PNB 2QFY11 – Raising estimates, target; Buy:: Anand Rathi

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PNB
2QFY11 – Raising estimates, target; re-iterate Buy


 Raising estimates and target. We raise PNB’s FY11e/FY12e
EPS by 7.7%/12.9%, due to its healthy 2QFY11 performance. We
value the stock at 1.9x FY12e ABV (earlier 1.6x) owing to a better
RoE, and raise our target price to `1,602 from `1,230. We retain a
Buy, as we expect its high NIM and adequate NPA coverage to
keep its RoE one of the best in the sector.
 Healthy business growth, high NIM. Yoy growths in credit
(27.6%) and deposits (18.4%) were higher than the sector’s. NIM
improved 56bp yoy, 12bp qoq, to 4.1%, led by a 200-bp improved
CASA share to 40.6%. PNB’s enviable liability franchise holds it
in good stead in protecting its NIM. Due to higher NIM assumed,
we raise NII by 10.8% in FY12e and 13.8% in FY13e.
 Productivity, fees improve. Core cost-to-income improved 67bp
yoy to 43.6%, despite `2.5bn of provisions for employee pensions
and gratuity. Fee growth at 24.4% yoy was largely in line with
credit growth (27.6% yoy).
 NPA coverage falls; sufficiently capitalized. Gross NPAs rose
11.4% qoq. NPA coverage dropped from 81.2% in Mar ’10 to
77.1% now. Restructured assets were 6.5% of loans, and are likely
to be the overhang for PNB’s stock performance, near term.
Capital adequacy was sufficient at ~14%, with Tier-1 capital at
~9%.
 Valuation. At our target, PNB would trade at 2x FY12e and 1.6x
FY13e ABV. Risk: Higher credit costs, due to lower-thanexpected
NPA recoveries.