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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).
Attractive valuations; migration-led NPLs well ahead of expectations resulting in weak earnings
We like OBC at current levels given our view on interest rates and inexpensive valuations. We
expect earnings to grow by 7% CAGR in FY2011-13E and deliver RoEs in the range of 13-14%
levels. We maintain our BUY recommendation as we find valuations attractive for the bank at 0.7X
book value and 4.8X FY2012E EPS. We see NIM headwinds to remain over the next few quarters
as the full impact of steep increase in deposit rates (wholesale and retail) and lower CASA ratio
profile flows into earnings, before the recent decline of wholesale funds starts benefitting
positively. We believe that savings bank deregulation will have relatively lesser impact on public
banks (which have relatively more inelastic customer base) as compared to private banks. We
believe that our 40 bps decline in NIM assumptions factors the pressure on margins.
However, NPLs during 2QFY12 was significantly higher than expectation (2.5% slippage even after
excluding the impact of migration to system-based NPL recognition). Migration-related slippages
have been higher than expected for small-ticket loans given that the bank’s performance on
slippages in the initial transition period was substantially lower. We are accordingly raising our
estimates for loan-loss provisions to 0.9% of loans (from 0.6-0.7% earlier).
NIMs decline 30 bps qoq on the back of higher income de-recognition
NIM for the quarter declined 30 bps to 2.64% in 2QFY12 from 2.94% in 1QFY12 due to higher
income de-recognition (30 bps impact on NIMs) and sharp rise in cost of deposits (up 40 bps qoq).
Yield on advances increased by 25 bps qoq to 11.7% (adjusted for NPLs was 12.4%). Yield on
investments improved by 30 bps qoq. We believe that OBC is well-positioned from a margin
perspective post moderation in wholesale funds and lower slippages in 2HFY12E. However, we
remain conservative and factor 40 bps decline in NIMs in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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).
Attractive valuations; migration-led NPLs well ahead of expectations resulting in weak earnings
We like OBC at current levels given our view on interest rates and inexpensive valuations. We
expect earnings to grow by 7% CAGR in FY2011-13E and deliver RoEs in the range of 13-14%
levels. We maintain our BUY recommendation as we find valuations attractive for the bank at 0.7X
book value and 4.8X FY2012E EPS. We see NIM headwinds to remain over the next few quarters
as the full impact of steep increase in deposit rates (wholesale and retail) and lower CASA ratio
profile flows into earnings, before the recent decline of wholesale funds starts benefitting
positively. We believe that savings bank deregulation will have relatively lesser impact on public
banks (which have relatively more inelastic customer base) as compared to private banks. We
believe that our 40 bps decline in NIM assumptions factors the pressure on margins.
However, NPLs during 2QFY12 was significantly higher than expectation (2.5% slippage even after
excluding the impact of migration to system-based NPL recognition). Migration-related slippages
have been higher than expected for small-ticket loans given that the bank’s performance on
slippages in the initial transition period was substantially lower. We are accordingly raising our
estimates for loan-loss provisions to 0.9% of loans (from 0.6-0.7% earlier).
NIMs decline 30 bps qoq on the back of higher income de-recognition
NIM for the quarter declined 30 bps to 2.64% in 2QFY12 from 2.94% in 1QFY12 due to higher
income de-recognition (30 bps impact on NIMs) and sharp rise in cost of deposits (up 40 bps qoq).
Yield on advances increased by 25 bps qoq to 11.7% (adjusted for NPLs was 12.4%). Yield on
investments improved by 30 bps qoq. We believe that OBC is well-positioned from a margin
perspective post moderation in wholesale funds and lower slippages in 2HFY12E. However, we
remain conservative and factor 40 bps decline in NIMs in FY2012E.
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