Oriental Bank of Commerce - Higher slippages impact performance; valuations attractive - Nirmal Bang

The bank's operating performance for Q4FY13 was below estimates primarily due to higher provisions and stress on asset quality. Interest reversals on slippages impacted margins and therefore NIMs were flat sequentially. Higher operating cost (Rs 140 cr on employee wage revision) and higher provisions impacted the performance. However, tax write back helped the bank to report PAT of Rs 308 cr (down 5.7% QoQ and up 16.2% YoY). PAT for FY13 stood at Rs 1328 cr up by 16.3% YoY.

Although the quarter was below expectation on many counts; what is encouraging is excluding the one off; slippages was in line with expectation and also the bank has been able to increase its CASA ratio and improve its cost to income ratio on YoY basis. Moreover, the restructured book of the bank has come down substantially from 9.5% of advance book in Q3FY13 to 7.7% of total book in Q4FY13. Going forward, Management sticks to its guidance of improving NIMs and bringing down NPA levels.

The stock has been underperforming in the last one quarter despite the outperformance of the broader indices owing to the concerns relating to the bank's asset quality (high restructured book) and the lower return ratios. We believe that the current price factors in most of the concerns and the risk reward ratio turns favourable for the stock with limited downside from current levels. Considering the structural improvements taking place in the balance sheet, we expect the bank's profitability to grow at 18.8% CAGR over FY13-FY15E. At CMP, the stock is trading at 0.75x and 0.69x FY14E and FY15E Adj BVPS and 5.0x and 4.2x FY14E and FY15E EPS respectively. In view of the recent correction in the stock price, we recommend to BUY the stock with a target price of Rs 324 (0.9x FY14E BV) indicating potential upside of 20% from current levels.

- Slippages stood at Rs 1,040 cr (vs Rs 813 cr in Q3FY13)
- Gross NPAs increased substantially as one solar power account of Rs 420 cr which the bank had initially guided for restructuring; turned into NPA owing to some issues on promoter guarantee.
- The bank added Rs 800 cr to its restructured book taking the total restructured book stands at Rs 9,940 cr (7.7% of total advance book)
- The restructuring pipeline for the bank stands at Rs 800 cr for Q1FY14E excluding Punjab SEB which has likely made a turnaround and would not approach for restructuring.
- Management has guided for Gross NPA of 2.9% and Net NPA of 2% with Provision Coverage Ratio at 68%.
- Capital Adequacy Ratio stood at 12.0% as on March 2013 with Tier I ratio of 9.2%.
- The bank declared dividend of Rs 9.2 per share; translating into a dividend yield of 3.4%.

Source : Equity Bulls

Keywords