PNB: Margins compensate for higher NPLs. BUY.:: Kotak Sec

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Punjab National Bank (PNB)
Banks/Financial Institutions
Margins compensate for higher NPLs. BUY. PNB delivered yet another strong
quarter with NII growing by 49% yoy. Margins improved further by 12 bps to 4.1%.
While slippages remained high at 1.9% (annualized) of loans, it declined sequentially.
We expect asset quality performance to get better resulting in lower provisioning and
this should compensate for likely lower margins going forward. RoAs likely to sustain at
1.3-1.4% and RoEs at 23-24%. Retain BUY with a target price of `1,500.


Quality of earnings continues to impress; retain BUY
We are impressed by PNB’s quality of earnings which is enabling the bank to withstand pressure
on asset quality and higher employee expenses on account of increased retirement benefits. Asset
quality which has been under pressure in the previous few quarters improved with lower slippages
with the trend still remaining high with a delinquency of 1.9% during the quarter. We continue to
maintain our favorable rating on the stock and revise earnings by 5% in FY2011E. The bank is
trading at relatively expensive multiples of 1.8X FY2012E PBR. We maintain BUY with TP of `1,500
(`1,450 earlier). At our TP, the stock will trade at 2XFY2012E PBR and 10XFY2012E PBR.
Slippages reduce for the quarter; NPLs stable qoq
Unlike the previous few quarters, slippages have reduced somewhat in the current quarter.
However, we note that recognition of corporate NPLs are lumpy in nature and difficult to predict
the trend on a quarterly basis. Compared to the past three quarters where slippages were at about
2.5% levels, 2QFY11 was considerably lower at 1.9% (`9.1 bn). Nearly a quarter of this slippage
was specific to a single client. Overall, gross NPL increased by 11% qoq and 54% yoy to `40 bn
(1.9% of loans). Net NPLs increased 11% qoq to `14.3 bn (0.7% of loans). Including technically
written-off portfolio, the provision coverage stands healthy at 77%, while reported coverage is at
65%. We model a delinquency ratio of 2.2% in FY2011E and 1.8% in FY2012E.

Restructured loans increased by 4% qoq (6.5% of loans)
Total restructured assets are at `135 bn, about 6.5% of the loan book (increased by 4% qoq).
While high level of restructured assets remains a concern, slippages out of the restructured loan
portfolio have been lower at about 9% of loans. On a one year lagged basis, slippages are at
about 12% of loans, which is broadly in line with industry trends.