Stock Market Result Update on Oriental Bank of Commerce for 2QFY2012

Stock Market Result Update on Oriental Bank of Commerce for 2QFY2012 with an Accumulate recommendation and a Target Price of `301 (12 months).

For 2QFY2012, OBC reported a disappointing set of results with net profit dipping by 57.8% yoy due to considerably higher-than-expected provisioning expenses. On the pre-provision profit level, results were in-line with our expectations. A sharp surge in slippages and the consequent interest income reversal leading to a qoq decline in reported NIM were the key negatives of the results. We recommend Accumulate on the stock on inexpensive valuations.

Higher slippages dent overall profitability: On the business side, the bank’s net advances showed healthy momentum rising by 6.4% qoq (up by reasonable 20.6% yoy) as compared to deposits increasing by 3.5% qoq (up 18.9% yoy), leading to a 195bp qoq expansion in CD ratio. CASA deposits growth was muted both on a sequential (just 1.3%) and on a yoy (7.1%) basis. Consequently, calculated CASA ratio dipped by 252bp yoy (down 49bp qoq) to 22.9%. The recognition of slippages under the system-based NPA recognition platform led to an interest income reversal of `137cr, which partly dragged down the bank’s reported NIM. Sequentially, cost of funds rose by 29bp vs. a 12bp rise in yield on funds, leading to a 30bp fall in reported NIM to 2.6%. On the asset-quality front, the bank surprised negatively by reporting annualized slippage ratio of 6.3%, which was considerably higher than the 1.8% witnessed in FY2011. Absolute gross and net NPAs rose sharply by 52.9% and 86.8% qoq, respectively, and the PCR (including technical write-offs) dipped sharply to 63.8%.

Outlook and valuation: We believe the current inexpensive valuations of 0.7x FY2013E ABV largely factor in the asset-quality stress faced by the bank. Going forward, incremental slippages are expected to moderate on completion of the migration exercise; and with our expectation of interest rates peaking at the current levels, the bank is expected to benefit from the stable to declining trend in wholesale interest rates going forward. Hence, we recommend an Accumulate rating on the stock with a target price of `301.