Punjab National Bank: Key risks: JPMorgan

Visit http://indiaer.blogspot.com/ for complete details �� ��


Punjab National Bank
Asset quality has been weak of late: Asset quality continues to remain a concern
with slippages inching up and credit costs increasing from ~60bps to ~100bps in
1HFY11. Exposure to real estate is relatively high and is a cause of concern for PNB.
Management maintains that they will restrict Gross NPAs to <2.0% (1.9% currently)
and hence expect pace of slippages to come off as slippages have impacted
performance over last 1-2 quarters. Management has guided that 2H will see
improvement – the stock could underperform if NPLs do not improve in 2H.


Weak systemic loan demand could put pressure on margins: Systematic loan
growth has been weak YTD and system liquidity has been tight over the last 3-4
months. Though margins for PSU banks have surprised over the last 2 quarters, we
expect margin moderation from here for PNB as deposit costs rise. Management has
also guided to base margins at 3.5% from >4.0% currently.

Bond book is still vulnerable: Bond yields have been inching up from ~7.6% to
8.1% over the last 3-4 months and that leaves PSU banks vulnerable to bond losses.
20% of the bond book is in AFS with a duration of 2.6 yrs. Though RBI has
introduced liquidity easing schemes over the last fortnight we believe other income
for PSU banks including PNB would be impacted by any further rise in bond yields.