26 October 2012
2QFY12 Results Update | Sector: Financials
Oriental Bank of Commerce
BSE SENSEX
S&P CNX
18,759
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf.(%)
M.Cap. (INR b)
M.Cap. (USD b)
5,705
OBC IN
291.8
324/190
10/24/2
91.7
1.7
CMP: INR314
TP: INR415
Buy
Oriental Bank of Commerce (OBC) reported 80% YoY growth in 2QFY13 PAT to INR3b, 9% below our estimate. In-
line NII (stable NIM QoQ at 2.8%) and 13% higher than estimated non-interest income led to 4% higher than
estimated operating profit. However, higher provision of INR4.6b and tax rate of 34.5% (expected 30%) led to
lower than estimated PAT. Key highlights:
Bank restructured INR5.3b in 2QFY13, as a result outstanding (o/s) restructured loans increased to INR115b
(9.7% of loans). Excluding government entities (SEB and Air India), o/s restructured loans was at 4.8% of loans.
GNPA was stable (+3% QoQ), led by higher write-offs; slippages were INR6.5b v/s INR7b in 1QFY13.
Momentum from recoveries from written-off accounts remains strong at INR1.4b v/s INR260m in 1QFY13.
Management guidance for FY13:
(1) NIM of 2.85% (3% for 4Q) v/s 2.79% in 1HFY13, (2) GNPA of 2.8% (2.92% in
2Q) and NNPA of 1.75% (2.04% in 2Q), (3) PCR of 70% (64.5% in 2Q) and (4) Loan growth of 16%.
Valuation and view:
Reduction in high cost deposits and easing interest rate in the system are likely to be margin
accretive for OBC. Management’s focus to strengthen its balance sheet even at the cost of growth is a step in the
right direction. Restructuring pipeline of INR25b over the next couple of quarters and a challenging macro
environment will keep asset quality under pressure. However, valuations at 0.7x FY14E BV discount this.
Buy.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415
Sohail Halai
(Sohail.Halai@motilaloswal.com)+ 91 22 3982 5430
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Oriental Bank of Commerce
Quarterly performance v/s our estimates and reasons for deviation (INR m)
Y/E March
Net Interest Income
% Change (Y-o-Y)
Other Income
Net Income
Operating Expenses
Operating Profit
% Change (Y-o-Y)
Other Provisions
Profit before Tax
Tax Provisions
Net Profit
% Change (Y-o-Y)
2QFY13A
11,571
17
4,068
15,639
6,427
9,212
22
4,599
4,614
1,592
3,022
80
2QFY13E
11,799
19
3,591
15,390
6,550
8,840
17
4,097
4,744
1,423
3,320
98
Var. (%)
-2
13
2
-2
4
12
-3
12
-9
Higher provisions on restructured loan
Comments
Margin in-line with estimate
Higher recoveries from written off accounts
led to higher other income
Higher than expected provisions led to under performance
Source: Company, MOSL
Asset quality on expected lines; PCR stable QoQ
Asset quality was healthy (in line with management guidance). Gross slippages
declined to INR6.5b (annualized slippage ratio of 1.7%) as against INR7b in 1QFY13.
While the momentum in recoveries and upgradations moderated (~INR2.7b v/s
INR4.3b in 1QFY13), the bank wrote-off INR3b, which led to just ~3% QoQ increase in
GNPA. Of the gross slippages during the quarter, INR2.9b were from the large corporate
segment, INR1.4b from MSME, INR500m from agri & retail.
Ex-SEB and AI, restructured loans at 4.8% of loans
Addition to restructured loans portfolio stood at INR5.3b, of which fresh restructuring
was INR3.3b; INR2b (AI - INR377m and HFCL - INR815m) was disbursed to already
restructured accounts. The cumulative restructured book stood at INR114.8b (9.7% of
loans). Adjusting for aggregate restructuring of government entities (INR58.3b) such
as AI (INR16.8b) and SEBs (INR41.5b), the total restructured book stood at INR56.5b, or
4.8% of overall loans. OBC is expected to restructure a further INR25b in 2HFY13, of
which INR12b is on account of Punjab SEB (expected to be NPV neutral) and the rest
on account of 3-4 large corporate accounts.
Focus remains on reducing bulk deposits and improving CASA ratio
The management continued with its strategy of de-bulking the balance sheet and has
increased focus on retail deposits. Core deposit growth remained healthy at 18% YoY
and 10% QoQ, while bulk deposits de-grew 12.5% QoQ to INR415b. The share of bulk
deposits declined further to 22.1% as compared to 26.2% in 1QFY13 and 27% in 2QFY12.
Traction in SA deposits was strong at 6% QoQ (+16% YoY), but CA deposits were flat
QoQ (up 15% YoY). Overall CASA deposits grew 4% QoQ and 16% YoY, and CASA ratio
was stable QoQ at ~24%.
Loan growth remains moderate; focusing on increasing share of retail and
SME loans
Loans grew 4% QoQ and 12.5% YoY to INR1.18t. Incremental growth during the quarter
was led by strong growth in the retail segment (11% QoQ and 15% YoY) and healthy
growth in the agriculture segment (7% QoQ and 25% YoY). Growth in the large corporate
segment (constitutes 52% of overall loans) was healthy at 4% QoQ and 12% YoY.
26 October 2012
2

Oriental Bank of Commerce
Other highlights
Reported NIM was stable QoQ at 2.8%, as yield on funds and cost of funds increased
marginally by 3-4bp QoQ to 9.6% and 7.1%, respectively.
Fee income (including forex) growth was disappointing; it declined 8% YoY (and
5% QoQ) to INR2.1b.
Credit cost for the quarter was ~1% as compared to 1.5% a quarter ago. PCR
(including technical write-offs) was stable at 64.5%.
Strong recoveries from written-off accounts boost non-interest income
2Q
FY13
Non Interest income
4,068
Fee income (incl. forex) 2,137
Sale of Invt
519
Recoveries
1,412
1Q
FY13
4,084
2,250
-133
1,967
QoQ
Gr. (%)
0
-5
N.A.
-28
2Q
FY12
2,774
2,331
183
260
YoY
Gr. (%)
47
-8
184
443
1H
FY13
1H
FY12
YoY
Gr. (%)
8,152
6,012
36
4,387
4,462
-2
386
900
-57
3,380
650
420
Source: Company, MOSL
Higher provisions on restructured loans led to sharp increase in provisioning expense
2Q
FY13
4,599
3,010
240
-62
1,410
1Q
FY13
3,321
4,301
310
-1,318
28
QoQ
Gr. (%)
38
-30
-23
N.A.
N.A.
2Q
FY12
4,853
3,422
240
801
390
YoY
Gr. (%)
-5
-12
0
N.A.
262
1H
FY13
7,920
7,311
550
-1,380
1,439
Source:
1H
YoY
FY12 Gr. (%)
7,996
-1
4,776
53
860
-36
2,137
N.A.
223
544
Company, MOSL
Provisions
NPA
Std Assets
Depreciation on Invt
Others
Conference call highlights
Yield on loans is likely to be under pressure, as the bank has reduced its base
rate thrice (cumulative reduction of 35bp) since April 2012.
Strong growth in the retail segment is partially being aided by reduction in
lending rate. OBC offers home loans at 10.4% and vehicle loans at 10.75% to
existing customers. The management expects traction in the retail segment to
continue.
Of the bond issuance for Air India (AI) exposure, the management expects to
receive INR5b (overall exposure of INR16.8b), which could lead to some write-
back of provisions.
The bank is likely to maintain the momentum of recoveries and upgradations.
The management expects recoveries and upgradations for the full year to be
INR16b as compared to INR7b in 1HFY13.
RIDF investments stand at INR70b (13% of investment book and 4% of balance
sheet). Since these are low-yielding investments, the overall yield on
investments has been impacted. Yield on other investments would be in the
range of 8-8.5%, in line with peers.
26 October 2012
3

Oriental Bank of Commerce
Of the overall GNPA of INR34.7b, priority sector loans constitute 52% (~INR18b;
agri – INR 7.6b, MSME – INR5.3b and other PSL – INR5.1b).
Tax rate for 2Q cannot be taken as base case, as the management expects to
come under MAT wherein the tax rate would be lower. The bank would avail of
the benefit in 2HFY13.
If Mahapatra Committee recommendations on restructuring are accepted in
the current form, then the restructured loans of INR18b would be reduced from
the overall restructured portfolio. Of the overall restructured loans, INR5.4b
has slipped into NPA.
Valuation and view
Reduction in high cost deposits and easing interest rates are likely to be margin
accretive for OBC. While there would be some pressure on yield on loans, margins
should expand 5/10bp over FY13/14. The management’s focus to strengthen balance
sheet even at the cost of growth is a step in the right direction, in our view.
During the quarter, accretion of fresh slippages declined and the management expects
to improve asset quality (GNPA) hereon. While the restructuring pipeline of INR25b
over the next couple of quarters and the challenging macro environment may lead to
volatility in slippages, we believe that the concerns are largely priced-in.
Though our operating profit estimate for FY13 remains unchanged, we downgrade
our earnings estimate by 5% to factor in higher provisions on restructured loans.
In 1HFY13, the tax rate stood at 32.8%. The management has guided tax of 20% for
FY13, implying a much lower tax rate for 2HFY13. We model a tax rate of 27.5% for
2HFY13. We expect OBC to report an EPS of INR48 for FY13 and INR57 for FY14. We
estimate BV at INR417 for FY13 and INR461 for FY14. We expect the bank to report an
RoA of ~0.7% and RoE of 12/13% over FY13/14.
We maintain OBC as our top pick among mid-cap state-owned banks, given (a) the
management’s focused strategies to improve the health of the balance sheet even at
the cost of growth, (b) higher capitalization, with tier-I ratio of ~10%, (c) top
management continuity till September 2014, and (d) attractive valuations. The stock
trades at 0.8x FY13E BV and 0.7x FY14E BV. Maintain
Buy.
26 October 2012
4

Oriental Bank of Commerce
We downgrade our earnings estimate to factor higher provisions for FY13 (INR b)
Old Estimates
FY13
FY14
Net Interest Income
Other Income
Total Income
Operating Expenses
Operating Profits
Provisions
PBT
Tax
PAT
Margins (%)
Credit Cost (%)
RoA (%)
RoE (%)
48.9
15.6
64.5
27.1
37.3
16.2
21.2
6.4
14.8
2.7
1.1
0.8
12.7
58.0
16.6
74.7
31.1
43.5
20.0
23.6
7.1
16.5
2.8
1.3
0.7
12.8
Revised Est
FY13
FY14
48.7
16.5
65.2
27.1
38.1
18.0
20.1
6.0
14.1
2.7
1.1
0.7
12.1
59.2
16.4
75.5
30.7
44.8
20.1
24.8
8.0
16.7
2.8
1.2
0.7
13.1
Change (%)
FY13
FY14
-0.3
5.7
1.2
0.0
2.0
11.4
-5.1
-5.1
-5.1
2.0
-1.7
1.1
-1.4
3.0
0.5
5.0
13.8
1.3
Source: MOSL
OBC: One-year forward P/E (x)
OBC: One-year forward P/B (x)
26 October 2012
5

Oriental Bank of Commerce
Quaterly trends
Loan growth led by retail; deposit growth by core deposits (%)
CASA ratio remains stable QoQ (%)
Core deposits grew 18% YoY; share of bulk deposits declined
to 22.2% v/s 27.3% a year ago and 26.5% a quarter ago
Traction in SA deposits was strong at 6% QoQ (+16% YoY).
However, CA deposits were flat QoQ (+15% YoY)
NIM stable QoQ (%)
Incremental restructuring of INR5.3b in 2QFY13
Yield on funds and cost of funds increased marginally by
3-4bp QoQ to 9.6% and 7.1%, respectively
Adjusting for aggregate restructuring of government entities
(INR58.3b) such as Air India (INR16.8b) and SEBs (INR41.5b),
the total restructured book stood at 4.8% of overall loans
Slippages in line with expectation (INR b)
Recoveries and upgradations moderate (INR b)
Slippage ratio (TTM) declined to 1.7% v/s 2% a quarter ago
While recoveries and upgradations declined QoQ , the
management remains focused on achieving INR16b in FY13,
implying 2HFY13 recoveries and upgradations of INR9b
26 October 2012
6

Oriental Bank of Commerce
Quarterly Snapshot
FY12
1Q
Profit and Loss (INR m)
Net Interest Income
10,183
Other Income
3,238
Trading profits
717
Recoveries
390
Fee income (incl forex)
2,132
Total Income
13,421
Operating Expenses
5,408
Employee
3,196
Others
2,212
Operating Profits
8,014
Provisions
3,143
PBT
4,871
Taxes
1,324
PAT
3,547
Asset Quality
GNPA
20,348
NNPA
10,592
GNPA (%)
2.1
NNPA (%)
1.1
PCR (Calculated, %)
48
PCR (Reported, %)
75
Slippages
3,780
Slippage Ratio
1.2
Prov. for NPA in qtr
1,354
Credit Cost
0.6
Restructured loans (INR b)
48
% to Loans
5
Ratios (%)
Fees to Total Income
15.9
Cost to Core Income
43.9
Tax Rate
27.2
CASA Reported
23.4
Loan/Deposit
67.9
CAR
13.6
Tier I
10.8
Margins Reported (%)
Yield on loans
11.6
Yield On Investments
7.0
Cost of Deposits
7.2
Spreads
2.5
NIM Quarterly
2.9
Balance sheet (INR b)
Deposits
1,446
of which CASA Deposits
338
Current Deposits
89
Savings Deposits
249
Gross Advances
982
For %age change QoQ and YoY is bp
2Q
9,895
2,774
183
260
2,331
12,669
5,087
2,783
2,304
7,582
4,853
2,729
1,051
1,677
31,111
19,783
3.0
1.9
36
64
15,033
4.8
3,422
1.4
54
5.1
18.4
41.6
38.5
22.9
70.6
12.6
9.9
11.7
7.5
7.6
2.4
2.6
1,496
342
86
256
1,056
3Q
11,399
2,953
365
299
2,289
14,352
6,081
3,532
2,549
8,271
3,809
4,462
920
3,542
32,322
20,616
2.9
1.9
36
63
6,988
2.2
1,011
0.4
76
6.9
15.9
44.4
20.6
22.3
70.9
12.1
9.5
12.2
7.6
7.9
2.6
2.9
1,562
348
85
263
1,107
4Q
10,682
3,438
438
301
2,699
14,119
6,580
3,957
2,623
7,539
5,344
2,196
(453)
2,649
35,805
24,590
3.2
2.2
31
62
13,174
3.8
5,000
1.8
95
8.4
19.1
49.2
-20.6
24.1
72.5
12.7
10.1
12.3
7.5
8.0
2.4
2.7
1,560
376
94
283
1,130
FY13
1Q
11,258
4,084
-133
1,967
2,250
15,343
6,377
3,762
2,615
8,965
3,321
5,644
1,730
3,914
33,776
23,061
3.0
2.1
32
64
7,069
2.0
4,301
1.5
110
9.6
14.7
47.2
30.7
24.0
72.0
12.3
9.9
12.4
7.5
8.0
2.5
2.8
1,582
380
99
281
1,139
2Q
Variation (%)
Cumulative Numbers
QoQ
YoY 1HFY12 1HFY13 YoY Gr (%)
3
0
NA
-28
-5
2
1
-3
6
3
38
-18
-8
-23
3
4
-5
-1
-78
5
-8
-21
-30
-49
5
4
17
47
184
443
-8
23
26
32
20
22
-5
69
51
80
11
21
-3
14
-547
70
-57
-304
-12
-31
113
456
20,078
6,012
900
650
4,462
26,090
10,494
5,979
4,516
15,596
7,996
7,600
2,375
5,224
22,830
8,152
386
3,380
4,387
30,982
12,804
7,427
5,377
18,178
7,920
10,258
3,322
6,936
14
36
-57
420
-2
19
22
24
19
17
-1
35
40
33
11,571
4,068
519
1,412
2,137
15,639
6,427
3,665
2,762
9,212
4,599
4,614
1,592
3,022
34,656
23,934
2.9
2.0
31
64
6,522
1.7
3,010
1.0
115
9.7
13.7
46.9
34.5
24.1
72.4
12.1
9.7
12.4
7.5
7.9
2.5
2.8
1,642
396
99
297
1,188
18,814
4,776
54
5.1
17.1
42.8
31.3
13,591
7,311
115
9.7
14.2
47.0
32.4
-28
53
113
456
-3
0
-5
1
0
4
4
0
6
4
70
0
30
15
15
10
16
15
16
13
11.6
7.2
7.4
2.4
2.8
12.4
7.5
8.0
2.5
2.8
73
21
55
6
0
Source: Company, MOSL
26 October 2012
7

Oriental Bank of Commerce
Stock Info
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY13
FY14
48.2
57.3
Consensus
Forecast
51.4
63.0
Variation
(%)
-6.2
-9.0
1-year Sensex rebased
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
Sep-12
58.0
25.4
9.6
7.0
Jun-12
58.0
25.5
9.6
6.9
Sep-11
58.0
25.4
9.9
6.7
26 October 2012
8

Oriental Bank of Commerce
Financials and Valuation
26 October 2012
9

Oriental Bank of Commerce
Financials and Valuation
26 October 2012
10

Oriental Bank of Commerce
N O T E S
26 October 2012
11

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Oriental Bank of Commerce
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