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MOSL: OBC (Buy) - NIMs decline - Slippages remain elevated - Asset quality under pressure




Motilal Oswal Securities Ltd.


04 Feb 2014





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Oriental Bank of Commerce (OBC IN, Mkt Cap USD0.8b, CMP INR174, Buy) Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) / Sohail Halai (Sohail.Halai@MotilalOswal.com) OBCs 3QFY14 PAT of INR2.2b (down 31% YoY) was 10% below estimate. Weak core income led by (1) 5% lower than estimated NII of INR12.3b (NIM drop of 15bp QoQ to 2.7% v/s expectation of 5bp drop) and (2) fee income of INR1.9b (11% below estimate led to disappointment). Lower than expected opex (10% below estimate) and provisions of INR5.6b (6% below estimate; PCR compromise of 400bp) helped PAT. Slippages remained elevated at INR10.4b (slippage ratio of 3.4%) v/s INR10.1b in 2QFY14. Upgrades and recoveries improved QoQ to INR3.5b (v/s INR1.9b in 2QFY14). Hence, net slippages came in at INR6.9b vs INR8.2b in 2QFY14. Restructured loan of INR13.5b (1% of loans) in 3QFY14. However led by conversion of SEB loans to Bonds under FRP, contained OSRL at INR96.9b (7.2% of loans). Other highlights: a) Bank created DTL (on special reserve) of INR190m through P&L with rest INR570m to be provided in 4QFY14. Bank is expected to debit its reserve for creation of DTL on special reserve in 4Q (quantum not specified), (b) loans grew 3% QoQ and 8% YoY, (c) bulk deposits proportion increased marginally to 15.6% and d) CASA ratio was stable QoQ at 24.2%. Valuation and View: Stress on asset quality led to pressure on margins and higher credit cost. Macro-economic condition is challenging and stress level is likely to be elevated for next couple of quarters, however in our view it is largely priced in. Reduction in high cost deposits and managements focus to strengthen its balance sheet even at the cost of growth is a step in the right direction. Maintain Buy.

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