OBC - Results above expectation; improving asset quality - Nirmal Bang

The bank (Oriental Bank of Commerce) reported good results for Q2FY13 with control over slippages, improving provision coverage ratio and reducing bulk deposits. In a challenging environment, the bank has been able to post good results backed by an improvement in asset quality which is encouraging. We believe that an improvement in the economic scenario will lead to an improvement in the bank's performance as well; albeit at a faster pace.

Earlier, the bank had witnessed significant deterioration in the asset quality. However, going forward, with a significant improvement in the recovery efforts of the bank and control over fresh slippages, Gross NPAs have started showing an improving trend.

The new management so far been successful in bringing about a meaningful change in the banks overall performance. The determination to deliver what has been committed makes it stand apart from other PSU banks. Management has identified some focus areas which includes focus on retail portfolio, improving CASA ratio and thereby improving the NIMs, improving the asset quality of the bank with focus on recoveries.

Going forward, we believe that all such efforts will lead to an improvement in the bank's overall performance. However, we remain concerned about the expected restructuring (~Rs 2500 cr) in Q3FY13. Nevertheless, given the improvement in the bank's earnings and the structural improvements in the balance sheet, we expect the bank's profitability to grow at 23.1% CAGR over FY12-FY14E.

At CMP, the stock is trading at 0.9x and 0.79x FY13E and FY14E Adj BVPS and 6.66x and 5.21x FY13E and FY14E EPS respectively. We recommend to HOLD the stock and BUY at dips with a target price of Rs 351 (0.9x FY14E BV) indicating potential upside of 13.7% from current levels.

Source : Equity Bulls

Keywords