PNB 3QFY11 – Lower estimate, price target; re-iterate Buy: Anand Rathi

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PNB
3QFY11 – Lower estimate, price target; re-iterate Buy
We lower our FY11e/FY12e EPS 9.9%/5.3% for PNB due to
higher NPA provisions. We value the stock at 1.8x FY12e BV
(earlier 1.9x) owing to lower RoE, and cut our target price to
`1,506 from `1,602. We retain Buy, as we expect PNB’s high
NIM and adequate NPA coverage to maintain RoE as one of the
best in the sector.

 Healthy business growth, stable NIM. Yoy growth in credit
(29.8%) and deposits (23.2%) was higher than the sector’s. NIM
improved 49bps yoy and 7bps qoq, to 4.13%, led by a 390bps rise
in credit-to-deposit to 76.8%. PNB’s low-cost deposit (CASA)
share of 39.1% augurs well for its NIM.
 Lower employee pension/gratuity provisions ahead. Core
cost-to-income increased 154bps yoy to 42.1%, due to `2.5bn of
provisions for employee pensions and gratuity. Management has
indicated that further such provisions would be lower, at `1.8bn
each in the next two quarters.

 NPA coverage falls; sufficiently capitalized. Gross NPAs rose
12.8% qoq. NPA coverage dropped to 77.2% from 81.2% in Mar
’10. Restructured assets increased `8.2bn qoq and comprise 6.5%
of loans; these are likely to be the overhang for PNB’s short-term
stock performance. Capital adequacy is sufficient at 13.3%, with
tier-1 capital at 9%.
 Valuation and risks. At our target price, PNB would trade at 2x
FY12e and 1.6x FY13e ABV. Risk: Higher credit costs due to
lower-than-expected NPA recoveries.