>ORIENTAL BANK OF COMMERCE (MORGAN STANLEY)

Time to Buy this Forgotten Stock at 0.6x BV

Raising target price to Rs. 325 (1x F2010 BV): We have raised our target price on the back of greater visibility on margin progression and comfort on earnings outlook. We estimate that OBC can generate close to 12% ROE in F2011 without any support from capital gains and even after assuming Rs. 55 bn of loan loss provisions (3x that in F2009). We believe a cyclical uptick in core earnings over the next few quarters could be the catalyst for a re-rating.

Key beneficiary of strucural and cyclical margin expansion theme: OBC’s net interest margin (1.8% in QE-Jun 09) is the lowest in our coverage universe. Its margins have declined by two percentage points since F2004 primarily due to a collapse in bond spreads. We believe that this trend is behind us. Further, by QE-Dec 09, OBC will see the full benefit from repayment of
high-cost deposits amounting to Rs. 209 bn (17% of assets). This alone will likely help margin expand by more than 30 bps.

Bond book relatively insulated from losses: OBC’s bond portfolio is relatively immune to bond losses up to a yield of 8.25%. Hence, even if bond yields were to rise to 9%, OBC’s earnings would be impacted by 13-14%. Note that there would be some offsetting cushion in the form of higher yield on investment book.

Upside Optionality from Insurance Business: OBC has a 23% stake in a life insurance JV with HSBC and Canara that has gained significant market share within one year of operation. We currently do not ascribe any value to this. If it keeps gaining market share, we would likely start ascribing value to this business, which could potentially amount to >25% of current market cap.

To see full report: OBC