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PNB
Reuters: PNBK.BO Bloomberg: PNB IN Exchange: BSE Ticker: PNBK
Margins strong, credit quality disappoints
Maintain Buy with revised TP at INR1360
We maintain Buy on Punjab National Bank after reducing the TP to Rs1,360 from
Rs1,440 following a minor earnings revision and a lower multiple due to sector
challenges on account of rate increases. The bank’s high margins provide a
significant buffer against rate increases as well as enhance competitive position.
Although presently the credit quality situation appears less than satisfactory, we
believe that credit costs can reduce in FY12E with upgrades of some chunky NPLs
and the completion of the credit cycle by the restructured asset portfolio.
Q3FY11 results – higher non-interest costs drag down profit
Net profit at Rs10.89bn were 6% below DBe and consensus estimates due to
higher NPL provisions and amortization of pension liabilities. Top line was solid –
net interest income came in above our estimate as loan growth was strong at
30%YoY and NIM was one of the sector’s best at 4.13% (our estimate 3.95%).
However, operating expenses and provisions were 7% and 52% higher than our
estimates. Due to some large accounts slipping, NPLs increased by 13% QoQ and
hence, provisions were higher.
Has strengths to counter current headwinds well
PNB has historically demonstrated significant pricing power, probably a function of
its geographical presence. Although we expect margins to correct from the
current heady levels in line with the sector, it should still be among the best in this
regard, thereby helping PNB post the highest RoA among state owned-banks. We
expect pressure on operating costs to cool off with retirement benefit provisions
coming down. Credit costs (in bps terms) could be significantly reduced in FY12E.
Top management stability is an added positive.
Gordon growth model valuation; credit quality remains the key risk
We value PNB on the single state Gordon growth model P/BV=(RoE – g)/(CoE – g).
Assumptions: (blended RoE of 19.9%, COE of 14.3% (using DB estimates), and
perpetual growth rate 5%. Inability to hold on to very low level of funding costs
and materially higher slippage from the restructured book are key risks
Investment thesis
Outlook
PNB's high-quality deposit franchise has enabled the bank to hold on to its margins at a time
when most of its peers have seen a collapse in their NIMs. We believe the bank is
exceptionally well poised to handle a rising interest rate environment owing to its superior
deposit franchise and a relatively insulated investment portfolio as a substantial portion is
held in a held-to-maturity category. A high coverage ratio also cushions against possible
increases in NPLs. Top management stability, a critical factor in the case of state-owned
banks, also goes in PNB's favour. We also expect PNB's earnings profile to remain relatively
stable in the coming years because of no exceptional benefit coming from treasury or
investment write-backs in the past two fiscal years. On account of the above factors, we rate
the stock a Buy.
Valuation
The bank is valued on a single-stage Gordon Growth model (RoE - g)/(CoE - g), which we
believe is an appropriate model for a relatively steady-growth public sector bank.
Assumptions: schematic RoE estimate 18.9%, FY12E RoE 22.8%, thus a blended RoE of
19.9% (25% weight to FY12E and 75% to schematic), cost of equity of 14.3% (using DB
estimates), and perpetual growth rate 5% (expected long-term nominal GDP growth for
developed economies).
Risks
Inability to hold on to current very low levels of funding costs (arising both from a very good
North Indian deposit franchise and higher asset yields) is the key risk, especially if the bank
cannot raise lending rates to offset funding cost increases. Materially higher slippage from
the restructured book is another risk, especially as restructured assets are relatively higher
than peers as a proportion of equity
Q3FY11 result - lower than expected on higher provisioning
PNB reported net profit of INR ~11bn (up 8% YoY) and 6% below our estimates and 4%
below the consensus. Operating profit at INR 23.5bn (up 29% YoY) was 7% higher than
estimated by us and the street. Credit costs rise of 28bps QoQ dragged down the growth in
operating profit.
Earnings, ratings and target price
Earnings revision
We are adjusting our estimates to reflect higher NPL provisions during 3QFY11.
Consequently, FY11E net profit is revised lower by 2.8%. We also adjust operating cost and
provision estimates for FY12E and FY13E resulting net profit change of +1.1% and -2.3%
respectively.
Single stage Gordon growth method of valuation
We value PNB on single stage Gordon growth model P/BV = (RoE – g)/(CoE – g).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
PNB
Reuters: PNBK.BO Bloomberg: PNB IN Exchange: BSE Ticker: PNBK
Margins strong, credit quality disappoints
Maintain Buy with revised TP at INR1360
We maintain Buy on Punjab National Bank after reducing the TP to Rs1,360 from
Rs1,440 following a minor earnings revision and a lower multiple due to sector
challenges on account of rate increases. The bank’s high margins provide a
significant buffer against rate increases as well as enhance competitive position.
Although presently the credit quality situation appears less than satisfactory, we
believe that credit costs can reduce in FY12E with upgrades of some chunky NPLs
and the completion of the credit cycle by the restructured asset portfolio.
Q3FY11 results – higher non-interest costs drag down profit
Net profit at Rs10.89bn were 6% below DBe and consensus estimates due to
higher NPL provisions and amortization of pension liabilities. Top line was solid –
net interest income came in above our estimate as loan growth was strong at
30%YoY and NIM was one of the sector’s best at 4.13% (our estimate 3.95%).
However, operating expenses and provisions were 7% and 52% higher than our
estimates. Due to some large accounts slipping, NPLs increased by 13% QoQ and
hence, provisions were higher.
Has strengths to counter current headwinds well
PNB has historically demonstrated significant pricing power, probably a function of
its geographical presence. Although we expect margins to correct from the
current heady levels in line with the sector, it should still be among the best in this
regard, thereby helping PNB post the highest RoA among state owned-banks. We
expect pressure on operating costs to cool off with retirement benefit provisions
coming down. Credit costs (in bps terms) could be significantly reduced in FY12E.
Gordon growth model valuation; credit quality remains the key risk
We value PNB on the single state Gordon growth model P/BV=(RoE – g)/(CoE – g).
Assumptions: (blended RoE of 19.9%, COE of 14.3% (using DB estimates), and
perpetual growth rate 5%. Inability to hold on to very low level of funding costs
and materially higher slippage from the restructured book are key risks
Investment thesis
Outlook
PNB's high-quality deposit franchise has enabled the bank to hold on to its margins at a time
when most of its peers have seen a collapse in their NIMs. We believe the bank is
exceptionally well poised to handle a rising interest rate environment owing to its superior
deposit franchise and a relatively insulated investment portfolio as a substantial portion is
held in a held-to-maturity category. A high coverage ratio also cushions against possible
increases in NPLs. Top management stability, a critical factor in the case of state-owned
banks, also goes in PNB's favour. We also expect PNB's earnings profile to remain relatively
stable in the coming years because of no exceptional benefit coming from treasury or
investment write-backs in the past two fiscal years. On account of the above factors, we rate
the stock a Buy.
Valuation
The bank is valued on a single-stage Gordon Growth model (RoE - g)/(CoE - g), which we
believe is an appropriate model for a relatively steady-growth public sector bank.
Assumptions: schematic RoE estimate 18.9%, FY12E RoE 22.8%, thus a blended RoE of
19.9% (25% weight to FY12E and 75% to schematic), cost of equity of 14.3% (using DB
estimates), and perpetual growth rate 5% (expected long-term nominal GDP growth for
developed economies).
Risks
Inability to hold on to current very low levels of funding costs (arising both from a very good
North Indian deposit franchise and higher asset yields) is the key risk, especially if the bank
cannot raise lending rates to offset funding cost increases. Materially higher slippage from
the restructured book is another risk, especially as restructured assets are relatively higher
than peers as a proportion of equity
Q3FY11 result - lower than expected on higher provisioning
PNB reported net profit of INR ~11bn (up 8% YoY) and 6% below our estimates and 4%
below the consensus. Operating profit at INR 23.5bn (up 29% YoY) was 7% higher than
estimated by us and the street. Credit costs rise of 28bps QoQ dragged down the growth in
operating profit.
Earnings, ratings and target price
Earnings revision
We are adjusting our estimates to reflect higher NPL provisions during 3QFY11.
Consequently, FY11E net profit is revised lower by 2.8%. We also adjust operating cost and
provision estimates for FY12E and FY13E resulting net profit change of +1.1% and -2.3%
respectively.
Single stage Gordon growth method of valuation
We value PNB on single stage Gordon growth model P/BV = (RoE – g)/(CoE – g).
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