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Canara + Corporation + Oriental Bank – House Views

November 8, 2007

Canara, Corporation and Oriental bank have reported weak numbers in their core business [Banking], yet DSP Merrill Lynch in a report has different recommendations for each of the stocks.

Canara Bank:
Canara Bank’s 2QFY08 PAT, although in line with estimates at Rs4bn owing to higher than expected other income and lower provisions, has shown lackluster topline performance. Topline has de-grown by 20% yoy and 12% qoq on the back of margin pressure. Margins have collapsed by 18bps qoq and 79bps yoy to
Earning forecast cut by 3% for FY08 and 4% for FY09, factoring in lower margins stemming from cost pressures. Canara Bank is expected to report earnings of Rs 39.45 and 44.48 for FY08 and FY09 respectively. DSPML is NEUTRAL on the stock.

Corporation Bank:
Corporation bank,s 2QFY08 net income grew 27% yoy to Rs1.6bn (2% ahead of MLe) largely on back of higher other income (treasury profits) and lower provisions. Loans grew 17%yoy (from +35%yoy in 2QFY07) and while margins held-up qoq, on yoy basis, margins declined by +15bps to 2.85%, as deposit costs rose resulting in top line growth of only 18%yoy (v/s. 25% estimated). Rise in funding costs (up 136bps yoy) resulted in margin pressure.

Corp Bank is expected to report an EPS of Rs 44.01 and 52.30 for FY08 and FY09 respectively. DSPML maintains a SELL rating on the stock at CMP of Rs 452.

Oriental Bank of Commerce:
OBC reported a 24% yoy de-growth in earnings to Rs2.36bn in 2QFY08 (15% below MLe) as margins compressed and fee income declined yoy and qoq. NII de-grew by 3% yoy (10% yoy growth- MLe) to Rs4.0bn. DSPML estimates that on a yoy basis margins for 2QFY08 have declined by +50bps as deposit cost increased owing to a shift in deposit mix (CASA declined by +300bps yoy). OBC loan growth has also slowed down to 21% yoy (29% yoy avg. in FY07) and incremental LDR (YTD) has come down to 28%.

OBC is expected to report an EPS of Rs 35.69 and 41.37 for FY08 and FY09 respectively. DSPML maintains a BUY with a target price of Rs 280.

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