Oriental Bank of Commerce (Q1 FY13)

CMP Rs233, Target Rs275, Upside 18.2%
 

• OBC’s loan book grew marginally by 0.7% qoq, versus our expectation of 2.5%. The growth was driven by Large Corporate portfolio (3.1% qoq), followed by Retail lending (2.4% qoq). Agricultural loan book de-grew by 2.6% owing to repayment of short term loans lent in the previous quarter. Driven by 1.5% qoq growth in Term Deposits and 1% increase in CASA Deposits, total deposits reported a sequential growth of 1.4% close to our expectation of 1.5%. Bulk Deposits accounted for 26.2% of total deposits in Q1 FY13. CASA ratio remained almost flat at 24% in Q1 FY13. However, unlike other PSBs that witnessed steep decline in Current Deposits in this quarter, OBC reported 5.6% sequential growth. Mobilization of Savings Deposits remained weak, down by 0.6% qoq. Management has guided a 16% credit growth and 17% deposits growth in FY13.
  

• Notwithstanding a 27bps decline in YoA, NIM expanded by 11bps to 2.79%. CoD remained flat in the current quarter. RoA improved 27bps qoq, from 0.6% in Q4 FY12 to 0.87%in Q1 FY12. Management has guided a NIM of 3% and RoA of 1% in FY13
  

• Asset quality improved remarkably as reflected in 20bps sequential decline in GNPA ratio, from 3.17% to 2.97%. Delinquency ratio plunged to 2.5% compared to 4.7% in the previous quarter. Total cash recovery stood at Rs4.3bn, compared to Rs3.1bn in Q4 FY12. Management indicated to bring down the GNPA ratio to 2.8% by Mar’2013. Exposure to infra and power are still worrisome at 22.7% and 13.3%, respectively. Total exposure to Discoms is 5.6% of the total advances as on Jun’2012. Restructuring activity continued to be high for OBC in Q1 FY13 as well, increasing from 5.8% of total advances in Q4 FY12 to 9.6% in Q1 FY13. During the quarter, bank restructured advances worth Rs20.4bn. Credit cost remained high despite falling GNPA, thereby leading to an improvement in PCR from 61.5% in the previous quarter to 64.4% in the current quarter 
  

• Non-interest income reported strong growth of about 18.8% sequentially, aided by robust recovery of Rs1.97bn compared to Rs0.3bn in Q4 FY12. Resultantly bank’s total income was boosted by 8.7% qoq. Healthy growth in total income and decline in operating expenses (3.1% qoq) led to an improvement in C/I ratio by 5ppt to 41.6%.
  

• OBC is one of the better capitalized banks among its peer group. With CAR and Tier I ratio of 12.3% and 9.9% respectively. OBC is well positioned to support its planned balance sheet expansion for next 2-3 years.
  

• Factoring in an expansion in margin, improvement in asset quality, strong capitalization, robust recovery and healthy provisioning, we assign a target multiple of 0.8x FY13E P/Adj.BV and target price of Rs275. Upgrade the stock to BUY.