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For 3QFY2011, PNB posted moderate net profit growth of 1.4% qoq and 7.8%
yoy to `1,090cr, in line with our estimates of `1,100cr. However, the bank
reported higher provisioning expenses, over 30% above estimates, which were
offset by higher non-interest income. We recommend Accumulate on the stock.
Strong business growth but pressure on asset quality persists: During the quarter,
advances grew by 6.0% qoq (29.8% yoy) to `221,252cr, while deposits grew by
5.7% qoq (23.5% yoy) to `288,873cr. Asset quality continued to be under
pressure, with gross NPAs rising by 12.8% qoq and net NPAs increasing by 10.5%
qoq. On a qoq basis, the annualised slippage ratio increased by 14bp to 2.1%.
The CASA ratio dropped to 39.1% from 40.6% in 2QFY2011. Yield on funds
increased by 10bp qoq to 8.25%, aided by the 100bp increase in base rate,
which was higher-than-peer average of ~70bp, while the cost of funds increased
by 15bp sequentially to 4.54%. Reported NIMs expanded by 7bp sequentially to
4.13%. Consequently, NII increased by 7.6% sequentially to `3,203cr (a healthy
37.5% increase yoy). The non-interest income increased by 17.4% yoy to `857cr,
despite a 44.6% reduction in treasury gains. Operating expenses increased
substantially by 7.3% qoq and 37.7% yoy, led by the 46.9% yoy increase in
employee costs and 19.0% yoy increase in other operating expenses.
Outlook and valuation: Post the recent correction in the stock, it is trading at 1.5x
FY2012E ABV of `741 v/s its five-year range of 1.1–1.6x and median of 1.4x.
We recommend an Accumulate rating on the stock with a Target Price of `1,259
(earlier `1,341), valuing it at a multiple at 1.7x FY2012E ABV
NIMs high, but likely to come down going forward
During the quarter, the yield on funds increased by 10bp sequentially to 8.25%,
aided by the 100bp increase in base rate, which was higher-than-peer average of
~70bp, while the cost of funds increased by 15bp sequentially to 4.54%. Reported
NIMs expanded by 7bp sequentially to 4.13%. Consequently, NII increased by
7.6% sequentially (a healthy 37.5% increase yoy) to `3,203cr.
The bank has continuously maintained high reported NIMs at ~4% over the last
year. However, going forward, with rising cost of funds, we expect calculated
FY2012E NIMs to moderate by ~25bp to 3.5% from 3.8% in FY2011E.
Healthy core non-interest income
Non-interest income increased by 17.4% yoy to `857cr, despite a 44.6% reduction
in treasury gains. Non-interest income, excluding treasury gains, gained healthy
34.4% yoy to `770cr. Recoveries from written-off accounts grew by strong 59.7%
yoy to `123cr.
Asset quality pressures persist
PNB’s gross NPAs increased, in absolute terms, by 12.8% qoq to `4,541cr and net
NPAs rose by 10.5% qoq to `1,575cr. Gross slippages for the quarter stood at
`977cr (`911cr in 2QFY2011), indicating an annualised slippage ratio of 2.1%
(2.0% in 2QFY2011). Gross NPA ratio deteriorated to 2.0% (as against 1.9% in
2QFY2011). Net NPA ratio remained stable at 0.7%. The bank’s provision
coverage ratio including technical write-offs stood at 77.2% (77.1% in 2QFY2011).
The bank made provisions of `555cr towards NPAs in 3QFY2011, compared to
`359cr in 2QFY2011 and `329cr in 2QFY2010. Provision for investments stood at
`44cr, compared to `65cr in 2QFY2011.
Operating costs rise due to employee benefit provisions
Operating expenses increased by substantial 7.3% qoq and 37.7% yoy, driven by
the 46.9% yoy increase in employee costs and 19.0% yoy increase in other
operating expenses. The cost-to-income ratio stood at 42.1% (43.2% in 2QFY2011
and 40.6% in 3QFY2010).
The increase in employee expenses was attributable to provisions
(`360cr) made on account of gratuity (`125cr) and second pension option
(`235cr) during the quarter. Management indicated that the total second option
pension provision liability is expected to be ~`3,600cr as against earlier estimates
of `2,500cr. We have accordingly raised our operating expense estimates for
FY2012 from `7,014cr to `7,427cr.
Comfortable capital adequacy
The bank’s CAR stood at 11.9% at the end of 3QFY2011, with tier-I ratio of 7.6%.
Including the nine-month profit till 3QFY2011, CAR stands at healthy 13.3% with
tier-I of 9.0%.
Investment arguments
Strong CASA legacy, but losing market share
PNB has a structural advantage of having a high CASA ratio of 39.1%, which is
driven by strong rural and semi-urban presence, especially in North India (total of
4,787 branches and 4,400 ATMs). This should act as a strong cushion in the
current rising rate environment, and we have accordingly factored in a moderate
~25bp decline in calculated NIMs in FY2012E to 3.5% from 3.8% in FY2011E.
That said, the bank is losing market share like most other PSBs on account of slow
branch expansion and competition from private banks – savings market share was
down by 50bp to 7.1% during FY2007–10.
Higher slippages in 3QFY2011
On a qoq basis, the annualised slippage ratio increased by 14bp to 2.1%. Fresh
additions stood at `977cr (higher by `66cr compared to 2QFY2011) and
deductions stood at `460cr (lower by `39cr compared to 2QFY2011). Provisions
for NPAs increased by 54.6% qoq to `555cr (`359cr in 2QFY2011) to compensate
for high slippages witnessed in this quarter.
Asset quality continued to be under pressure, with gross NPAs rising by 12.8% qoq
and net NPAs increasing by 10.5% qoq. The provision coverage ratio including
technical write-offs stood at 77.2% compared to 77.1% in 2QFY2011.
Management is expecting better recoveries and upgradation in the coming
quarters, which could curb the recent increase in slippages.
In our view, the bank’s strategy of high growth in advances at relatively high yields
could contribute to relatively higher deterioration in asset quality and NIM
compression going forward.
Outlook and valuation
Post the recent correction in the stock, it is trading at 1.5x FY2012E ABV of `741
v/s its five-year range of 1.1–1.6x and median of 1.4x. We recommend an
Accumulate rating on the stock with a Target Price of `1,259 (earlier `1,341),
valuing it at a multiple at 1.7x FY2012E ABV
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank – 3QFY2011 Result Update
Angel Broking recommends an Accumulate on Punjab National Bank with a Target Price of Rs1,259.
For 3QFY2011, PNB posted moderate net profit growth of 1.4% qoq and 7.8%
yoy to `1,090cr, in line with our estimates of `1,100cr. However, the bank
reported higher provisioning expenses, over 30% above estimates, which were
offset by higher non-interest income. We recommend Accumulate on the stock.
Strong business growth but pressure on asset quality persists: During the quarter,
advances grew by 6.0% qoq (29.8% yoy) to `221,252cr, while deposits grew by
5.7% qoq (23.5% yoy) to `288,873cr. Asset quality continued to be under
pressure, with gross NPAs rising by 12.8% qoq and net NPAs increasing by 10.5%
qoq. On a qoq basis, the annualised slippage ratio increased by 14bp to 2.1%.
The CASA ratio dropped to 39.1% from 40.6% in 2QFY2011. Yield on funds
increased by 10bp qoq to 8.25%, aided by the 100bp increase in base rate,
which was higher-than-peer average of ~70bp, while the cost of funds increased
by 15bp sequentially to 4.54%. Reported NIMs expanded by 7bp sequentially to
4.13%. Consequently, NII increased by 7.6% sequentially to `3,203cr (a healthy
37.5% increase yoy). The non-interest income increased by 17.4% yoy to `857cr,
despite a 44.6% reduction in treasury gains. Operating expenses increased
substantially by 7.3% qoq and 37.7% yoy, led by the 46.9% yoy increase in
employee costs and 19.0% yoy increase in other operating expenses.
Outlook and valuation: Post the recent correction in the stock, it is trading at 1.5x
FY2012E ABV of `741 v/s its five-year range of 1.1–1.6x and median of 1.4x.
We recommend an Accumulate rating on the stock with a Target Price of `1,259
(earlier `1,341), valuing it at a multiple at 1.7x FY2012E ABV
Strong business growth
During the quarter, advances grew sequentially by 6.0% (29.8% yoy) to
`221,252cr, while deposits grew sequentially by 5.7% to `288,873cr (23.5% yoy).
On a yoy basis, saving deposits increased by 23.7% to `89,860cr, while current
deposits rose by 15.5% to `22,945cr. Overall CASA deposits increased to
`112,806cr in 3QFY2011 from `92,492cr in 3QFY2010, recording growth of
22%. However, sequentially, CASA deposits only grew by 1.6% as compared to the
8.4% increase in term deposits. Consequently, the CASA ratio dropped to 39.1%
from 40.6 in 2QFY2011.
The bank saw robust 76.5% yoy growth in overseas gross advances to `10,817cr
(4.8% of overall gross advances) from `6,973cr (3.7% of overall gross advances),
partly due to concentrated efforts on overseas expansion and partly due to a small
base effect.
The bank increased its exposure to the infrastructure sector to `33,787cr (up
49.7% yoy and comprising 15.3% of overall advances) from `22,567cr (10.8% of
overall advances) in 3QFY2010.
NIMs high, but likely to come down going forward
During the quarter, the yield on funds increased by 10bp sequentially to 8.25%,
aided by the 100bp increase in base rate, which was higher-than-peer average of
~70bp, while the cost of funds increased by 15bp sequentially to 4.54%. Reported
NIMs expanded by 7bp sequentially to 4.13%. Consequently, NII increased by
7.6% sequentially (a healthy 37.5% increase yoy) to `3,203cr.
The bank has continuously maintained high reported NIMs at ~4% over the last
year. However, going forward, with rising cost of funds, we expect calculated
FY2012E NIMs to moderate by ~25bp to 3.5% from 3.8% in FY2011E.
Healthy core non-interest income
Non-interest income increased by 17.4% yoy to `857cr, despite a 44.6% reduction
in treasury gains. Non-interest income, excluding treasury gains, gained healthy
34.4% yoy to `770cr. Recoveries from written-off accounts grew by strong 59.7%
yoy to `123cr.
Asset quality pressures persist
PNB’s gross NPAs increased, in absolute terms, by 12.8% qoq to `4,541cr and net
NPAs rose by 10.5% qoq to `1,575cr. Gross slippages for the quarter stood at
`977cr (`911cr in 2QFY2011), indicating an annualised slippage ratio of 2.1%
(2.0% in 2QFY2011). Gross NPA ratio deteriorated to 2.0% (as against 1.9% in
2QFY2011). Net NPA ratio remained stable at 0.7%. The bank’s provision
coverage ratio including technical write-offs stood at 77.2% (77.1% in 2QFY2011).
The bank made provisions of `555cr towards NPAs in 3QFY2011, compared to
`359cr in 2QFY2011 and `329cr in 2QFY2010. Provision for investments stood at
`44cr, compared to `65cr in 2QFY2011.
Operating costs rise due to employee benefit provisions
Operating expenses increased by substantial 7.3% qoq and 37.7% yoy, driven by
the 46.9% yoy increase in employee costs and 19.0% yoy increase in other
operating expenses. The cost-to-income ratio stood at 42.1% (43.2% in 2QFY2011
and 40.6% in 3QFY2010).
The increase in employee expenses was attributable to provisions
(`360cr) made on account of gratuity (`125cr) and second pension option
(`235cr) during the quarter. Management indicated that the total second option
pension provision liability is expected to be ~`3,600cr as against earlier estimates
of `2,500cr. We have accordingly raised our operating expense estimates for
FY2012 from `7,014cr to `7,427cr.
Comfortable capital adequacy
The bank’s CAR stood at 11.9% at the end of 3QFY2011, with tier-I ratio of 7.6%.
Including the nine-month profit till 3QFY2011, CAR stands at healthy 13.3% with
tier-I of 9.0%.
Investment arguments
Strong CASA legacy, but losing market share
PNB has a structural advantage of having a high CASA ratio of 39.1%, which is
driven by strong rural and semi-urban presence, especially in North India (total of
4,787 branches and 4,400 ATMs). This should act as a strong cushion in the
current rising rate environment, and we have accordingly factored in a moderate
~25bp decline in calculated NIMs in FY2012E to 3.5% from 3.8% in FY2011E.
That said, the bank is losing market share like most other PSBs on account of slow
branch expansion and competition from private banks – savings market share was
down by 50bp to 7.1% during FY2007–10.
Higher slippages in 3QFY2011
On a qoq basis, the annualised slippage ratio increased by 14bp to 2.1%. Fresh
additions stood at `977cr (higher by `66cr compared to 2QFY2011) and
deductions stood at `460cr (lower by `39cr compared to 2QFY2011). Provisions
for NPAs increased by 54.6% qoq to `555cr (`359cr in 2QFY2011) to compensate
for high slippages witnessed in this quarter.
Asset quality continued to be under pressure, with gross NPAs rising by 12.8% qoq
and net NPAs increasing by 10.5% qoq. The provision coverage ratio including
technical write-offs stood at 77.2% compared to 77.1% in 2QFY2011.
Management is expecting better recoveries and upgradation in the coming
quarters, which could curb the recent increase in slippages.
In our view, the bank’s strategy of high growth in advances at relatively high yields
could contribute to relatively higher deterioration in asset quality and NIM
compression going forward.
Outlook and valuation
Post the recent correction in the stock, it is trading at 1.5x FY2012E ABV of `741
v/s its five-year range of 1.1–1.6x and median of 1.4x. We recommend an
Accumulate rating on the stock with a Target Price of `1,259 (earlier `1,341),
valuing it at a multiple at 1.7x FY2012E ABV
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