Maintain ‘hold’ on OBC with target of Rs 115: Edelweiss

By: | Published: August 18, 2016 6:04 AM

Oriental Bank of Commerce’s (OBC) Q1FY17 performance was marred by continued asset quality weakness. Slippages were higher...

Oriental Bank of Commerce’s (OBC) Q1FY17 performance was marred by continued asset quality weakness. Slippages were higher at >I Rs 34 billion (>9%) driven by higher corporate slippages. Core operating profitability remained under pressure (down >20% year-on-year) on muted core revenue traction (down >1.5% year -on-year ) and higher opex (up 22% y-o-y). Factoring in muted revenue traction and higher opex we prune our FY17/FY18 earnings estimates by 7%/4%.

We expect structural challenges to persist for mid-size PSU banks . Slippages continues to be elevated at Rs 34.6 billion (>9%) largely driven by iron & steel (Rs 10.7 billion) and textile (Rs 10 billion). According to OBC, slippages have peaked and it expects lower (albeit elevated) trend going ahead, anchored by the fact that large part of stress in stressed industries has already been recognised (>55% in iron & steel, >25% in textile etc., already NPL).
This, along with higher opex (22% y-o-y), led to muted core profitability. Operating profitability will remain under pressure due to structural challenges.

We maintain ‘hold/SP’ with TP of Rs 115. OBC recorded yet another subdued quarter with advances coming in at `1.5 trillion (up 2.6% y-o-y /1% q-o-q, partially due to conversion of power exposure to bonds under UDAY scheme) much lower than industry, implying market share loss.

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