Buy Oriental Bank; target of Rs 285: GEPL Capital

GEPL Capital is bullish on Oriental Bank of Commerce and has recommended buy rating on the stock with a target of Rs 285 in its April 27, 2012 research report.

“Oriental Bank of Commerce (OBC) has major concentration in wholesale business which is low yielding asset. Now the banks focus is to increase retail and SME assets as these are high yielding. This would help the bank to maintain margins in downward sloping interest rate term structure as well as to garner high Current Account & Savings Account (CASA) deposits i.e. low cost deposit. To achieve this structural change, the bank has taken steps like: Now wholesale banking business is concentrated in few branches and all the branches are instructed to focus on SME and retail segment. Proportion of bulk deposit expected to go down from current level of ~26% to ~20% in FY13E. The banks advances have grown by 21.4% CAGR against industry growth of 19.5% CAGR over FY07- FY11. Going forward, we expect the bank’s loan book to grow at 20.3% CAGR over FY11-FY14E and growth drivers to be SME segment growing by 26.2% CAGR and retail segment by 26.4% CAGR over FY11-FY14E.”

“The bank’s books contain high risk in the form of exposure to sensitive sectors like power 13% of total advances (mainly SEBs), steel, metal, textile etc. We have factored in higher slippages in our estimates considering risky nature of restructured accounts with the bank. High slippages also imply that we have factored in higher credit cost which would move downwards FY13E onwards as compared to FY12E as the banks Provision Coverage Ratio (PCR) is maintained well above 60% (excluding Tech Write/offs). Going forward, we expect the Gross Non Performing Assets (GNPA) levels to move up to 4.2% by FY14E. Compared to peers, the bank’s performance is much better in terms of employee and branch efficiency. The structural change is expected to further improve its performance compared to peers there by making it a preferred one out of the lot.”

“OBC has been a good performer in the past and has improved asset quality along with growth. But FY11 and FY12 both posed difficulties for the bank to perform mainly due to its working strategy of depending on bulk deposits and bulking business growth towards low yielding assets. With change in management we feel the right steps have already been taken to improve performance by improving retail banking business and more cautious stance on asset quality front. These steps might impact bank for short term but in long term it would strengthen the banks performance. Asset quality concerns still persist but we have already factored in higher delinquency in our estimates and considering its valuation on such base seem to be attractive. Considering these factors we feel that the stock should command better valuations compared to its peers as the bank is trading at discount to all its peers. At CMP the stock is trading at PBV of 0.63x and 0.56x FY13E and FY14E book value. We recommend BUY on the stock with Target Price of Rs285 (0.65x ABV FY14E),” says GEPL Capital research report. 

Public holding more than 90% in Indian cos

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