>ORIENTAL BANK OF COMMERCE

Healthy business expansion: In Q3 FY12, the bank’s management expects credit and deposit growth in a range of 20% and 18% respectively compared to 21% and 19% in Q2 FY12. In deposits, CASA share is expected to be maintained at 23% level.


OBC’s business growth in Q2 FY12 grew around 19.6%. In Q2 FY12, SME and overall priority sectors were key loan growth drivers. Going forward, higher retail term deposit rates will lead to higher deposit mobilisation. Further, OBC is expected to witness strong growth across all credit segments. Over FY11-13, we estimate OBC’s business CAGR at 17%, nearly in line with the industry. On business volume growth front, we expect credit and deposit growth of 18% and 17% respectively in FY12 and 17% in FY13.


Stable margin: In Q3 FY12, NIM is expected to improve by 10 bps (QoQ) to 2.75% on the back of higher credit-deposit ratio and lesser write-back of interest income. In Q2 FY12, the bank reported margins of 2.64% compared to 3.3% in Q2 FY11 and 2.94% in Q1 FY12. We expect margin to fall by 60 bps to 2.24% (on yearly average basis) compared to the bank’s management expectations of 20 bps fall to below 3% level compared to 3.2% in FY11.


Strain on asset quality: Overall, the bank’s management expects gross NPA to remain stable in percentage terms on QoQ basis, but loan-restructuring to increase sharply in Q3FY12 and Q4FY12. Though, the bank’s management is not sure of quantum of loan-restructuring to be done in Q3FY12, but they sounded quite negative on this front. Majority of large-ticket loan-restructuring would come from power (Rajasthan & Haryana SEBs), aviation (mainly Air India) sectors. Asset quality deteriorated over past couple of quarters as CBS implementation led to ` 8bn of slippages in Q2 FY12. During Q2 FY12, the bank completed 100% migration of its loan book under the systemdriven NPA recognition platform as expected.


The bank’s exposure to power sector is close to ` 135bn (13% of total advances), of which 71% is with central &; state government projects and rest with private companies’ projects. Total exposure to state electricity boards is ` 81bn of which ` 38bn is secured by state government guarantee.


The bank’s management expects Rajasthan & Haryana SEBs loans to come for restructuring in Q3FY12. The bank’s exposure to GTL group (`5bn) has been already restructured. In Aviation sector, the bank’s total exposure is ` 15bn (1.4% of total advances), of which exposure to Kingfisher is ` 460mn (backed by receivables). Rest is with AirIndia and Jet Airlines. Post FY12, the bank’s management expects things to revive in FY13 on restructuring front.


On gross NPA front, we factor increase in GNPA to 3.2% March-2012 from 1.98% in March-2011 and 2.95% in Q2FY12. On loan-restructuring front, we expect doubling of restructured loan book to ` 92bn on end- March-12 from ` 52bn as on end March-11.


Valuation
We expect business to grow 17% CAGR during FY11-13 and margins to hover around 2.2-2.3%. At current market price of ` 218, the stock quotes at 0.67x adjusted book value FY13. We value the bank at ` 223 at 0.7x ABV FY13; we rate the stock as a Reduce.


RISH TRADER