Oriental Bank of Commerce (OBC) recorded 27% y-o-y growth in both Advances and Deposits to Rs69,065 crore and Rs98,639 crore respectively, during 4QFY2009.
Symptomatic of higher competitive pressures for mid-sized PSU Banks, the Bank’s Net Interest Income (NII) on the other hand, was up only 5% y-o-y and down a substantial 19% on a sequential basis, due to erosion in pricing power in loans, even as the deposit mix remained weak.
The CASA ratio remained at around 24% while bulk deposits remained a high 21% of total deposits. Calculated NIMs indicated a substantial 57bp sequential fall.
The asset quality remained relatively healthy, with the Gross NPA ratio further declining sequentially to 1.53% (1.63%) and Net NPA to 0.65% (0.76%).
Gross additions to NPAs at Rs547 crore for FY2009 were almost 40bp lower than the expected slippage rate of around 1.4% of FY2008 advances.
This could be partly attributed to the substantial restructuring undertaken by OBC of Rs2,200 crore during FY2009, amounting to 3.2% of FY2009 Advances. Management indicated that further Rs1,700 crore of applications were pending for approval.
Capital Adequacy was comfortable at 12% (13% under Basel 2), with Tier 1 Capital Adequacy healthy at 9.1%.
OBC delivered 4% y-o-y de-growth in net profit to Rs196 crore (Rs205cr, adjusting for extra-ordinary items), which was lower than expectations on account of lower NII and increase in the effective tax rate.
The Bank’s sustainable RoAs are among the lowest in the sector on account of its weak deposit mix and low Fee Income.
Its relatively small, regional and urban-centric operations (facing greater competition from private banks) further temper the growth outlook on these key competitive parameters.
Nonetheless, at the CMP, the stock is trading at relatively cheap valuations of 3.7x FY2010E EPS of Rs35.3 and 0.5x FY2010E Adjusted Book Value of Rs286.2.
Mainly on account of cheap valuations, we maintain an ACCUMULATE rating on the stock, with a target price of Rs143, implying an upside of 10%.