We maintain ?buy? on Oriental Bank of Commerce (OBC) with a target price of R350. At valuation of 0.5x FY15 adjusted book value, we believe risks are adequately priced in. Led by clarity on asset quality and stable-to-improving margins, we expect the bank to deliver 28% CAGR in earnings over FY13-15 with the ROE profile improving from ~11% in FY13 to 15.4% in FY15e.
We recently met with the senior management of OBC to get an insight into their asset quality trends. Led by continuous focus and monitoring, the management believes that slippages would be contained at around R3,000 crore (against R3,200 crore in FY13). It has a target recovery set at around R2,000-2,200 crore.
Specific exposure of R175 crore to Nafed has been fully provided for and written off. However, on a comparable basis income from written would be lower as Q1FY13 was characterised by lumpy recoveries.
Recovery efforts continue to be on track and the bank aims to bring down NPLs closer to 3% (3.2% currently) and improve provisioning coverage to 67-68%. The management reiterated its guidance of improving margins to 2.9% by FY14.
In addition, the company expects loan growth to be in line with industry growth.
