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Strong return ratios; management continuity a key positive
High CASA & NIM - a structural positive; concerns over asset quality exaggerated
Punjab National Bank's (PNB) average RoE over FY99-09 was 23%, the highest among its
peers. RoA improved from 0.8-0.9% in FY2000 to 1.4% in FY10, driven by strong core
operating performance. Average core operating profits as a percentage of average assets
has improved to 2.28% in FY10 vs 1.73% over FY99-09 and we expect it to be 2.44% over
FY11-13. Considering PNB's superior and sustained margins and efficiencies of scale, we
expect RoA to sustain at ~1.3% and RoE at ~24% over FY11-13.
Comfortably placed in a rising interest rate scenario: In a rising interest rate
scenario, banks with strong branch network and a higher proportion of CASA deposits
(and thus, lower cost of funds) would be best placed in our view. PNB's CASA ratio is
expected to remain at ~40%, against the industry average of ~32%, giving it a significant
funding cost advantage vis-à-vis other banks. PNB's margins have been the most
stable across interest rate cycles and liquidity scenarios of recent times, highlighting
extraordinary asset-liability management. The bank's above the industry loan growth,
has not come at the cost of margins. We expect margins to remain the best among
large PSU banks at 3.5%+ (cal.)
Improving economic scenario to reduce concerns over asset quality: PNB's
provision coverage of ~77% and tier-I CAR of ~9% are one of the best among its peer
banks. While restructured loans of ~6.5% of the book (borrower wise) are relatively
higher (4-5%) than peers, PNB's superior margins of ~4% (v/s 3-3.5% for peers) factor
in the inherent risk in PNB's loan book. Over FY11-13, risk adjusted margins (as a
percentage of average assets) will be superior to peers at 2.96% (v/s ~2.2% for peers).
The improving economic scenario and lower relapse from restructured loans will reduce
concerns over asset quality.
Top management stability an additional positive: Mr KR Kamath has a full fiveyear
term till October 2014, ensuring management stability at the top. His focus on
"profitable and qualitative growth" and execution capabilities have been proved during
his earlier stint at Allahabad Bank.
Underperformance unwarranted, operating performance strong: Worries due
to deteriorating asset quality, higher employee related expenses on account of the
second pension and its impact on profitability has led to underperformance of the
stock against the Sensex and the Bankex. An improving economic scenario and strong
core operating profit will help to reduce concerns over asset quality and provide a
cushion to absorb higher credit costs without impacting profitability. We factor in core
operating CAGR of over 22% and PAT CAGR of over 21% over FY11-13. We expect
PNB to report the best RoA of 1.3% and RoE of 24% among large PSU banks. Buy
with a target price of Rs1,385 (1.5x FY13E BV of Rs923).
3QFY11 highlights
Key positives
Margins improved 7bp QoQ and 50bp YoY to 4.13%
led by a hike in lending rates. NIM in 9MFY11
improved to 56bp YoY to 3.99%.
Strong business growth with loan growth of 30%
YoY and 6% QoQ at Rs2.2t, deposit growth of 23.5%
YoY and ~6% QoQ to Rs2.9t. Overall CASA growth
was 22% YoY with savings deposit growth of 24%
YoY (up 3% QoQ).
Key negative
Asset quality deteriorated with GNPA increasing by
13% QoQ to Rs45b. Gross slippages in 3QFY11
was ~Rs10b v/s Rs9b in 2QFY11. The bank added
Rs8.2b to restructured accounts.
Management guided for gratuity liability of ~Rs5b
(to be fully provided in FY11) and Rs36b towards
the second pension option (up from Rs25b guided
earlier).
Others highlights
Fee income (excluding forex income) grew 20% YoY
however, declined ~6% QoQ. Lower processing
charges from big-ticket loans and a waiver of
processing charges on home loans are the reasons
for the sequential drop in fee income.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong return ratios; management continuity a key positive
High CASA & NIM - a structural positive; concerns over asset quality exaggerated
Punjab National Bank's (PNB) average RoE over FY99-09 was 23%, the highest among its
peers. RoA improved from 0.8-0.9% in FY2000 to 1.4% in FY10, driven by strong core
operating performance. Average core operating profits as a percentage of average assets
has improved to 2.28% in FY10 vs 1.73% over FY99-09 and we expect it to be 2.44% over
FY11-13. Considering PNB's superior and sustained margins and efficiencies of scale, we
expect RoA to sustain at ~1.3% and RoE at ~24% over FY11-13.
Comfortably placed in a rising interest rate scenario: In a rising interest rate
scenario, banks with strong branch network and a higher proportion of CASA deposits
(and thus, lower cost of funds) would be best placed in our view. PNB's CASA ratio is
expected to remain at ~40%, against the industry average of ~32%, giving it a significant
funding cost advantage vis-à-vis other banks. PNB's margins have been the most
stable across interest rate cycles and liquidity scenarios of recent times, highlighting
extraordinary asset-liability management. The bank's above the industry loan growth,
has not come at the cost of margins. We expect margins to remain the best among
large PSU banks at 3.5%+ (cal.)
Improving economic scenario to reduce concerns over asset quality: PNB's
provision coverage of ~77% and tier-I CAR of ~9% are one of the best among its peer
banks. While restructured loans of ~6.5% of the book (borrower wise) are relatively
higher (4-5%) than peers, PNB's superior margins of ~4% (v/s 3-3.5% for peers) factor
in the inherent risk in PNB's loan book. Over FY11-13, risk adjusted margins (as a
percentage of average assets) will be superior to peers at 2.96% (v/s ~2.2% for peers).
The improving economic scenario and lower relapse from restructured loans will reduce
concerns over asset quality.
Top management stability an additional positive: Mr KR Kamath has a full fiveyear
term till October 2014, ensuring management stability at the top. His focus on
"profitable and qualitative growth" and execution capabilities have been proved during
his earlier stint at Allahabad Bank.
Underperformance unwarranted, operating performance strong: Worries due
to deteriorating asset quality, higher employee related expenses on account of the
second pension and its impact on profitability has led to underperformance of the
stock against the Sensex and the Bankex. An improving economic scenario and strong
core operating profit will help to reduce concerns over asset quality and provide a
cushion to absorb higher credit costs without impacting profitability. We factor in core
operating CAGR of over 22% and PAT CAGR of over 21% over FY11-13. We expect
PNB to report the best RoA of 1.3% and RoE of 24% among large PSU banks. Buy
with a target price of Rs1,385 (1.5x FY13E BV of Rs923).
3QFY11 highlights
Key positives
Margins improved 7bp QoQ and 50bp YoY to 4.13%
led by a hike in lending rates. NIM in 9MFY11
improved to 56bp YoY to 3.99%.
Strong business growth with loan growth of 30%
YoY and 6% QoQ at Rs2.2t, deposit growth of 23.5%
YoY and ~6% QoQ to Rs2.9t. Overall CASA growth
was 22% YoY with savings deposit growth of 24%
YoY (up 3% QoQ).
Key negative
Asset quality deteriorated with GNPA increasing by
13% QoQ to Rs45b. Gross slippages in 3QFY11
was ~Rs10b v/s Rs9b in 2QFY11. The bank added
Rs8.2b to restructured accounts.
Management guided for gratuity liability of ~Rs5b
(to be fully provided in FY11) and Rs36b towards
the second pension option (up from Rs25b guided
earlier).
Others highlights
Fee income (excluding forex income) grew 20% YoY
however, declined ~6% QoQ. Lower processing
charges from big-ticket loans and a waiver of
processing charges on home loans are the reasons
for the sequential drop in fee income.
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