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Recommendations India

Oriental Bank of Commerce Q3FY14 results update

February 3, 2014, Monday, 11:51 GMT | 07:51 EST | 17:21 IST | 19:51 SGT
Contributed by Nirmal Bang

OBC reported results below estimates led by decline in net interest income and higher provisions on QoQ basis. Tax rate too stood higher both QoQ and YoY impacting bottom line performance.
- Asset quality further deteriorated with slippages at Rs 1,042 cr, in the same range as last quarter (Rs 1,014 cr); and was higher than the range guided by the management. Most slippages came from the agriculture (Rs 314 cr), corporate (Rs 570 cr of which one textile account of Rs 260 cr , one sugar account of Rs 107 cr and one infra sector of Rs 94 cr slipped). However, in the retail segment asset quality was stable with slippages of Rs 19 cr.
- OBC restructured Rs 1,365 cr in Q3FY14. There was Rs 1,700 cr of bond issued as well during the quarter and thus the outstanding standard restructured book adjusted for the bonds stood at Rs 9,687 cr (7.2% of total loan book). Restructuring pipeline stands at Rs 1100 cr.
- Advances increased by 8.4% YoY and 4.4% QoQ with focus on retail advances which grew 15.8% YoY. Large and mid corporate advances grew by 6.96% YoY and 8.04% YoY respectively.
- CASA deposits grew 9.8% YoY. SA deposit increased 12.2% YoY while CA deposit increased 2.8% YoY. CASA ratio improved YoY. Bulk deposits now constitute 15.6% of total deposits which was higher than last quarter impacting margins.
- Net Interest Income was flat YoY and witnessed de growth of 3.9% QoQ led by higher cost of deposits and interest reversals.
- Non-interest income declined 9.8% YoY indicating weakness in fee income and recoveries. The bank opened 30 branches in Q3FY14. Employee expenses were lower this quarter (as actual salary escalation came in lower than expectation) leading to an improvement in cost to income ratio sequentially. Capital Adequacy Ratio stood at 11.0% as on Dec 2013 with Tier I ratio of 8.57%. CAR was lower by 43 bps on QoQ basis as the bank started providing for un-availed funds which it was not providing earlier. The government infused Rs. 150 cr by way of preferential allotment leading to increase in shareholding from 58% to 59.13%. The bank declared an interim dividend of Rs 4 per share.
We are cautious by the increasing pressure on asset quality and believe that huge restructuring will continue to weigh on the performance of the bank. Consequently, the stock will continue to remain an underperformer in the near term. Considering this, we have reduced our estimates for FY14E further and now expect the bank to report a 17.4% decline in profitability. At CMP, the stock is trading at 0.54x and 0.53x FY14E and FY15E Adj BVPS and 4.67x and 3.90x FY14E and FY15E EPS respectively. We maintain HOLD with a target price of Rs 193 (0.6x FY15E ABV); an upside of 13.0% from current levels.