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Buy Oriental Bank of Commerce - TP Rs.325 - Dolat Capital
Posted On : 2012-08-03 10:45:05( TIMEZONE : IST )
Higher core interest income and expansion in margin on the back of better asset yield. On liability front, sequential increase in current deposit balances & stable CASA share were in stark contrast with the industry.
Though, improvement in asset yield (on Q/Q basis) with decrease in yield on credit and investment books was beyond our comprehension. Incremental addition to credit and investment books was much higher than incremental deposits leading to better core interest income matrix. The bank either went for squeezing cash balances or added cheaper borrowings.
Much higher non-fund income and higher investment depreciation writeback aided bottom-line. Further improvement in asset quality enhanced its earning quality. We maintain our positive stance on the stock.
In Q1 FY13, Oriental Bank of Commerce's (OBC) net interest income (NII) grew by 10.6% YoY to Rs.11.3bn - 4% higher than our estimates of Rs.10.8bn. The bank's margin increased to 2.79% from 2.68% in Q4 FY12, though declined from 2.94% level in Q1 FY12.
Non-fund income grew by 26% YoY to Rs.4.1bn (primarily led by 15% YoY jump in fee income to Rs.1.7bn) ahead than our estimate of Rs.3.6bn which led to deviation at operating profit level. It reported operating profit of Rs.9bn compared to our estimates of Rs.8.3bn. The write-back of investment depreciation provision of Rs.1.3bn off-setted higher NPA provisioning and thereby aided bottom-line growth. Net profit grew by 10.3% YoY to Rs.3.9bn as against our estimates and market consensus of Rs.3.4bn.
OBC's gross and net NPA declined by 6% QoQ to Rs.33.8bn and Rs.23bn respectively. The bank's net slippages remained at Rs.2.8bn as against Rs.2.6bn in Q1FY12. Provision coverage ratio rose to 64.4% from 61.5% in Q4 FY12. The gross slippage ratio declined to 2.67% from 5.02% in Q4 FY12. However, as of end-Q1 FY13, the bank restructured loan book increased by 15% QoQ to Rs.110bn.
Owing to the concerns on future balance sheet expansion, strain on margin and loan restructuring pipeline, we revise our earnings estimates downward by 16% and 5.7% for FY13 and FY14 respectively and decrease our target price by 8.4% to Rs.325. We reiterate our rating on the stock to Buy. At current price, it quotes at 0.7x and 0.6x ABV FY13 and FY14 respectively; based on our target price, the stock would quote at 0.86x adjusted book value FY14.
