Quick Gun Morgan, the Leading Researcher for other Western Financial institutions, has started its coverage on the long forgotten Oriental Bank of Commerce – OBC. In a report released just minutes ago, Murugun emphasizes on OBC’s net interest margin (1.8% in QE-Jun 09) is the lowest in their coverage universe. Its margins have declined by two percentage points since F2004 primarily due to a collapse in bond spreads.This trend is behind us. Further, by QE-Dec 09, OBC will see the full benefit from repayment of high-cost deposits amounting to Rs. 209 bn (17% of assets). This alone will likely help margin expand by more than 30 bps.
OBC has a 23% stake in a life insurance JV with HSBC and Canara that has gained significant market share within one year of operation. We currently do not ascribe any value to this.
Key beneficiary of cyclical and structural margin improvement theme. Core earnings progression to improve in F2H 2010 with an improvement in margins as high-cost deposits reprice downwards.
OBC could re-rate to 1x BV from current 0.6x over the next 12 months driven by reduced pressure from asset quality concerns. OBC will likely generate close to 12% ROE in F2011 without any support from capital gains and even after building in a 3x rise in credit costs.
OBC is likly to report an EPS of Rs 36 for FY10 and Rs 40.1 for FY11 according to Murgun 😉 Morgan has set a Target price of Rs 325 on OBC, Mind it!!!