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Punjab National Bank
Overweight
PNBK.BO, PNB IN
Management meeting takeaways, remain Overweight
We met with the management of PNB recently. Management expects
margins to moderate from current levels but remain >3.5%, given two
PLR hikes taken over the last six months. Gross NPAs are expected to
remain <2.0%, with slippages expected to stabilize by year-end. With a
strong deposit franchise, PNB is relatively better positioned in a high
interest rate scenario and remains our top pick in the PSU space.
• Margins to moderate but stay >3.5%: Management expects margins
to moderate from >4.0% to ~3.5% over the next 2-3 quarters, in line
with their guidance. Funding costs are under pressure with a sharp
increase in wholesale deposit rates (20% of deposits) and a hike in retail
deposit rates. PNB has hiked PLR twice and that would help to
somewhat offset higher funding costs.
• Strong loan growth expected: Loan growth has been strong across
verticles for PNB and management expects 23-24% y/y growth in FY11
(27% y/y in Sep-10). Though deposit growth has been slower, growth in
core deposits has been strong at 22% and with an increase in bulk
deposit rates (negative for margins) deposit growth is expected to pick
up.
• Maintain gross NPAs within 2.0%: Slippages have inched over the last
2 quarters and management expects a similar trend to continue over the
near term and stabilise by year-end. Higher upgrades and recoveries
should help contain gross NPAs <2.0%. PNB has already moved to
system-based NPA recognition for >Rs1mn accounts, which is >90% of
the overall book and hence does not expect any negative surprise. Credit
costs have been high in 1H11 and we expect it to moderate to 65bps in
FY12.
• Maintain Overweight: The liquidity situation will impact margins for
the sector including PNB. We believe with high CASA and ROAs, PNB
is relatively better placed with possible positive surprise on credit costs
in FY12. We remain Overweight with PNB as our top PSU pick.
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