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Punjab National Bank -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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank -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.
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