OBC - A Good Bet

OBC is a mid-size PSU bank with a network of 1461 branches. The bank provides a broad range of financial services which includes wholesale and retail banking products, merchant banking, credit assistance, lead banking and management and foreign exchange. The business of the bank has grown at a CAGR of 24.7% over FY04-FY09.

Expansion to fuel growth: OBC plans to add over 100 branches every year in order to have a network of 2000 branches by FY12. Most of these new branches are being opened in key strategic locations in metro/urban areas which will enable the bank to increase its low cost deposit base and improve its Net Interest Margins.

Comfortable Capital Adequacy: The tier I capital ratio of 9.8% is sufficient to fund near-medium term growth. The low tier II capital ratio at 3.4% gives enough head room to raise tier II capital whenever required.

OBC’s business is undergoing a major revamping exercise with management’s increased focus towards improving NIM through better asset liability management.

At the current market price, the stock is trading at 0.75x of its FY12E Adjusted Book Value and 5x of its FY12E EPS. Given the distribution expansion, improving fundamentals and comfortable capital requirement, the stock appears highly undervalued compared to other PSU banks. We recommend buying the stock with first target price of Rs 400.