BNP Paribas: downgrade PNB to HOLD (from BUY)

We downgrade PNB to HOLD (from BUY)
as it has reached our TP and looks fully
valued from a FY12 perspective. We
revise our TP to INR1,300 (from
INR1,200) implying 1.8x FY12 ABV. Our
FY11 & FY12 outlook is detailed below.
Outlook: Our loan-growth estimate is
23% for FY11 and 19% for FY12. The
loan growth assumption is comprised of
17% growth in retail loans and 22%
growth in corporate loans. We expect an
average NIM of 3.5% for FY11 and FY12,
which would be flat with respect to FY10.
We are factoring in loan loss provisions of
88bps in FY11 and 65bps in FY12, compared with 65bps in FY10.
Our thesis has played out: We had upgraded Punjab National
Bank to a BUY from HOLD with an increased TP of INR1300 in July 2010
(refer our note ‘Negatives priced in’ dated July 2, 2010). We had argued
for the stock being undervalued at INR 1020 despite factoring in
conservative loan loss provisions. PNB has returned 22% in the last 3
months compared to the broader market return of 17%. We now believe
the stock is richly valued and do not see any significant re-rating catalysts
coming up in terms of earnings trajectory. With over INR100bn in
restructured loans, we cannot rule out further slippages. It is time to take
some money off the table. Also with the stock trading close to the FII limit
of 20%, further expansion for the valuation multiple appears limited.
Valuation
Our TP of INR1,300 is based on a three-stage residual income model,
which includes the following assumptions: risk-free rate of 8% equity risk
premium of 6%, beta of 1.1, terminal growth of 4% and terminal COE of
10%. At our TP, the stock would trade at 1.8x adjusted BV for adjusted
FY12E ROE of 26%. Downside risks to TP: aggressive rate tightening by
the RBI and worse than-expected NPLs. Upside risks: lower-thanexpected
NPL slippage, higher-than-expected loan-book growth and
continued surge of liquidity into the counter.