Tuesday, December 1, 2009

[Investors] Oriental Bank of Commerce – attractive at 1.1x H1FY10 ABV

Oriental Bank of Commerce – attractive at 1.1x H1FY10 ABV


Loan growth: OBC is targeting loan growth of 20-22% for FY10.  The strong loan growth is likely to be driven by growth in SME and agriculture segment.

Net interest margins: OBC's NIMs have seen dramatic drop from 4% in FY04 to 1.8% in H1FY10. The drop was driven by sharp fall in investment yield coupled with dropping CASA profile (24% in H1FY10).

We believe that it will be difficult for the bank to improve CASA profile looking a sharp growth in loans that it is targeting. However, driven by repricing of wholesale deposits, the NIMs may improve to ~2.0% over H2FY10. Deposits worth Rs80bn priced at 9%+ will be up for repricing in H2FY10 resulting in savings of Rs1.4bn over H2FY10. The proportion of wholesale deposits as on September 2009 was 18%, which OBC intends to bring down to 15% by March 2010.

OBC has launched "OBC Unnati" savings account scheme in September 2009 for mobilization of savings deposits. The bank has opened ~4 lakh accounts over last three months and is targeting ~2mn account till June – 2009.

Insurance business to help fee income: OBC entered into life insurance business (23%) in June 2008 through a venture with HSBC (26%) and Canara Bank (51%). The Canara HSBC OBC Life Insurance did first year premium collection of Rs3bn in FY09 of which Rs684mn was done by OBC. OBC earned income of Rs260mn on the same.

Till October 2009, life insurance venture has already done FYP of Rs3.4bn and OBC has received commission income of Rs210mn. OBC is likely to receive commission income of Rs450mn for FY10 which is 11% of its fee income.

OBC has invested Rs1.3bn till date in the insurance venture and has already received Rs470mn in commissions amounting to whopping 38% return on investment.

Restructured assets: The total restructured asset portfolio as on September 2009 was Rs46bnn or 6% of advances. Of this, Rs8bn is in textiles and Rs4bn is in real estate. Of these total restructured advances Rs2.5bn of loans may see stress in coming quarters implying 5% slippages.

Provision cover: OBC's provision cover stood at 57.6% as at the end of September 2009. As the RBI has allowed the banks to include technical write offs to calculate the provision cover, OBC will not have to provide anything more to increase the cover to 70%. Even if OBC had to increase reported provision cover to 70%, OBC needs to provide Rs1.5bn further which is just 2% FY09 ABV and 14% of FY10 annualised profits.

Wage revision: Although, the bank has not revealed the impact of allowing existing employees to opt for pension, we believe that the impact on OBC could be ~Rs3.7bn or ~5% of book value.

Capital infusion: OBC is likely to get Rs10bn capital infusion from the central government by Jan-Feb 2009 to shore up its tier I capital adequacy.

Valuation and view

At the current market price OBC is quoting at 1.2x FY09 ABV and 1.1x H1FY10 ABV. We believe that the valuations are attractive looking at upsides from the expansion in NIMs and fee income from insurance venture. High amount of restructured assets and low CASA float remain key concern.

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