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Oriental Bank of Commerce 3QFY2010 performance highlights and results update

February 16, 2010, Tuesday, 20:30 GMT | 15:30 EST | 01:00 IST | 03:30 SGT
Contributed by Angel Broking


By Angel Broking

 

Oriental Bank of Commerce reported a better-than-expected Net Profit growth of 14.8% yoy, on account of a higher-than-expected improvement in its NIM. A strong improvement in the NIM, coupled with an above-industry advances growth of 19.7% yoy, were the key highlights of the results. We maintain a Buy rating on the stock.

 

Strong on Profitability: The Net Interest Income (NII) of the bank increased by a very strong 53.7% yoy and 55.6% qoq to Rs873cr. The reported NIM of the bank in 3QFY2010 improved to 3.00% (2.41% in 3QFY2009), driven by a 127bp yoy reduction in the cost of funds to 5.63% in 3QFY2010. The Business growth stood at 20.6% yoy, driven by an advances growth of 19.7% yoy to Rs78,555cr, and a deposits growth of 21.2% yoy to Rs1,10,745cr. The bank has 47.5% of the total loan book’s exposure to the corporate sector, followed by 13.5% to Retail and 12.1% to Agriculture. The non-interest income growth disappointed due to poor treasury gains during the quarter, in-line with the trend in the industry. With a strong advances growth, the asset quality ratios remained relatively stable; however, we remain concerned about the high restructured portfolio of the bank at Rs5,314cr (6.8% of the Advances and 72.6% of the networth). The NPA provision coverage ratio stood at 54.6%. There was slippage of Rs109cr during 9MFY2010 from restructured accounts. The bank’s CAR stood at 13.2%, with Tier-I capital of 9.8% (forming 74% of the total CAR). With the Government holding already at the minimum permissible level of 51%, the bank has requested the Government for capital infusion of Rs1,000cr.

 

Outlook and Valuation: We expect the bank to deliver an average RoE of 15% during FY2010-12E. It is expected to gain a benefit from re-pricing its deposits for one more quarter. The key weaknesses of the bank are the small, regional and urban-centric nature of its operations and the inconsistency in its fee income growth. However, in our opinion, the stock is trading at an attractive multiple of 5.9x FY2012E EPS of Rs44.9 and 0.7x FY2012E Adjusted Book Value of Rs357.9. We have a Buy rating on the stock, with a 15-month Target Price of Rs326, implying an annualised return of 18.7%.

 

 

 

 

 

 

Robust Advances and Deposits Growth


During 3QFY2010, the Business growth stood at 20.6% yoy, driven by an advances growth of 19.7% yoy to Rs78,555cr, and a deposits growth of 21.2% yoy to Rs1,10,745cr. The bank has 47.5% of the total loan book’s exposure to the corporate sector, followed by 13.5% to Retail and 12.1% to Agriculture. The YTD growth in the advances stood at 13.7%; we have factored-in a yoy growth of 20.0% in advances for the bank in FY2010E and 16% in FY2011E and FY2012E each. The CASA deposits of the bank increased by 21.4% yoy to Rs27,050cr, which constituted 24.4% of the total deposits.

 

 

 

 

Improved NIM on shedding of high-cost deposits


The Net Interest Income (NII) of the bank increased by a very strong 53.7% yoy and 55.6% qoq to Rs873cr. The reported NIM of the bank in 3QFY2010 improved to 3.00% (2.41% in 3QFY2009), driven by a 127bp yoy reduction in the cost of funds to 5.63% in 3QFY2010. The bank has aggressively shed high-cost deposits, from the level of Rs21,068cr in FY2009 to Rs13,497cr in 3QFY2010 (constituted 12.2% of the total deposits).

 

 

Non-Interest Income declines due to poor treasury income


The non-interest income declined by 24.6% yoy to Rs238cr, due to a 72.6% degrowth in the Profit on sale of Investments (because of an unfavourable interest rate scenario). However, the core non-interest income was strong at Rs185cr, and grew by 82.9% yoy. The break-up of the same was not available.

 

 

 

Asset-quality Stable so far


The Gross NPAs of the bank increased by a marginal 9.3% sequentially and 18.2% yoy to Rs1,288cr in 3QFY2010. The Gross NPA and Net NPA ratios stood at 1.6% (1.5% in 2QFY2010) and 0.8% (0.6% in 2QFY2010), respectively. With a strong advances growth, the ratios remained relatively stable; however, we remain concerned about the high restructured portfolio of the bank at Rs5,314cr (6.8% of the Advances and 72.6% of the networth). The NPA provision coverage ratio stood at 54.6%. There was slippage of Rs109cr during 9MFY2010 from restructured accounts. That said, so far, in 9MFY2010 only 2% of restructured accounts have slipped.

 

 

 

 

Lower Provisions for NPAs due to new norms


The Provision for investment depreciation stood at Rs15.5cr, compared to a writeback of Rs11.4cr in 3QFY2009. The bank has a very high modified duration of 5.6 years on overall investment book of Rs34,688cr, indicating a higher interest rate risk in a rising interest rate environment.

 

 

 

 

Productivity improved on strong Operating Performance


The total operating expenses declined by 1.9% yoy and increased by 35.0% sequentially, to Rs488cr. The cost-to-income ratio of the bank stood at 43.9% (compared to 56.3% in 3QFY2009), on the back of a strong 25.7% growth in total income. Employee costs increased by 47.0% sequentially to Rs289cr, which included an ad-hoc provision of Rs110cr towards wage revision. The bank has added 49 branches and 77 ATMs during 9MFY2010, to take the total network to 1,450 and 922, respectively.

 

 

Capital Adequacy


The bank’s CAR stood at 13.2%, with Tier-I capital of 9.8% (forming 74% of the total CAR). With the Government holding already at the minimum permissible level of 51%, the bank has requested the Government for capital infusion of Rs1,000cr. However, the bank still has adequate headroom to raise tier-II capital (as indicated by the higher proportion of tier-I capital to CAR).

 

 

Outlook and Valuation


We expect the bank to deliver an average RoE of 15% during FY2010-12E. It is expected to gain a benefit from re-pricing its deposits for one more quarter. The key weaknesses of the bank are the small, regional and urban-centric nature of its operations and the inconsistency in its fee income growth. However, in our opinion, the stock is trading at an attractive multiple of 5.9x FY2012E EPS of Rs44.9 and 0.7x FY2012E Adjusted Book Value of Rs357.9. We have a Buy rating on the stock, with a 15-month Target Price of Rs326, implying an annualised return of 18.7%.