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Oriental Bank of
Commerce
F1Q12: Weak Underlying
Trends
Quick Comment: OBC reported a PAT of Rs3.55 bn
(-6% QoQ, -2% YoY) vs. our estimate of Rs3.62 bn.
PBT was Rs4.87 bn vs. our estimate of Rs5.2 bn.
Weaker-than-expected NII and higher expenses were
offset by higher capital gains and lower provisions.
We believe that revenue growth at SOE banks will
remain weak, owing to sustained margin pressure. In
addition, given the increase in lending rates, the
potential for fresh asset quality issues emerging later in
the year/early F13 remains a potential risk. Also, OBC
has yet to complete migrating loans of value less than
Rs1 mn to system based recognition of NPLs.
Considering the experience of BOI (which reported large
slippages upon migration to less than Rs1 mn account
value), there is potential for OBC to see additional NPL
pressure in QE-Sep 2011.
However, OBC’s multiples (7.7x F2012 P/E and 0.9x
P/BV) provide some margin of safety. OBC also has the
highest Tier I ratio in our SOE coverage at 11.1%.
Hence, we maintain our Equal-weight rating.
The key highlights from the results were:
a) Underlying margin progression was weak:
Reported NIM was down by 4 bps QoQ at 2.94%.
However, OBC benefitted from the receipt of overdue
interest of Rs300 mn from the government related to the
debt waiver scheme (which could be considered to be
one-off). Adjusted for the same, NIM was down 13 bps.
In addition, they benefited from free funds effect, owing
to capital infusion in F4Q11, excluding which their
margins would have been down an additional 35 bps (on
our computations). This implies underlying margin
compression of 45-50 bps QoQ.
The reason for sharp underlying compression is funding
cost pressure: a) Upward repricing of term deposits (which
on our computations have moved up to 8.5% from 7.8% in
QE Mar-11); b) Saving a/c deposit increase from 3.5% to
4%.
NII was down 2% QoQ and 7% YoY. However, NII /share
growth (which would adjust for capital issuance benefit), it
would be down -16% QoQ / -20% YoY.
b) Volume growth was muted: Volume growth was muted,
with deposits growing +4% QoQ / 17% YoY and loans -1%
QoQ / +14% YoY. CASA/deposits was down 210 bps QoQ
at 22.4% as CA was down 20% QoQ, up 5% YoY, SA was
+1% QoQ, +20% YoY, and term deposits grew +7% QoQ,
+18% YoY.
c) Core non-interest income trends were weak: Fee
income growth was weak at -18% QoQ, +5% YoY. Core
non-interest income growth was driven by the volatile FX
component (+27% QoQ, +93% YoY).
The bank made higher provisions for investments and
hence contribution of net capital gains + recoveries to PBT
was lower QoQ at -4.7% vs. 1.9% in F4Q11.
d) Employee expenses (excluding retirement related
costs) were up sharply at +25% QoQ, +36% YoY.
Non-employee expenses were -3% QoQ, +13% YoY. Total
expenses were +15% QoQ, +20% YoY.
e) Asset quality trends were weak: GNPLs were up 6%
QoQ. New NPL creation was lower QoQ, owing to
seasonality in F4Q11, but was high at Rs3.78 bn (1.6% of
opening loans, annualized vs. Rs6.5bn, 2.9% in F4Q11). As
per management, almost Rs1.5 bn (0.6%) of slippages
were related to migration to system based recognition of
NPLs. The bank has yet to complete the migration of loans
< Rs 1 mn and hence we expect to see higher slippages in
the following quarter.
Provisions for NPA moved lower QoQ to Rs1.35 bn (56 bps
of loans, annualized) from Rs3.9 bn (168 bps) in F4Q11 &
Rs1.4 bn (67 bps) in F1Q11. Of these, Rs0.8 bn (33 bps)
were on account of additional provisioning required by new
RBI norms. The bank also made additional provisions on
restructured loans (under new norms) of Rs0.6 bn (25 bps).
Coverage ratio (including tech write-offs) was slightly lower
QoQ at 75.1% vs 76.8% in F4Q11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oriental Bank of
Commerce
F1Q12: Weak Underlying
Trends
Quick Comment: OBC reported a PAT of Rs3.55 bn
(-6% QoQ, -2% YoY) vs. our estimate of Rs3.62 bn.
PBT was Rs4.87 bn vs. our estimate of Rs5.2 bn.
Weaker-than-expected NII and higher expenses were
offset by higher capital gains and lower provisions.
We believe that revenue growth at SOE banks will
remain weak, owing to sustained margin pressure. In
addition, given the increase in lending rates, the
potential for fresh asset quality issues emerging later in
the year/early F13 remains a potential risk. Also, OBC
has yet to complete migrating loans of value less than
Rs1 mn to system based recognition of NPLs.
Considering the experience of BOI (which reported large
slippages upon migration to less than Rs1 mn account
value), there is potential for OBC to see additional NPL
pressure in QE-Sep 2011.
However, OBC’s multiples (7.7x F2012 P/E and 0.9x
P/BV) provide some margin of safety. OBC also has the
highest Tier I ratio in our SOE coverage at 11.1%.
Hence, we maintain our Equal-weight rating.
The key highlights from the results were:
a) Underlying margin progression was weak:
Reported NIM was down by 4 bps QoQ at 2.94%.
However, OBC benefitted from the receipt of overdue
interest of Rs300 mn from the government related to the
debt waiver scheme (which could be considered to be
one-off). Adjusted for the same, NIM was down 13 bps.
In addition, they benefited from free funds effect, owing
to capital infusion in F4Q11, excluding which their
margins would have been down an additional 35 bps (on
our computations). This implies underlying margin
compression of 45-50 bps QoQ.
The reason for sharp underlying compression is funding
cost pressure: a) Upward repricing of term deposits (which
on our computations have moved up to 8.5% from 7.8% in
QE Mar-11); b) Saving a/c deposit increase from 3.5% to
4%.
NII was down 2% QoQ and 7% YoY. However, NII /share
growth (which would adjust for capital issuance benefit), it
would be down -16% QoQ / -20% YoY.
b) Volume growth was muted: Volume growth was muted,
with deposits growing +4% QoQ / 17% YoY and loans -1%
QoQ / +14% YoY. CASA/deposits was down 210 bps QoQ
at 22.4% as CA was down 20% QoQ, up 5% YoY, SA was
+1% QoQ, +20% YoY, and term deposits grew +7% QoQ,
+18% YoY.
c) Core non-interest income trends were weak: Fee
income growth was weak at -18% QoQ, +5% YoY. Core
non-interest income growth was driven by the volatile FX
component (+27% QoQ, +93% YoY).
The bank made higher provisions for investments and
hence contribution of net capital gains + recoveries to PBT
was lower QoQ at -4.7% vs. 1.9% in F4Q11.
d) Employee expenses (excluding retirement related
costs) were up sharply at +25% QoQ, +36% YoY.
Non-employee expenses were -3% QoQ, +13% YoY. Total
expenses were +15% QoQ, +20% YoY.
e) Asset quality trends were weak: GNPLs were up 6%
QoQ. New NPL creation was lower QoQ, owing to
seasonality in F4Q11, but was high at Rs3.78 bn (1.6% of
opening loans, annualized vs. Rs6.5bn, 2.9% in F4Q11). As
per management, almost Rs1.5 bn (0.6%) of slippages
were related to migration to system based recognition of
NPLs. The bank has yet to complete the migration of loans
< Rs 1 mn and hence we expect to see higher slippages in
the following quarter.
Provisions for NPA moved lower QoQ to Rs1.35 bn (56 bps
of loans, annualized) from Rs3.9 bn (168 bps) in F4Q11 &
Rs1.4 bn (67 bps) in F1Q11. Of these, Rs0.8 bn (33 bps)
were on account of additional provisioning required by new
RBI norms. The bank also made additional provisions on
restructured loans (under new norms) of Rs0.6 bn (25 bps).
Coverage ratio (including tech write-offs) was slightly lower
QoQ at 75.1% vs 76.8% in F4Q11.
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