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Punjab National Bank Overweight
PNBK.BO, PNB IN
Mixed 2Q: Margin surprises, asset quality disappoints,
Maintain Overweight
• In line 2Q11: PNB declared in line 2Q11 results with net profit at
Rs10.75bn up 16% y/y. Higher than expected provisions and costs were
netted off by higher than expected margins and NII. Slippages did
continue in 2Q11 but moderated from 1Q11 levels.
• Margin and loan growth surprises: Margin improvement was very
strong with NIMs improving to >4.0% from 3.94% in 1Q11, leading to a
14% sequential increase in NII (10% higher than our expectations).
Management expects margins to moderate from current levels but NII
growth should still be very strong at 33% y/y in FY11. Loan growth at
28% y/y also surprised with strong growth from Infra and SMSE sectors.
Management expects loan growth momentum to continue with 2-3%
higher than system loan growth for FY11.
• Asset quality – Slippages continue: Gross slippages of Rs9.1bn were
high in 2Q10 leading to higher than expected credit costs. As a result,
Gross NPAs inched up by 11% in 2Q11. PNB has aligned to system
based NPA recognition for >Rs1.0mn accounts and expects to fully
move to system based recognition by Mar-11. In spite of the high
slippages in 2Q11, management re-iterated that they expect to maintain
gross NPAs <2.0% (currently 1.9%).
• Return ratios to remain high: In spite of the high slippages and credit
costs, ROAs were ~1.4% in 1H10 and we expect higher than expected
margins would more than offset higher credit costs. ROAs will continue
to remain >1.4%, justifying premium valuations, in our view.
• Maintain Overweight: We revise up our earning estimates for PNB by
3%/1%/1% for FY11/12/13 on higher margins and operating costs. On a
relative basis, we continue to believe that PNB should trade at a premium
to other PSUs given higher return ratios. We thus maintain our
Overweight recommendation. Key risks are higher than expected
slippages.
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