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OBC Q1FY15 results update

August 5, 2014, Tuesday, 13:04 GMT | 08:04 EST | 16:34 IST | 19:04 SGT
Contributed by Nirmal Bang

OBC reported results below expectations on account of lower NII. Lower provisions boosted bottom line performance and PAT increased 3.2% YoY and 17.5% QoQ. However, asset quality continued to witness deterioration.

- Asset quality further deteriorated with slippages at Rs 1,431 (Rs 1,205 cr in last quarter). As per the management accounts worth Rs 578 cr slipped from priority sector while Rs 320 cr slipped from restructured books. Of the remaining; three large accounts (more than Rs 100 cr each) slipped into NPAs. The bank restructured Rs 876 cr in Q1FY15 taking the outstanding standard restructured book to Rs 10,737 cr (7.8% of total loan book). Restructuring pipeline stands at Rs 900 cr. Going forward management has guided for slippages in the range of Rs 3800-4000 cr for FY15E indicating lower run rate on the back of improvement in economic conditions.

- Advances increased by 8.1% YoY and declined marginally on QoQ basis. Focus on retail advances continued and it grew 10.9% YoY. Large corporate advances grew by 11.7% YoY while mid corporate book increased ~13% YoY respectively. The bank is not targeting any aggressive growth on the loan book given the stress in the environment. Focus will be more towards consolidation rather than chasing growth. We have factored in growth of 11.5% for FY15E.

- Net Interest Income declined 4.9% YoY and 5.0% QoQ. NIMs declined by 16 bps on QoQ basis and 34 bps on YoY basis due to interest reversal of Rs 98 cr during the quarter and also as the bank had raised high cost bulk deposits in Q4FY14. Though management is highly optimistic with margin target of 2.7-2.8% for FY15E, we expect margins to be at 2.5% for FY15E.

- The bank managed to keep opex under control with cost to income ratio at 37.6%. Staff cost declined (for the second consecutive quarter) 4.1% QoQ, with write back of sick leave provisions of Rs 67.5 cr. We expect cost to income ratio to be at 42.3% for FY15E and improve to 41.3% for FY16E.

- CMD is slated for retirement in September 2014.

- The bank is looking to raise Rs 500 cr via QIP.

The bank has reported performance in line with weak macros. Higher slippages have remained a key concern for the stock and consequently the stock has remained an underperformer as compared to broader indices. Going forward, we believe that with improvement expected in overall economy, stress asset addition for the bank will also gradually subside. In this challenging time, the bank has reduced aggressive growth plans and has consolidated its balance sheet which is likely to benefit the bank in the longer term. We expect the bank to report CAGR of 20.5% in profitability over FY14-FY16E vs decline of 14.2% in FY14. At CMP, the stock is trading at 0.88x and 0.80x FY15E and FY16E Adj BVPS and 6.77x and 4.97x FY15E and FY16E EPS respectively. We maintain our HOLD rating on the stock with a target price of Rs 316 (0.9x FY16E P/ABV); an upside of 12.2% from current levels.