Oriental Bank of Commerce

Transcription

1 ANNUAL REPORT ANALYSIS 11 JUN 2015 Oriental Bank of Commerce BUY INDUSTRY BANKS CMP (as on 10 Jun 2015) Rs 182 Target Price Rs 287 Nifty 8,124 Sensex 26,841 KEY STOCK DATA Bloomberg/Reuters OBC IN/ORBC.BO No. of Shares (mn) 300 MCap (Rs bn) / ($ mn) 55 / 855 6m avg traded value (Rs mn) 534 STOCK PERFORMANCE (%) 52 Week high / low Rs 363/180 3M 6M 12M Absolute (%) Relative (%) SHAREHOLDING PATTERN (%) Promoters FIs & Local MFs FIIs Public & Others 7.56 Source : BSE Darpin Shah darpin.shah@hdfcsec.com Shivraj Gupta shivraj.gupta@hdfcsec.com Fresh beginning OBC s FY15 Annual Report shows a mixed picture as highlighted below: RWA % Assets inch-up: Despite conscious decision to go slow on business (+5% YoY), OBC still reported increase in RWA % Assets ratio. The ratio inched up from 67% in FY14 to 69% in FY15. This rise is largely attributable to incremental loan growth in stressed sectors like Iron & Steel, Infra, Gem & Jewel and construction. These sectors incrementally contributed ~37% (Rs 27bn) towards incremental loans (Rs 73bn). One-offs dented profitability: (1) Reversal of aggressive income of Rs 4.2bn booking from earlier sale to ARCs, (2) higher wage provisions of Rs 3.1bn vs. Rs 1bn in FY14, towards 10 th bipartite wage settlement and (3) provisions of Rs 712mn towards a fraudulent account in one of its Mumbai branch. The combined impact of the above is Rs ~8bn, 87% of PBT. Aggressive discount rate assumption: OBC s actuarial assumptions for arriving at pension and gratuity liabilities appear aggressive. OBC has factored in discount rate/salary escalation of 8.75%/5.25% vs %/ % of peers. This increases the probability of OBC surprising negatively on staff cost. High contribution from non-recurring items, productivity still elusive: Higher treasury gains of Rs 6.1bn (15% of PPoP vs. ~5% in last three years) and lower tax rate provided some cushion to earnings. Despite focus on recoveries and large pool of recently written-off assets (Rs ~27bn in FY13-14), FY15 saw lower recoveries of Rs 2.9bn vs. Rs 3.3/5.5bn seen in FY14/13. Further, SA/branch for last four years has remained stagnant at Rs 160mn, despite adding 630 branches (28% of total) during FY GNPA ratio increased across most segments: Barring agri (10bps fall in GNPA to 5.7%), rest of the segments showed rise in GNPA ratio. Sharp rise in GNPA within Iron & Steel (14.3% v. 7.2%) and Textile (11.9% vs. 6.3%) pushed the overall GNPA ratio within non-psl industries segment (30% of total loans) to 9% vs. 6.5%. View and valuations: FY15 performance was subdued and RoA dipped by 30bps to a mere 22bps. Asset quality was weak and in line with peers given poor macros. This along with some bank specific issues impacted the overall performance. We believe the new top-management has a clean slate and relatively better Tier-I. The tepid growth over FY14-15 is an added advantage. Nonetheless remain conservative given the slower than anticipated macroeconomic recovery. OBC trades at an attractive valuation of 0.57x FY17E ABV (below 1-Std Dev). Maintain BUY. FINANCIAL SUMMARY YE Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Net interest income 47,012 51,271 50,842 54,857 61,315 PPP 36,907 41,555 42,271 45,097 49,879 PAT 13,279 11,394 4,971 9,551 13,757 EPS EPS growth (%) 16.3 (16.5) (56.4) RoAE (%) RoAA (%) Adj BV P/E (x) P / Adj BV Source: Company, HDFC sec Inst Research HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

2 ORIENTAL BANK OF COMMERCE : ANNAUL REPORT ANALYSIS ANNUAL REPORT HIGHLIGHTS FY11 FY12 FY13 FY14 FY15 Segmental GNPA (%) Agri and allied Industry Services Personal Loans (PL) Priority Sector Loans (PSL): GNPA % Agri n allied Industries Services PL Total Non PSL: GNPA % Industries Textile Iron n Steel Services PL Total GNPA break up GNPA (Rs mn) 19,205 35,805 41,840 56,179 76,662 w/w Substandard (%) Doubtful 1 (%) Doubtful 2 (%) Doubtful 3 (%) Loss (%) Sale to ARCs Rs mn No of Accounts Agg. value (net of provisions) sold , Agg. Net consideration received ,952 2,132 Agg. Gain (loss) on net book value ,927 1,490 Floating provision Rs mn % loans Source: Company, HDFC sec Inst Research A combination of higher slippages and tepid loan growth pushed NPL ratios upward across most segments Loan classified under PSL forms 34.7% of total loans while forms 36.3% of total GNPA Textile and Iron & steel remain the pain point; exposure to these two industries is 11.3% of total loans Aging of NPLs and higher stressed additions kept credit cost elevated; credit cost for FY15 stood at 1.4% vs. 1.25/1.3% in FY14/13 respectively Sale to ARC provided some cushion to headline NPL ratio; BV of investment in security receipts stands at Rs 1.4bn Bank utilized the option given by the RBI of adjusting 50% of the floating provisions towards specific provisions Page 2

3 ANNUAL REPORT HIGHLIGHTS FY11 FY12 FY13 FY14 FY15 PSL requirement (%) Total PSL (40% norm) Agri (18% norm) Weaker section (norm 10%) Women beneficiaries (norm 5%) Concentration (%) Top-20 Depositors Bulk deposit % Total deposit Top-20 Advances Top-4 NPA Largely met the PSL target Calibrated growth approach over FY14-15 has kept the concentration risk under check Exposure to sensitive sectors (%) Infra Commercial real estate Iron & Steel Textile Construction Gems & Jewel Total RWA to Total Assets (%) Exposure towards most of the riskier sectors increased YoY; textile was exceptional High growth in stressed sectors led to faster rise in RWA vis-à-vis balance sheet growth 10th bipartite wage settlement Provision made (Rs mn) - - 1, , ,097.4 Pension Assumption (%) Discount rate Salary escalation Reported Yield and Cost movement % Yield on Advances Yield on Investments Cost of deposits NIM Source : Company, HDFC sec Inst Research Earlier years shortfall in wage provisions led to sharp jump in FY15; now bank factor ~15% wage hike in line with peers Actuarial assumption for calculating pension assumption appears aggressive vs. peers Page 3

4 ANNUAL REPORT HIGHLIGHTS FY11 FY12 FY13 FY14 FY15 Saving (SA) deposit Rs mn Incremental SA deposits 49,448 35,028 32,684 36,390 13,649 W/w Interest component on SA deposits - 2,706 2,831 3,267 3,343 Adj. incremental SA deposits - 32,322 29,853 33,122 10,306 SA accretion remains muted SA deposits outstanding/ Branch Incremental SA/ Opening branch network Branches 1,620 1,772 2,000 2,126 2,251 Additions during year Branch presence % Rural Semi Urban Urban Metro Branch presence continues to tilt toward rural regions Asset Liability Management Deposit maturity (% total deposits) > 1 year years < 3 years Loan maturity (% total loans) > 1 year years < 3 years Source : Company, HDFC sec Inst Research CHANGE IN ESTIMATES (Rs bn) FY16E FY17E Old New Change Old New Change NII 54,857 54, % 61,315 61, % PPOP 45,528 45, % 50,357 49, % PAT 9,888 9, % 14,500 13, % Adj. BVPS (Rs) % % Source: Bank, HDFC sec Inst Research NIM accretive ALM position in less than one year bucket; though in higher than three years bucket we see significant ALM mismatch Further cut estimates to factor (1) higher staff cost & (2) marginally increase slippages & provisions. Page 4

5 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 ORIENTAL BANK OF COMMERCE : ANNUAL REPORT ANALYSIS P/ABV band chart x SD Avg. -1SD x 0.8x 0.4x Source : Company, HDFC sec Inst Research PEER VALUATIONS Banks CMP (Rs) Mcap (Rs bn) Reco ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E AXSB 565 1,338 BUY DCBB BUY FB BUY ICICIBC # 293 1,696 BUY IIB BUY YES NEU ALBK NEU BOB BUY BOI NEU CBK NEU OBC BUY PNB BUY SBIN # 261 1,972 BUY UNBK NEU Source: Bank, HDFC sec Inst Research, # Adjusted for Subsidiaries Page 5

6 INCOME STATEMENT (Rs mn) FY13 FY14 FY15 FY16E FY17E Interest Earned 177, , , , ,626 Interest Expended 130, , , , ,311 Net Interest Income 47,012 51,271 50,842 54,857 61,315 Other Income 16,547 19,453 21,214 23,233 24,878 Fee Income (CEB) 7,658 8,649 9,108 9,966 10,910 Treasury Income 1,685 2,478 6,135 6,500 6,000 Total Income 63,559 70,724 72,056 78,090 86,193 Total Operating Exp 26,652 29,169 29,785 32,993 36,314 Employee Expense 15,761 16,767 16,375 18,541 20,536 PPOP 36,907 41,555 42,271 45,097 49,879 Provisions & Contingencies 21,546 25,751 35,923 29,909 29,887 Prov. for NPAs (incl. std prov.) 17,439 18,455 23,093 25,201 28,710 PBT 15,361 15,804 6,348 15,188 19,992 Provision for Tax 2,081 4,410 1,377 5,637 6,235 PAT 13,279 11,394 4,971 9,551 13,757 Source: Bank, HDFC sec Inst Research BALANCE SHEET (Rs mn) FY13 FY14 FY15 FY16E FY17E SOURCES OF FUNDS Share Capital 2,918 2,998 2,998 2,998 2,998 Reserves 124, , , , ,649 Shareholder's Funds 127, , , , ,648 Savings 315, , , , ,915 Current 116, , , , ,377 Term Deposit 1,327,130 1,464,465 1,546,446 1,654,697 1,820,167 Total Deposits 1,758,975 1,934,890 2,040,097 2,185,372 2,400,459 Borrowings 76,793 78,636 65,450 70,577 76,110 Other Liabilities & Provisions 43,448 55,193 61,795 67,568 73,962 Total Liabilities 2,006,972 2,203,025 2,305,136 2,468,627 2,706,179 APPLICATION OF FUNDS Cash & Bank Balance 85, , ,758 91,380 88,150 Investments 585, , , , ,197 G-Secs 440, , , , ,713 Advances 1,289,551 1,390,798 1,452,613 1,594,553 1,773,923 Fixed Assets 12,274 12,556 13,525 13,999 14,489 Other Assets 33,705 42,259 46,835 50,248 54,420 Total Assets 2,006,972 2,203,025 2,305,136 2,468,627 2,706,179 Source: Bank, HDFC sec Inst Research Page 6

7 KEY RATIOS FY13 FY14 FY15 FY16E FY17E Valuation ratios EPS Earnings growth (%) 16.3 (16.5) (56.4) BVPS Adj. BVPS ROAA (%) ROAE (%) P/E (x) P/ABV (x) P/PPOP (x) Dividend Yield (%) Profitability Yield on Advances (%) Cost of funds (%) Core spread (%) NIM (%) Operating efficiency Cost / Avg. Asset Ratio (%) Cost-Income ratio (Excl Treasury) Balance sheet structure ratios Loan Growth (%) Deposits Growth (%) C/D ratio (%) Equity / Assets (%) Equity / Loans (%) CASA (%) Total Capital Adequacy Ratio (%) W/w Tier I (%) Asset quality FY13 FY14 FY15 FY16E FY17E Gross NPLs (Rs m) 41,840 56,179 76,662 89,799 93,829 Net NPLs (Rs m) 29,027 39,044 48,162 54,540 53,943 Gross NPLs (%) Net NPLs (%) Coverage Ratio (%) Provision/ avg. loans (%) RoAA Tree Net Interest Income 2.49% 2.44% 2.26% 2.30% 2.37% Non Interest Income 0.87% 0.92% 0.94% 0.97% 0.96% Treasury Income 0.09% 0.12% 0.27% 0.27% 0.23% Operating Cost 1.41% 1.39% 1.32% 1.38% 1.40% Provisions 1.14% 1.22% 1.59% 1.25% 1.16% Provisions for NPAs 0.92% 0.88% 1.02% 1.06% 1.11% Tax 0.11% 0.21% 0.06% 0.24% 0.24% ROAA 0.70% 0.54% 0.22% 0.40% 0.53% Leverage (x) ROAE 11.46% 9.16% 3.83% 7.06% 9.54% Source: Bank, HDFC sec Inst Research Page 7

8 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 ORIENTAL BANK OF COMMERCE : ANNUAL REPORT ANALYSIS RECOMMENDATION HISTORY OBC TP Date CMP Reco Target 18-Jun BUY Aug BUY Oct BUY Jan BUY May BUY Jun BUY Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

9 Disclosure: We, Darpin Shah, MBA & Shivraj Gupta, MBA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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