OBC - In line quarter; BUY : Religare

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Oriental Bank of Commerce Ltd
In line quarter; maintain BUY

Oriental Bank of Commerce’s (OBC’s) Q2FY11 results was largely in line with
our estimates. NII grew by 92% YoY (2% QoQ) due to significant improvement
in NIMs. On QoQ basis, NIMs remain largely stable (as against our estimates of
marginal decline in NIMs). While incremental slippages were higher at 1.7% in
Q2FY11 (as against 0.6% in Q1FY11), we note that the total slippages in
H1FY11 is still better than most of the PSU banks. Gross NPA declined by ~3%
QoQ in absolute term due to higher write-offs during the quarter.

We are revising our FY11/FY12 estimates upward by 3.3/2.1% to factor in
higher than estimated NIMs. We believe that OBC’s NIMs is likely to decline
from Q2FY11 levels; however, for the full year, NIMs are set to improve by
50bps. While the stock has re-rated significantly in the last few quarters, we
note that, at the current valuations of 1.3x FY12E BV and 7.2x FY12E earnings,
the stock is amongst the cheapest in PSU space. We remain positive on the stock
as we believe that the company is likely to report a 29% CAGR in earnings and
expect its ROE to improve to 20.1% in FY12 from 16.5% in FY10. Maintain
BUY with a target price of Rs 580/sh.

NIMs stable on asset re-pricing; advances growth subdued: NIMs declined only by
~4bps QoQ as 25bps increase in costs of deposits was offset by ~25bps increase
in yield on advances. While hike in deposit rates is likely to impact NIMs (given
CASA proportion of only 25%); we note that OBC’s C/D ratio is at 69.2% only
and improvement in C/D ratio would reduce the impact on margins. Advances
growth was subdued at 14% YoY; however, SME segment grew by 76% YoY
(now contributing ~15.6% of total advances). CASA deposits grew by 25% YoY
(as against 16.6% growth in deposits); consequently, CASA proportion increased
from 23.7% in Q2FY10 and 24.9% in Q1FY11 to 25.4% in Q2FY11.


Asset quality healthy: While slippages in Q2FY11 at Rs 3.2 bn (1.7% of
advances) were higher than Q1FY11, we note that total slippages in H1FY11 (at
1.1% of advances) are lower than FY10 (1.6% of advances). However, gross NPA
declined by 3% QoQ due to higher write-offs. Provision coverage ratio (including
technical write-offs) stood at 81.4%, higher than 70% ratio required by RBI.
Other income subdued; costs up on higher employee expenses: Other income
declined by ~30% YoY primarily due to sharp decline in trading profits (Rs 10 mn
in Q2FY11 as against Rs 1.1bn in Q2FY10 and Rs 170mn in Q1FY11). Adjusting
for trading profits, non-interest income grew by 9% YoY (8% QoQ). Cost to
income ratio increased from 35.3% in Q1FY11 to 37.6% in Q2FY11 primarily
due to higher employee expenses resulting from wage hikes.