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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.
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. Mr
Bansal has tenure of at least 10 quarters till September 2014, ensuring longevity of
the new strategies.
Some of the advantages for Mr Bansal while taking over as CMD of OBC are:
1. Meaningful stint with OBC – In the early stage of his career, he headed various
branches/regions in North and Central India.
2. Throughout his career, he has been a banker involved with credit functions.
3. He brings with him the experience of successful improvement in key parameters
of United Bank of India where he worked as Executive Director.
De-bulking the balance sheet: A key requirement for improving operating
parameters
Over the past few years, OBC’s focus has shifted towards bulk business to rapidly
grow the balance sheet. This has taken a toll on its core operating performance.
Margins and CASA have been impacted significantly due to the rapidly growing
bulk business.
Mr Bansal wants to de-bulk the balance sheet although in the process the bank
may have to grow at a moderate pace in the near-term.
To achieve the desired results, OBC has shifted the bulk business to select branches
(dedicated for wholesale banking) which would be monitored directly from the
Head Office (HO). Meanwhile, the other branches have been directed to strengthen
focus on SME, retail and mid-corporate segments.
Improving CASA ratio: To leverage strong foothold in CASA-rich northern
region
OBC’s CASA ratio has been at the lower end among state-owned banks at ~22% as
against the industry average of ~30%. The steep decline in CASA ratio has been on
the back of rapid increase in the bank’s bulk business.
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
Credit monitoring and recoveries from NPA accounts would also be OBC’s key
focus areas. To improve asset quality, the management is planning to strengthen
credit appraisal at all levels. 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.
The healthy momentum in recoveries continues and the trends during 4QFY12
too looks encouraging. To expedite the recovery process, the bank is: (1) holding
recovery camps across the country and offering a one-time settlement (OTS)
scheme to small borrowers (less than INR1m category) based on their repayment
capacity, and (2) implementing action under SARFAESI Act to accelerate disposal
of assets and improve recoveries
Focusing on SME / Retail portfolio: Capitalizing on key strength
To reduce dependence on the wholesale business and to increase the share of
high yielding assets in the overall mix, the management intends to focus on the
SME and Retail portfolio.
After shifting the wholesale business to select branches, the management has
asked branches to focus on the SME/Retail business. The field officers have been
directed to exercise discretionary powers to make eligible good credit prospects
in line with the bank’s systems and processes.
In terms of the retail banking strategy, the branches have been advised to prepare
retail credit budgets for the year and focus specifically on housing loans, vehicle
loans and education loans to grow and de-risk the balance sheet.
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.
For improving core operating parameters, balance sheet consolidation is
imperative, in our view. Outstanding standard restructured loan book stands at
INR608b (5.6% of loans), and further restructuring expected in 1HCY12 remains a
concern. Immediately after assuming office, the new CMD has taken NPA
management and recoveries as focus areas, which should reduce stress.
Though core operating parameters are under pressure, a strong management at
the helm of affairs and low valuations are comforting.
We expect the bank to report an EPS of INR41 for FY12 and INR48 for FY13, and BV
of INR382 for FY12 and INR418 for FY13. It is likely to report RoA of 0.7% and RoE of
~12% over FY12/13. On the back of higher proportion of wholesale business, OBC
has one of the lowest cost-to-income ratios in the industry, which remains its key
strength. The stock trades at 0.7x FY12E and 0.6x FY13E BV. Maintain Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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.
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. Mr
Bansal has tenure of at least 10 quarters till September 2014, ensuring longevity of
the new strategies.
Some of the advantages for Mr Bansal while taking over as CMD of OBC are:
1. Meaningful stint with OBC – In the early stage of his career, he headed various
branches/regions in North and Central India.
2. Throughout his career, he has been a banker involved with credit functions.
3. He brings with him the experience of successful improvement in key parameters
of United Bank of India where he worked as Executive Director.
De-bulking the balance sheet: A key requirement for improving operating
parameters
Over the past few years, OBC’s focus has shifted towards bulk business to rapidly
grow the balance sheet. This has taken a toll on its core operating performance.
Margins and CASA have been impacted significantly due to the rapidly growing
bulk business.
Mr Bansal wants to de-bulk the balance sheet although in the process the bank
may have to grow at a moderate pace in the near-term.
To achieve the desired results, OBC has shifted the bulk business to select branches
(dedicated for wholesale banking) which would be monitored directly from the
Head Office (HO). Meanwhile, the other branches have been directed to strengthen
focus on SME, retail and mid-corporate segments.
Improving CASA ratio: To leverage strong foothold in CASA-rich northern
region
OBC’s CASA ratio has been at the lower end among state-owned banks at ~22% as
against the industry average of ~30%. The steep decline in CASA ratio has been on
the back of rapid increase in the bank’s bulk business.
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
Credit monitoring and recoveries from NPA accounts would also be OBC’s key
focus areas. To improve asset quality, the management is planning to strengthen
credit appraisal at all levels. 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.
The healthy momentum in recoveries continues and the trends during 4QFY12
too looks encouraging. To expedite the recovery process, the bank is: (1) holding
recovery camps across the country and offering a one-time settlement (OTS)
scheme to small borrowers (less than INR1m category) based on their repayment
capacity, and (2) implementing action under SARFAESI Act to accelerate disposal
of assets and improve recoveries
Focusing on SME / Retail portfolio: Capitalizing on key strength
To reduce dependence on the wholesale business and to increase the share of
high yielding assets in the overall mix, the management intends to focus on the
SME and Retail portfolio.
After shifting the wholesale business to select branches, the management has
asked branches to focus on the SME/Retail business. The field officers have been
directed to exercise discretionary powers to make eligible good credit prospects
in line with the bank’s systems and processes.
In terms of the retail banking strategy, the branches have been advised to prepare
retail credit budgets for the year and focus specifically on housing loans, vehicle
loans and education loans to grow and de-risk the balance sheet.
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.
For improving core operating parameters, balance sheet consolidation is
imperative, in our view. Outstanding standard restructured loan book stands at
INR608b (5.6% of loans), and further restructuring expected in 1HCY12 remains a
concern. Immediately after assuming office, the new CMD has taken NPA
management and recoveries as focus areas, which should reduce stress.
Though core operating parameters are under pressure, a strong management at
the helm of affairs and low valuations are comforting.
We expect the bank to report an EPS of INR41 for FY12 and INR48 for FY13, and BV
of INR382 for FY12 and INR418 for FY13. It is likely to report RoA of 0.7% and RoE of
~12% over FY12/13. On the back of higher proportion of wholesale business, OBC
has one of the lowest cost-to-income ratios in the industry, which remains its key
strength. The stock trades at 0.7x FY12E and 0.6x FY13E BV. Maintain Buy.
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