Buy Oriental Bank: Motilal Oswal

Motilal Oswal is bullish on Oriental Bank of Commerce and has recommended buy rating on the stock in its April 3, 2012 research report.

We met the new CMD of Oriental Bank of Commerce (OBC), Mr SL Bansal to gain insights into the bank's strategies and its roadmap under the new leadership. Our key takeaways:

De-bulking the balance sheet - A key requirement for improving operating parameters: In the last few years, strong loan growth and focus on bulk business led to a decline in OBC's CASA ratio and impacted margins. As a strategy, Mr Bansal intends to de-bulk the balance sheet. Accordingly, only select branches would focus on the wholesale business while the others would focus on the retail, SME and mid-corporate segments. In the process of realignment of its balance sheet, the bank is willing to grow moderately.

Improving CASA ratio - To leverage strong foothold in CASA-rich northern region: OBC's CASA ratio has been lower among state-owned banks at ~22% as against the industry average of ~30%. As at December 2011, the bank had ~1,750 branches, with very strong presence in the CASA-rich northern region. The management is planning various initiatives to improve CASA ratio and to leverage upon its strong foothold in the CASA-rich belt. Shedding of bulk deposits would also help to improve CASA ratio. The management targets CASA ratio of 25% by the end of CY12 as compared to 22% in December 2011.

NPA management and recoveries - A key focus area: Recoveries from NPAs and strengthening of credit appraisal at all levels to improve asset quality would be OBC's key focus areas. Moreover, with the help of technology, credit monitoring processes should advance considerably. The management is also considering providing preemptive restructuring of assets where the borrower has been temporarily impacted by economic slowdown.

Valuation and view - Maintain Buy: We expect near-term margins to be under pressure due to (1) tight liquidity conditions, (2) lower CASA ratio, and (3) higher proportion of deposits at preferential rates. However, we believe the new management's focus to improve the balance sheet, even at the cost of growth, is a step in the right direction. Though core operating parameters are under pressure, a strong management at the helm of affairs and low valuations are comforting. We expect OBC to report RoA of 0.7% and RoE of ~12% over FY12/13. The stock trades at 0.7x FY12E and 0.6x FY13E BV. Maintain Buy.