Macquarie Research: Punjab National Bank: Downgrade to Neutral

Punjab National Bank
Downgrade to Neutral
Event
􀂃 Downgrade to Neutral on valuations: We downgrade PNB to Neutral from
Outperform and maintain our TP at Rs1,300. PNB is now trading at its all-time
high valuations, and the risk-reward is unfavourable at this price, in our view.
Impact
􀂃 Higher restructured assets book worries us: PNB has one of the largest
restructured assets book among its peers at 6% (vs an average of 4-5%). So
far, PNB has had just 8% slippage from restructured assets. We have built in
roughly 15% slippage from restructured assets. Our sensitivity analysis
reveals that 25% slippage from restructured assets results in a 20% impact on
profits, with ROEs declining by 380bps to 16.7%.
􀂃 Cushion of NIMs is the greatest positive: PNB’s high margin structure and
its ability to maintain those high levels even during the toughest times last
year is quite commendable, in our view. The bank has maintained its margins
at 3.9%. The high margin structure is mainly due to its strong liabilities
franchise, which gives it a cost of funds advantage. The high NIMs give PNB
enough cushion to absorb credit losses compared to its peers, in our view.
􀂃 Return ratios consistently above those of peers: PNB’s ROA of 1.4% has
consistently been 200-300bps higher than those of its peers. The high ROA
mainly stems from its high margin structure, and we expect PNB to report an
ROE of around 20%, despite higher credit charges.
􀂃 Management stability is another encouraging factor: PNB’s CMD, Mr.
Kamath, has had a tenure of five years, and we believe management stability
in PSU banks is now likely to be a crucial differentiating factor in the banks’
achieving a consistent performance. The new CMD has managed to maintain
PNB’s margins at high levels of 3.9%, and his focus on growing profitably
without compromising on margins and asset quality is encouraging.
Earnings and target price revision
􀂃 No changes.
Price catalyst
􀂃 12-month price target: Rs1,300.00 based on a Gordon Growth Model
methodology.
􀂃 Catalyst: Slippages from restructured assets over the next two quarters and
margin compression in 2Q/3Q FY11.
Action and recommendation
􀂃 PNB is our top pick in the PSU banks space: PNB continues to be our
preferred play for investors willing to take an exposure to PSU banks. We
recommend that investors add PNB on corrections.