Punjab National Bank (PNB) Focus on profitability remains high:: Kotak Sec

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Punjab National Bank (PNB) 
Banks/Financial Institutions 
Focus on profitability remains high. Our interaction with the management gives us
reasonable confidence, about PNB doing the right things by increasing lending rates at
times of tight liquidity and rising deposit costs. While NIMs are expected to moderate
from elevated levels of 2QFY11, we believe that this is largely factored in our earnings.
Credit growth remains strong and getting diversified while asset quality trends are
broadly stable. Stock trades at 1.6X FY2012E PBR. BUY.
Hikes in lending rates and strong CASA ratio to cushion NIM pressure
We believe that the recent move by PNB to (1) hike its PLR by 75 bps to 12.5% and the base rate
to 9% from 8.5% earlier and (2) the strong CASA ratio of 41% will cushion the pressure on NIMs
due to increase in deposit costs. The management, in our recent discussion, has not changed its
guidance of NIMs. NIMs for PNB had expanded sharply over the past few quarters; we, anyway,
were expecting some moderation from peak 2QFY11 levels. Our NII growth assumption of about
5% in 2HFY11E over 1HFY11 compared to credit growth assumption of 11% reasonably factors
the expected compression in NIM (decline of about 20 bps). In FY2012E, we are building a decline
of about 10 bps over FY2011E.

Credit growth remains robust; getting diversified
PNB management has guided for about 22% loan growth, slightly ahead of RBI’s estimates for
FY2011E, but likely to surpass that given the current growth trends. The management highlighted
that inadequate deposit growth is becoming a primary constraint for credit growth resulting in a
sharp rise in deposit rates. Short-term measures like SLR and OMO operations from RBI is definitely
helping banks but reducing GoI surplus in RBI’s balance would be the most effective solution in
the medium term. Comforting factors are emerging with credit growth increasingly getting
diversified—capex programs have started in select sectors while working capital requirements have
improved in most sectors. Infrastructure credit has not witnessed any slowdown. We are broadly
maintaining our estimates of credit growth of 24% in FY2011E and 21% in FY2012E.

Management working on 1.2-1.3% RoA and 22-23% RoE targets
While there might be some negative headwinds to margins, retirement benefits and asset quality,
the management remains confident of delivering a 1.2-1.3% RoA and 22-23% RoE and is focused
on these ratios. Thus, while there could be near-term earnings volatility, medium-to-long-term
profitability remains strong and intact.


Asset quality pressure remains but manageable
Exposure to sensitive sectors like microfinance and real estate is fairly limited at about 3% of
overall loans. Also, commercial real estate exposure is mainly through lease rental discounting,
where the underlying exposure is being fully serviced. PNB has already moved to systemdriven NPL recognition for loans up to `1 mn and will graduate completely by FY2011E.
We are building fairly conservative slippages at 2% in FY2011E (1H was 2.3%) and 1.8% in
FY2012E. Our loan loss provisions estimates remain conservative at 90 bps in FY2011E, but
to decline to 75 bps in FY2012E on the back of higher recoveries and lower slippages.

Strong operating metrics while valuations remain attractive; maintain BUY
We remain comfortable with the underlying metrics of PNB and believe that our earnings
estimates broadly capture the underlying pressure on NIMs and asset quality. Uncertainty
remains on the revised pension costs and its accounting policy but PNB is one of the few banks
to have already started providing for the same (about `2.5 bn/quarter for retirement benefits).
Valuations are attractive at 1.6X FY2012E PBR and 8X PER delivering healthy RoEs of over
22% and 16% CAGR in earnings. Maintain BUY and our preferred stock amongst banks.