Buy Oriental Bank; target of Rs 380: Religare Capital

Religare Capital`s research report on Oriental Bank of Commerce Sluggish advances growth: Advances growth remained sluggish (+7.7% YoY) led by a decline in the large/mid-corporate books, even as growth in the retail/agri segments was healthy. Given an uncertain macro, management has taken a calibrated approach to promote B/S growth, with profitability taking precedence. NIMs improve QoQ; C/I spirals up: NIMs expanded by 7bps QoQ to 2.63% due to a higher increase in yields vis-à-vis the cost of funds. Staff costs too shot up due to increased AS15 provisions on account of a decline in yields, which coupled with lower other income resulted in a sharp 1000bps increase in the C/I ratio to 47.8%. Weak asset quality performance: While slippages declined QoQ, they remained elevated at 3% (vs. 4.5% in Q1FY15), with 70% coming from the restructured book. Lower sale to ARCs and insignificant write-offs led to an 11% QoQ increase in headline GNPLs and a 41bps increase in the GNPL ratio (aggravated by sluggish growth). Fresh restructuring spiraled down further to Rs 7.2bn (from Rs 8.8bn in Q1FY15), and the pipeline (as indicated by management) too stands low at Rs 10bn. Valuations reasonable – maintain BUY: Continued asset quality stress due to the prolonged economic slowdown remains a key risk; that said, we a maintain BUY on OBC given its steadily improving RoAs (0.7% in FY17), better capital position (CET I: 8.4%) vis-à-vis peers and reasonable valuations (0.6x FY17 ABV). "OBC reported a below-expected Q2FY15 PAT of Rs 2.9bn (RCMLe: Rs 3.5bn; +15.9% YoY) on lower other income, higher staff costs and increased provisions, but partly supported by tax write-backs. While impaired asset formation was lower QoQ to 5.2% (7.2% in Q1FY15), lower sale to ARCs and insignificant write-offs pushed up headline GNPLs. Continued asset quality stress due to the prolonged economic slowdown remains a key risk; however, valuations at 0.6x FY17 ABV are reasonable. Maintain BUY,” says Religare Capital research report. 

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