PNB: preferred pick in PSU space :: Goldman Sachs

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EARNINGS REVIEW
Punjab National Bank (PNBK.BO)
Buy
In line with expectations on core; still preferred pick in PSU space
Strong core performance on NIMs, fees, despite higher opex
Punjab National Bank (PNB) reported 2QFY11 net profit growth of 16% yoy
to Rs10.75bn (6% below estimates) but PBT, treasury and provisions, was
in line up 42% yoy. Key takeaways: (1) NII (up 48% yoy) was driven by
higher NIMs at 4.06% (3.94% in 1QFY11) and credit growth of 28% yoy.
CASA remained strong at 41%. (2) Core fees were up 24% yoy, 13% ahead
of GSe. (3) Operating expenses came in 22% ahead as PNB made Rs2.5bn
provisions for gratuity and pension liabilities. Company did not provide
details on actuarial liability; we estimate it at Rs40-44bn to be written-off
over five years. (4) Loan loss provisions (0.84% of loans) came in 26%
ahead of GSe. Gross NPLs up 11% qoq (likely as PNB moved to system
recognition of NPLs for loans greater than Rs1mn vs. manual earlier) to
Rs40 bn (1.8% of loans), restructured loans +4% qoq to Rs135 bn (6.5% of
loans) and net NPLs up 11% qoq to Rs14.3 bn (0.66% of loans). Coverage
ratio incl. write-offs remained healthy at 77.1%. Delinquency ratio came off
(2.23% in 2Q from 3.1% in 1Q) and we believe NPLs are likely close to the
peak, given buoyant economy and improving corporate fundamentals.
Remains a Buy
We adjust FY11E-FY13E EPS by -3%/3%/4% to factor in higher NII, partly
offset by higher provisions. Subsequently we increase our CAMELOT
based 12-m price target to Rs1410 (from Rs1300), as we also roll forward
BVPS by one quarter. We note that our implied valuation would be Rs1520
if we were to base it on our March 2012E BVPS. We retain our Buy rating
for PNB given strong earnings growth, high RoA of c. 1.45% and RoE of
over 23.5% for FY11E-FY13E. Risks: (1) Higher slippages (2) higher growth
leading to dilution in margins.