Maintain HOLD on Oriental Bank of Commerce - Moderate Business Growth amid Contraction in NIMs - Karvy

Oriental Bank of Commerce (OBC) is currently trading at five year average valuation, while the stock has outperformed the Bankex by 15% over last one year reflecting improving trend in asset quality in last two quarters.

Moderate Business Growth: The loan growth of Oriental Bank of Commerce has been marginally lower than the industry in FY10-12 period. However, we believe that the Bank's credit growth to remain weak in FY13 on account of dismal off-take in corporate loans.

NIMs Likely to Bounce Back amid Decline in Cost of Funds: Though Oriental Bank of Commerce's NIMs contracted marginally to 2.8% in H1FY13, the Bank's Management expects the NIMs to bounce back to 2.9% on account of decline in cost of funds.

Asset Quality witnesses Encouraging Trends: Oriental Bank of Commerce has been able to contain fresh slippage in H1FY13 enabling it in bringing down its gross NPA by 25 bps over last two quarters. We expect this trend to continue even in H2FY13. However, the Bank is expected to restructure loans worth Rs. 25 bn in H2FY13, which would be a partially downside risk to its asset quality. The Bank's restructured loan book is currently at 9.7% of the advances.

Outlook & Valuation

At the CMP, the stock trades at 5.8x & 5.0x FY14E & FY15E earnings, and at 0.9x & 0.8x P/ABV FY14E & FY15E, respectively. Based on its historical mean valuation implying 0.8x P/ABV FY15E, we reiterate our "HOLD" recommendation on Oriental Bank of Commerce with upwardly revised target price of Rs. 365 per share (from Rs. 320 earlier).

Source : Equity Bulls

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