Hold OBC; target of Rs 115: Edelweiss

Edelweis's research report on OBC

Oriental Bank of Commerce’s (OBC) Q2FY17 PAT, at INR 1.53 bn, was broadly in line with estimates. Key highlights were: a) slippages, at INR 21 bn (5.7%, while lower than past 3 quarters’ run-rate of >10%), remains high; and b) core operating profitability remained under pressure (down >25% YoY) on muted core revenue traction (down >13% YoY) and higher opex (up >15% YoY). On operational front, we anticipate the bank’s competitive prowess to be severely impacted given diversion towards clean up coupled with capital constraints (which may not be forthcoming for mid-size PSU banks). Hence, we expect OBC’s operating profitability to remain under pressure. Maintain ‘HOLD’.

Apart from high asset quality stress, mid-size PSU banks are hampered on operational front too. We perceive a clear demarcation between large and mid-size PSU banks and expect pressure to continue in latter. Given increasing BASEL III requirement and limited capital support from government, dilution risk is imminent at weak multiples, which will be detrimental to shareholders’ returns. The stock is trading at 0.5x FY18E P/BV (post dilution). We maintain ‘HOLD/SP’ with TP of INR 115.