriculture slippage at | 336 crore. Post system based
NPA recognition, technical upgradations were strong at | 328 crore.
Fresh restructuring during Q3FY12 was | 2207 crore, primarily on
account of | 900 crore restructuring of Uttar Haryana SEB and | 600
crore restructuring on account of a single telecom infra account. The
bank suffered a sacrifice in NPV on telecom infra account whereas
no such hit was taken for Uttar Haryana SEB restructuring. Total
restructuring provision for the quarter was | 143 crore. Management
has guided that fresh restructuring during Q4FY12E may be ~| 1500
crore, excluding Air India, where it has exposure worth | 1530 crore.
V a l u a t i o n
Exposure to Air India and stressed sectors like power, steel and textile
cause concerns to remain for higher  slippage and restructuring during
Q4FY12E. The bank has capital adequacy ratio of 12.1% with Tier I ratio at
9.5%. Factoring in higher NNPA, revised BV stands at | 345 from | 358,
leading to target price revision to | 310 and BUY rating (0.9xFY13E ABV).

Oriental Bank of Commerce: Q3FY12 – Business growth above industry::GEPL

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Q3FY12 – Business growth above industry, asset quality concern remains
• The bank reported decline in PAT of 13.2% Y-o-Y in Q3FY12 mainly due to higher growth of 31%
Y-o-Y in staff cost as the bank made provisions for staff welfare.
• NII has grown by 10.7% Y-o-Y as margins for the bank improved on sequential basis in Q3FY12.
• NIM stood at 2.9% in Q3FY12 vs 2.6% in Q2FY12.
• Advances have grown by 21.9% Y-o-Y and deposits grew by 20.8% Y-o-Y in Q3FY12.
• Asset quality improved as Gross NPA stood at 2.9% in Q3FY12 vs 3.0% in Q2FY12.
Result Highlights
Margins improve sequentially on back of higher yield on advances
NIM stood at 2.9% improving by 28bps Q-o-Q basis as yield on funds increased by 48bps Q-o-Q basis
to 9.54% against 25bps increase in cost of funds Q-o-Q basis to 6.95% in Q3FY12. Major reason for
low growth in cost of funds was decrease in bulk deposits from `406.2 bn in Q2FY12 to `194.9 bn in
Q3FY12. CASA deposits stood at 22.28% in Q3FY12.
Business growth remained above industry average
Advances for the bank has grown by 21.9% Y-o-Y basis and deposits by 20.8% Y-o-Y basis taking CD
ratio to 70.9% in Q3FY12. The bank has achieved its priority lending targets as set by RBI.
Management expects to achieve 20% growth in business in FY13E.
Asset quality improved, restructure book to increase by `~30 bn in Q4FY12.
Gross NPA has come down but restructured book increased to `75.98 bn as additional amount to
the tune of `28.5 bn got restructured in Q3FY12. The bank expects additional amount to the tune
of `30 bn to get restructured in Q4FY12. Out of this amount of `15 bn is towards Air India. The
banks total restructure loan book stands at 5.5% of total loan book as on Q3FY12. If additional
amount gets restructured then total percentage will increase to 8.2% of total loan book. Fresh
restructured loan book includes Uttar Haryana SEB (exposure of `9 bn) and GTL (exposure of `6 bn)
in Q3FY12.
During the quarter, there was fresh slippage of `3.36 bn from agri segment, as per management
there was recovery of `2 bn in month of Jan’ 12 from this fresh slippages.
Other updates
The bank had lower tax rate during quarter as provisions on restructured loan book give tax
benefit. There was treasury gain of `365 mn in Q3FY12. Retail segment saw fresh slippages of `1.55
bn in Q3FY12.
Valuation & Viewpoint
The bank has performed well above industry growth but concerns on asset quality are still not over.
Almost 3% of its loan book is in pipeline to get restructure which could add to low interest income
and fresh slippages to NPA. At CMP, the stock is trading at 0.65x and 0.59x book value of FY12E and
FY13E.

Sizzling Stocks: Tata Global Beverages; Oriental Bank of Commerce :: Business Line

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Sizzling Stocks: Tata Global Beverages (Rs 119.1)

Tata Global Beverages soared 22 per cent accompanied by extraordinary volumes in the last week, following its announcement of joint venture with the Starbucks group. With this rally, the stock appears to have resumed its long-term uptrend that has been in place from its 2008 trough of Rs 43.

But as the stock has run up sharply, its daily indicators and oscillators have reached over brought levels. The stock is hovering well above the upper boundary of the daily Bollinger Bands indicating over bought position. It is also facing key resistance at around Rs 121. A corrective decline to Rs 115 or Rs 111 is possible in the near-term if the stock fails to move above Rs 121.

On the upside, emphatic break through of Rs 121 will take the stock higher to Rs 128 and Rs 138 in the medium-term. Significant medium-term support for the stock is pegged at Rs 105. A fall below this level will mar the current medium-term uptrend and pull the stock down to Rs 95 and to Rs 92 in the ensuing months.

Oriental Bank of Commerce (Rs 288.2)

Following OBC's results report for the quarter ended December '11, the stock continued its strong up move by gaining 11.7 per cent in the past week. Ever since bottoming out from its 52-week low of Rs 190 registered on January 2, it has been on a strong medium-term uptrend. The stock has surged 51 per cent from its 52-week low. It has further breached the upper boundary of daily Bollinger Bands representing over brought position.

Further, the stock has a significant long-term resistance band ahead between Rs 300 and Rs 307. A downward reversal from this resistance can drag the stock down to Rs 260 and to Rs 230. But a conclusive breakthrough of the aforementioned resistance band will set a new trading range for the stock and pave the way for a rally to Rs 345-355 range in the medium-term.

Oriental Bank of Commerce (ORBC.BO): Initiate with Neutral :::Goldman Sachs

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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

Goldman Sachs: Financial Services :: Attractive valuations on slower growth, NPL woes; initiate Fed, OBC

Oriental Bank of Commerce: Disappointing quarter :: Kotak Sec

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Oriental Bank of Commerce (OBC)
Banks/Financial Institutions
Disappointing quarter. OBC’s net earnings were down 58% yoy and 52% below our
estimates primarily on the back of higher provisions (loan loss and taxation). While loan
growth accelerated to 20% yoy (from 12% in 1QFY12), weaker NIM and high
provisions on the back of 6% slippages (2.5% excluding the impact of the migration
exercise) pulled down reported earnings. We find valuations attractive at 0.7X book and
4.8X FY2013E EPS. Maintain BUY owing to its inexpensive valuations with TP of `430
(no change).

Buy Oriental Bank of Commerce; Target : Rs 358 ::ICICI Securities

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S l i p p a g e s   w r e a k   h a v o c ;   t o u g h   t i m e s   a h e a d …
Oriental Bank of Commerce’s (OBC)  Q2FY12 profit at | 168 crore was
abysmally below Street and our expectations (| 349 crore) with GNPA
shooting up from | 2035 crore in Q1FY11 to | 3111 crore. Even though
sequential business growth was healthy at 5.1%, NII declined 8.1% YoY
(2.8%QoQ) to | 989 crore due to interest income reversal of | 137 crore
on account of high slippages. Consequently, NIM declined 30 bps to
2.64%. Out of total slippages of | 1503 crore this quarter | 700 crore was
due to migration of sub 10 lakh loans to system based NPA recognition.
This pushed up provision for NPA by 153% QoQ to | 342 crore, thus
wiping profits. These windfall slippages would impact interest income,
going ahead, as well. Moreover, slippages expected in H2FY12 would
push up credit costs further. Hence, we have cut our earnings estimates
for FY12E and FY13E by 25% and 24%, respectively. We expect higher
GNPA at 2.5% and NNPA at 1.2% to stay till FY13E.
ƒ Business crosses | 2500 bn milestone, margins contract to 2.64%...
Total business grew 19.6% YoY  (5.1% QoQ) to | 255163 crore.
Deposits grew 18.9% YoY (3.5% QoQ) to | 149552 crore while
advances increased 20.1% YoY (7.5% QoQ) to | 105611 crore. We
expect credit growth of 18.5% as against 20% targeted by the bank
for FY12E. Even though CASA was flat QoQ at 22.9%, NIM
contracted by 30 bps QoQ to 2.64% with YoA rising only 27 bps
QoQ as against a 44 bps rise in CoD.
ƒ Asset quality concerns to stay…
Total slippages amounted to | 1503 crore out of which | 700 crore
was due to migration of sub | 10 lakh loans to system based NPA
recognition with the agri segment accounting for | 375 crore and
retail segment for | 327 crore. GNPA surged 52.9% QoQ to | 3111
crore (GNPA ratio: 2.95%) while  NNPA rose 86.8% QoQ to | 1978
crore  (NNPA  ratio:  1.9%).  We  expect  slippages  to  stay  high  in
H2FY12E and expect GNPA at 2.5% and NNPA at 1.2% by FY13E.
V a l u a t i o n
The stock is trading at a low 0.8x  FY13E ABV at the CMP of | 290. We
expect slippages to continue and have lowered our earning estimates,
thus depressing FY13E ABV by 9% to | 377. With lower RoA and RoE of
0.9% and 13.7%, respectively, for FY13E, we have valued the stock at
0.9x FY13E ABV at | 358.

Preview of Oriental Bank of Commerce; Q2FY12 Results Banking Sector Oct 2011 ::Way2Wealth

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Oriental Bank of Commerce
Even though we expect to remain more or less in line with Q1 figure, NIM will remain
under pressure for the bank.
􀂙 Growth in business will be on the lower side of the industry. CASA has been deteriorating since the
previous 2‐3 quarters and given the current market condition, we expect our concerns over the
same.
􀂙 The asset quality of the bank has been deteriorating since Q2FY11 till Q1FY12 with gross NPA
moving up from 1.67% to 2.07% from Q2FY11 to Q1FY12 respectively. We do not expect asset
quality to improve substantially as thebank is still shifting towards systembased recognition of
NPA’s.
􀂙 Return ratios are expected to be more or less in line with Q1FY12.
􀂙 Currently, the stock is available at a P/ABV of ~0.6x FY13E.

Oriental Bank of Commerce (OBC IN, Mkt Cap USD1.8b, Buy) :: Motilal Oswal

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Core operating performance improving
Valuations compelling; Buy
Over the past two years, OBC's core operating performance has improved, with margins up to 3.2%
in FY11 from 2.2% in FY09, and earnings CAGR of 29% over FY09-11. However, asset quality issues
and concerns over margin sustainability are weighing on the stock. The stock has corrected by 27%
during FY12YTD, underperforming Bankex by 8%. We expect OBC to deliver earnings CAGR of 15%,
driven by operating leverage and lower credit cost. The stock trades at 0.7x FY12E and 0.6x FY13
BV, with RoA of 0.9% and RoE of 14-16% over FY11-13E. Valuations are attractive and coupled with
3.5%+ dividend yield, offer favorable risk-reward ratio. Buy, with a target price of INR440.
 Expected fall in interest rates a key trigger: OBC will be a key beneficiary of the stable/declining
interest rates due to high proportion of wholesale bulk deposits (30%+) on its balance sheet. Expected
moderation in cost of funds and lower strain in asset quality will provide cushion to margins. Further
utilization of excess liquidity in the balance sheet (CD ratio at 68%) and capital infusion of INR17b at the
end of 4QFY11, will help margins. We model in ~30bp decline in FY12 and flat NIM in FY13.
 Asset quality to improve in 2HFY12: Over FY10-11, OBC reported stress on asset quality, led by
slippages from restructured portfolio, and transition to system-based NPA recognition. We expect the
trend to continue in 2QFY12, as the bank transits its remaining portfolio to system-based NPA recognition
(88% of loans up to INR1m have been covered up to 1QFY12). However, upgrades and recoveries will also
pick up in 2HFY12, resulting in lower credit cost. We model in credit cost of 0.8-0.9% over FY12/13.
 Loan growth to be in line with industry average: OBC has been reducing its dependence on low
margin bulk business and has been shedding short-term corporate loans in order to maintain / improve
margins and profitability. For FY12, the bank is targeting 18-20% loan growth driven by PSL, retail (housing
loans) and SME segments. We are model in loan CAGR of 18% over FY12-13.
 Conservative pension provisioning: OBC is one of the most conservative in terms of its provision
policies for AS-15, with discount rate of 8.5% (in-line with peers) and salary escalation at 6% (highest
amongst peers). Both these factors will create buffer in case of revision in actuarial parameters for pension
accounting (if standardized).

Business growth and asset quality to improve; Cost/income among the best

 Focus on profitability has led to moderation in
balance sheet growth in FY11. We expect
business growth to improve and model in loan
growth of 18% and deposit growth of 16% for
FY12.
 Reduction in proportion of bulk business and
lower interest rate has led to improvement in
margin over the past two years. OBC will be a
key beneficiary of stabilizing/ declining interest
rate, with 30%+ of bulk deposits in its balance
sheet.
 Improvement in core operating performance and
improved efficiency has led to decline in core
cost to income ratio. We expect opex growth
of ~18% over FY11-13.
 Over FY10-11, OBC reported stress on asset
quality, led by slippages from restructured
portfolio, and transition to system-based NPA
recognition. However, strong recoveries and
upgradations will to lead to improvement in asset
quality.

1QFY12: CD Ratio at 68%, room for improvement; asset quality remains under pressure

 Reported margins were largely stable QoQ (a
positive surprise) in 1QFY12 at 2.9%. While
cost of deposits increased 68bp, this was offset
by 78bp increase in yield on loans. The
management guided margins of 2.9-3% for
FY12.
 OBC has created excess liquidity in the balance
sheet, with CD ratio moderating to 68% in
1QFY12. Improvement in CD ratio could
further provide cushion to margins.
 Slippage ratio for 1QFY12 stood at 1.58%.
Shifting to system-based NPA recognition for
loans above INR1m in1QFY12 contributed to
incremental slippages. The bank still has 12%
of its portfolio (below INR1m) not classified
under CBS-based NPA recognition, which could
lead to higher slippage in 2QFY12. However,
in 2HFY12, higher up-gradations and recoveries
could lead to positive surprises.
 Fee income growth moderates on a higher base.
We model in fee income growth of 15% for
FY12.

Buy Oriental Bank of Commerce ; Target : Rs 410::ICICI Securities

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Oriental Bank of Commerce


S t e a d y   p e r f o r m a n c e  i n   t  o  u g  h   s c e  n  a r  i o…
Oriental Bank of Commerce’s (OBC) business grew 16% YoY (3.3% QoQ)
to | 2,42,770 crore. NII was flat QoQ at | 1018 crore (our estimate: | 1022
crore) with non interest income up 50.8% YoY to | 324 crore due to
healthy treasury income at | 72 crore (in a scenario where most banks are
facing MTM situation). NIM was stable at 2.94% (4 bps QoQ dip) but OBC
aims  to  improve  its  NIM  to  3%  by  FY12E.  The  cost  to  income  ratio  (C/I)
jumped from 35.8% in Q4FY11 to 40.3% in Q1FY12 as it provided | 105
crore for second pension option and gratuity. Provisions excluding taxes
declined 44% QoQ easing pressure off profits that grew 6.3% QoQ to |
355 crore. GNPA and NNPA came in at 2.1% and 1.1%, respectively, as
bank migrated loans above | 10 lakh to system based NPA. We expect
GNPA and NNPA at 2% and 1%, respectively, by FY13E.
ƒ Business to grow at 19% CAGR over FY11-13E
Deposits grew 17.5% YoY (4% QoQ) to | 1,44,554 crore while
advances increased 14.1% YoY (2.4% QoQ) to | 9,8216 crore. The
bank is targeting credit growth of 20% YoY with deposit growth low
at 17% as its C/D ratio is relatively low at 68% leaving room for
growth in FY12E. OBC plans to add 20 branches each quarter, which
would improve CASA (currently 23.4%). We estimate 19% CAGR in
total business to boost PAT by 21% CAGR over FY11-13E.
ƒ Slippages to remain high in Q2FY12 as well…
Due  to  system  based  NPA  recognition,  GNPA  rose  5.9%  QoQ  to  |
2034 crore while NNPA shot up 13% QoQ to | 1059 crore in
Q1FY12. OBC has already shifted loans above | 10 lakh to system
based NPA recognition and will shift remaining ~12% of its loan
book by the end of Q2FY11 that may lead to incremental slippages.
The bank expects delinquency ratio to be in the range of 1-1.5%.
V a l u a t i o n
OBC is currently trading at an attractive 0.9x its FY13E ABV with
consistent RoA of ~1% and RoE ~15%. We expect RoA of 1.1% and ROE
of 16.3% for FY13E. We are positive on the long-term fundamentals of the
bank and believe it should get a multiple of 1x FY13E ABV. Hence, we
have arrived at a target price of | 410 and recommend a BUY rating on
the stock. Asset quality would be an overhang in the near term.

Oriental Bank: Defending margins For 1QFY12::CLSA

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Defending margins
For 1QFY12, OBC reported net profit of Rs3.5bn, down 2% YoY, higher
than our estimates. While pressure on margins is suppressing YoY growth
in topline, management’s strategy to focus on profitability, rather than
market share, has helped to sustain ~3% margins in recent quarters. This
may also help to manage asset quality pressures in future. Delinquencies
have moderated from levels seen in recent quarters and this should help
to abate investor concerns. As management focuses on improving CASA
ratio, we believe that bank’s loan growth will lag sector’s. Maintain O-PF
with price target Rs400 based on 1x FY13CL adjusted PB.
Margins stabilising now
During 1QFY12, OBC’s NII declined by 4% YoY as its loan growth of 14% was
offset by 40bps YoY contraction in NIMs. However, margins have been stable
during the quarter (down just 4bps) to 2.9% in spite of tightness in liquidity
and high deposit rates. We believe that two key aspects have helped OBC to
defend margin pressures are (1) bank had moderated its growth ambitions in
order to defend margins near 3% levels and (2) recent infusion of capital by
government also supported margins. We believe that bank’s loan growth will
continue to lag behind sector as management is focussed on sustaining
higher margins in spite of lower CASA ratio (23% of deposits), slower CASA
growth (13% YoY) and higher cost of deposits (7.2%).
Asset quality stable
During 1QFY12, OBC’s delinquency ratio at 1.8% of past years’ loans was in a
manageable range considering that in the past two quarters delinquency ratio
was in the range of 2.4-3.1%. Part of the slippages were driven by transition
to system based NPA recognition- bank has moved loan accounts up to Rs1m
to this system and rest will be moved by Sep-11. Provisions also include some
impact of change in provisioning norms on NPLs and restructured loans.
Sustained low delinquency ratio will support earnings as well valuations.
Trades at discount to peers
Over next 2-3 years, management plans to improve OBC’s deposit franchise
and margins. Until then OBC’s loan growth is likely to lag sector. We expect
OBC’s loans to grow at 17% Cagr over FY11-14 and earnings will grow at
Cagr of 16%. The capital infusion by the government has improved Tier I CAR
to 10.8%. Valuations are at a discount to peers, but we believe that
improvement in CASA ratio and growth are a key to re-rating. Our target
price of Rs400 is based on 1x FY13 adjusted PB. Maintain O-PF.