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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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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.
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