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Punjab National Bank
Key highlights of 3QFY11 and what can be expected for the rest of FY11
Loan book grew by 6.0% q-q and 30% y-y in 3QFY11, with contributions coming
from retail loans (22% y-y), corporate loans (47% y-y) and rural loans (41% y-y).
This loan growth was backed by deposit growth of 24% y-y – CASA deposits grew
22% y-y and term deposits 25% y-y. CASA ratio declined marginally to 39% from
41% in 2QFY11.
NIM were flat at 4.1% in 3QFY11 from 4.06% in 2QFY11, on the back of a 10bp
rise in cost of funds as well as blended loan yields. Net-interest income grew by a
7.6% q-q and 37.5% y-y on the back of this NIM expansion. Non-interest income
grew 17% y-y (19% q-q), on the back of a big jump in treasury gains.
GNPLs increased 13% sequentially and 44% y-y – GNPL ratio closed at 2%. NNPL
ratio closed at 0.7% on the back of a core provision cover of 65% (78% including
technical write-offs). Loan-loss provisions for 3QFY11 at INR5.55b increased 55%
sequentially, representing 104bp of average loans compared to 80bp in 3QFY10.
What the bank needs to achieve in 4QFY11 to meet our expectations
Loans of INR74b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 22.6% for FY11. We expect NIMs to decline by 13bps to 4% in 4QFY11.
We need to bear in mind the higher incidence of priority sector loans in 4Q (which
should drag loan yields down) and a further pass-through of higher funding costs. We
are factoring in LLPs of 98bp for 4QFY11.
What to expect in FY12
We are budgeting for loan growth of 20.1%, NIM of 3.84%, core fee income growth of
20.6%, leading to a EPS growth of 15%. Our loan-loss provisions stay in the range of
105bp for FY12. We are factoring in a cost-to-income ratio of 40% for FY12.
Valuation: We cut our TP to INR1,200.00 (from INR1,300) to reflect the earnings
revision. Our TP is based on a three-stage residual income model, which assumes the
following assumptions: risk-free rate of 8.3%, equity risk premium of 6%, beta of 1.1,
terminal growth of 4% and terminal COE of 10%. Our TP implies FY12E P/BV of 1.65x
(earlier 1.8x). PNB trades at 1.37x FY12E adjusted BV for adjusted ROE of 24%. Risks
to TP: higher-than-expected LLPs and NIM compression.
Value emerging
Upgrade to BUY- system liquidity to improve near term
Recall our sector downgrade in October 2010 on tight liquidity
We expect NIM to contract 20bp and LLP of 105bp
Trades at 1.37x our FY12E adjusted BV for adjusted ROE of 24%
Why the upgrade now
We believe that the recent correction in
the share price of Punjab National Bank
(PNB) has been excessive and that the
key factor for our sector downgrade in
October 2010 (see our note, “Time to
book profit”, dated 8 October 2010) – the
lack of liquidity in the system – is likely to
correct itself over the next 2-3 months as
deposit growth has been inching up and
government spending should slowly
recycle the government surplus back into
the system. In our view, the stock’s
current valuation largely, if not fully, prices
in the expected margin contraction and
possible sector-specific credit-cost spikes.
What has changed in the sector and FY12 outlook
We downgraded PNB in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
system liquidity driving up funding costs. We have seen this thesis play
out so far, with the loan-to-deposit ratio (LDR) looking very stretched for
all major banks (see Exhibit 3 for PNB’s historical LDR and incremental
LDR). Deposit rates have increased 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.4%
in early January 2011. This deposit traction, together with the anticipated
increase in government spending, over the next 2-3 months should
further ease the liquidity pressure. In this context, we are building in NIM
contraction for FY12 and an increase in loan-loss provision (LLP) to
account for the possible spike in credit cost. But, we find PNB’s
valuations attractive and upgrade to BUY (from Hold). We calculate that
PNB will have to disburse loans worth INR74.3b in 4QFY11 to meet our
loan growth estimate of 23% for FY11. This represents 3.4% q-q growth
for 4QFY11. We are factoring in NIM compression of 15-20bp over the
next 2-3 quarters, in line with PNB’s guidance. We need to bear in mind
the generally higher incidence of priority-sector loans in 4Q (which should
drag down loan yields) and a further pass-through of higher funding
costs. Our LLP assumption stays in the range of 97bp for FY11. For
FY12, we assume loan growth of 21%, NIM of 3.8%, and LLP of 105bp.
Valuation
We cut our TP to INR1,200.00 (from INR1,300) to reflect the earnings
revision. Our target price is based on a three-stage residual income
model, which assumes a risk-free rate of 8.3%, equity risk premium of
6%, beta of 1.1, terminal growth of 4% and terminal COE of 10%. Our TP
implies FY12E P/BV of 1.65x (earlier 1.8x). PNB trades at 1.37x FY12E
adjusted BV for adjusted ROE of 24%. Risks to TP: Higher-thanexpected
LLP and NIM compression.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank
Key highlights of 3QFY11 and what can be expected for the rest of FY11
Loan book grew by 6.0% q-q and 30% y-y in 3QFY11, with contributions coming
from retail loans (22% y-y), corporate loans (47% y-y) and rural loans (41% y-y).
This loan growth was backed by deposit growth of 24% y-y – CASA deposits grew
22% y-y and term deposits 25% y-y. CASA ratio declined marginally to 39% from
41% in 2QFY11.
NIM were flat at 4.1% in 3QFY11 from 4.06% in 2QFY11, on the back of a 10bp
rise in cost of funds as well as blended loan yields. Net-interest income grew by a
7.6% q-q and 37.5% y-y on the back of this NIM expansion. Non-interest income
grew 17% y-y (19% q-q), on the back of a big jump in treasury gains.
GNPLs increased 13% sequentially and 44% y-y – GNPL ratio closed at 2%. NNPL
ratio closed at 0.7% on the back of a core provision cover of 65% (78% including
technical write-offs). Loan-loss provisions for 3QFY11 at INR5.55b increased 55%
sequentially, representing 104bp of average loans compared to 80bp in 3QFY10.
What the bank needs to achieve in 4QFY11 to meet our expectations
Loans of INR74b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 22.6% for FY11. We expect NIMs to decline by 13bps to 4% in 4QFY11.
We need to bear in mind the higher incidence of priority sector loans in 4Q (which
should drag loan yields down) and a further pass-through of higher funding costs. We
are factoring in LLPs of 98bp for 4QFY11.
What to expect in FY12
We are budgeting for loan growth of 20.1%, NIM of 3.84%, core fee income growth of
20.6%, leading to a EPS growth of 15%. Our loan-loss provisions stay in the range of
105bp for FY12. We are factoring in a cost-to-income ratio of 40% for FY12.
Valuation: We cut our TP to INR1,200.00 (from INR1,300) to reflect the earnings
revision. Our TP is based on a three-stage residual income model, which assumes the
following assumptions: risk-free rate of 8.3%, equity risk premium of 6%, beta of 1.1,
terminal growth of 4% and terminal COE of 10%. Our TP implies FY12E P/BV of 1.65x
(earlier 1.8x). PNB trades at 1.37x FY12E adjusted BV for adjusted ROE of 24%. Risks
to TP: higher-than-expected LLPs and NIM compression.
Value emerging
Upgrade to BUY- system liquidity to improve near term
Recall our sector downgrade in October 2010 on tight liquidity
We expect NIM to contract 20bp and LLP of 105bp
Trades at 1.37x our FY12E adjusted BV for adjusted ROE of 24%
Why the upgrade now
We believe that the recent correction in
the share price of Punjab National Bank
(PNB) has been excessive and that the
key factor for our sector downgrade in
October 2010 (see our note, “Time to
book profit”, dated 8 October 2010) – the
lack of liquidity in the system – is likely to
correct itself over the next 2-3 months as
deposit growth has been inching up and
government spending should slowly
recycle the government surplus back into
the system. In our view, the stock’s
current valuation largely, if not fully, prices
in the expected margin contraction and
possible sector-specific credit-cost spikes.
What has changed in the sector and FY12 outlook
We downgraded PNB in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
system liquidity driving up funding costs. We have seen this thesis play
out so far, with the loan-to-deposit ratio (LDR) looking very stretched for
all major banks (see Exhibit 3 for PNB’s historical LDR and incremental
LDR). Deposit rates have increased 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.4%
in early January 2011. This deposit traction, together with the anticipated
increase in government spending, over the next 2-3 months should
further ease the liquidity pressure. In this context, we are building in NIM
contraction for FY12 and an increase in loan-loss provision (LLP) to
account for the possible spike in credit cost. But, we find PNB’s
valuations attractive and upgrade to BUY (from Hold). We calculate that
PNB will have to disburse loans worth INR74.3b in 4QFY11 to meet our
loan growth estimate of 23% for FY11. This represents 3.4% q-q growth
for 4QFY11. We are factoring in NIM compression of 15-20bp over the
next 2-3 quarters, in line with PNB’s guidance. We need to bear in mind
the generally higher incidence of priority-sector loans in 4Q (which should
drag down loan yields) and a further pass-through of higher funding
costs. Our LLP assumption stays in the range of 97bp for FY11. For
FY12, we assume loan growth of 21%, NIM of 3.8%, and LLP of 105bp.
Valuation
We cut our TP to INR1,200.00 (from INR1,300) to reflect the earnings
revision. Our target price is based on a three-stage residual income
model, which assumes a risk-free rate of 8.3%, equity risk premium of
6%, beta of 1.1, terminal growth of 4% and terminal COE of 10%. Our TP
implies FY12E P/BV of 1.65x (earlier 1.8x). PNB trades at 1.37x FY12E
adjusted BV for adjusted ROE of 24%. Risks to TP: Higher-thanexpected
LLP and NIM compression.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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