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Punjab National Bank
Focus on the bright side
PNB delivered strong core earnings in 3QFY11, but the good news was clouded
by asset-quality concerns. In FY12, we believe a moderate rise in operating
expenses and lower provision for bad loans will increase ROAs, despite NIM
compression. Valuations look attractive, Buy
NIMs continue to surprise positively; likely to moderate going forward
Net interest income (NII) grew 40% yoy (4% qoq) on the back of 30% yoy (6% qoq) loan
growth. NIMs increased by 50bps yoy to 4.13% in 3Q (4.06% in 2QFY11). Core fee income
increased 5.5% yoy in 3Q (7% in 9MFY11) and treasury gains were 5.3% of PBT (10.2% in
3QFY10). The bank estimated the second pension option liability at about Rs36bn (Rs7.2bn
annual charge for the next five years; Rs4.9bn provisioned in 9MFY11). Further, the gratuity
liability was Rs5bn, which it to be fully provisioned off in FY11F (Rs3.75bn provisioned in
9MFY11). Going forward, management guides for moderation in NIMs.
Asset quality concerns persist, leading to higher provisions
Gross slippage at about 60bps of loans on a one year lag basis continues to pose some
concern. However, the management guides that the slippages are from large accounts which
will likely be upgraded in 4QFY11. Gross NPLs has now reached close to management
guidance of about 2% level (2.03% as of December 2010). The restructured loans at 6.4% of
loan book (December 2010), remains higher than the industry average of about 3.5-4.0%.
Going forward, improvement in ROAs is likely
In FY12, we believe a moderate rise in operating expenses and lower provision for bad loans
will increase ROAs, despite NIM compression. In our FY12 estimates, we factor in a 20bps
yoy decline in NIMs; we also expect operating cost to income to moderate to about 40% and
a 20bps decrease in provision to average loans.
Valuations at 1.5x PBV and 6.7x PE on FY12 estimates appear attractive; Buy
We cut FY12F net profit by about 8% and, so, reduce our GGM-based target price to
Rs1,495 (from Rs1,625). PNB has delivered 22% average RoEs over FY01-10 and we
expect it to deliver about 24% average RoE over FY11-13. Given what we see as
comfortable tier-1 capital (adjusted), at 9%, we believe equity dilution is unlikely in the
medium term. Valuations appear attractive, in our view; at our target price the stock would
trade at 2.0x FY12F adjusted book value and 8.8x FY12F earnings. Buy
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank
Focus on the bright side
PNB delivered strong core earnings in 3QFY11, but the good news was clouded
by asset-quality concerns. In FY12, we believe a moderate rise in operating
expenses and lower provision for bad loans will increase ROAs, despite NIM
compression. Valuations look attractive, Buy
NIMs continue to surprise positively; likely to moderate going forward
Net interest income (NII) grew 40% yoy (4% qoq) on the back of 30% yoy (6% qoq) loan
growth. NIMs increased by 50bps yoy to 4.13% in 3Q (4.06% in 2QFY11). Core fee income
increased 5.5% yoy in 3Q (7% in 9MFY11) and treasury gains were 5.3% of PBT (10.2% in
3QFY10). The bank estimated the second pension option liability at about Rs36bn (Rs7.2bn
annual charge for the next five years; Rs4.9bn provisioned in 9MFY11). Further, the gratuity
liability was Rs5bn, which it to be fully provisioned off in FY11F (Rs3.75bn provisioned in
9MFY11). Going forward, management guides for moderation in NIMs.
Asset quality concerns persist, leading to higher provisions
Gross slippage at about 60bps of loans on a one year lag basis continues to pose some
concern. However, the management guides that the slippages are from large accounts which
will likely be upgraded in 4QFY11. Gross NPLs has now reached close to management
guidance of about 2% level (2.03% as of December 2010). The restructured loans at 6.4% of
loan book (December 2010), remains higher than the industry average of about 3.5-4.0%.
Going forward, improvement in ROAs is likely
In FY12, we believe a moderate rise in operating expenses and lower provision for bad loans
will increase ROAs, despite NIM compression. In our FY12 estimates, we factor in a 20bps
yoy decline in NIMs; we also expect operating cost to income to moderate to about 40% and
a 20bps decrease in provision to average loans.
We cut FY12F net profit by about 8% and, so, reduce our GGM-based target price to
Rs1,495 (from Rs1,625). PNB has delivered 22% average RoEs over FY01-10 and we
expect it to deliver about 24% average RoE over FY11-13. Given what we see as
comfortable tier-1 capital (adjusted), at 9%, we believe equity dilution is unlikely in the
medium term. Valuations appear attractive, in our view; at our target price the stock would
trade at 2.0x FY12F adjusted book value and 8.8x FY12F earnings. Buy
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