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India Equity Institutional Research | Banking Management Visit Note
Punjab National Bank Rs 1,089
Near term margin pressure & delinquencies are key concerns BUY
We recently met the management of the bank and the key highlights of our interaction are as
follows:
Growth likely to moderate
Considering continuous upward bias in interest rates, credit growth is likely to moderate. RBI is
expected to hike key policy rates by another 50-75bps in FY12 in order to tame inflationary
expectations. However, the bank is finding it difficult in passing on the rise in cost of funds. We
expect net interest income to increase by 17.2% CAGR over FY11-13e driven by 20.5% CAGR in
loans.
Strong growth in fee income
The bank is investing heavily into HR initiatives to train the staff for cross selling of financial
products. It is also increasingly focusing on LC and guarantee business on consortium lending to
boost its fee income. It expects 20% growth in fee income in FY12.
Margin to remain under pressure
During Q4FY11, our analysis suggests that margin contracted by ~45bps q-o-q. The bank has been
able to protect its healthy margin despite increasing pressure in cost of funds as it has re-priced
the assets faster than the liabilities. Recent hike in saving deposit rates by 50bps, general rise in
cost of funds coupled with moderation in credit demand is likely to mount further pressure on the
margin. We are factoring in 28bps margin compression in FY12. However, the management is
confident of maintaining 3.5% margin in FY12.
Asset quality remains a matter of concern
The slippages were quite high increasing 40% q-o-q to Rs 4,353 crore in Q4FY11 which equivalent
to 1.86% of advances. Asset quality was comfortable due to higher recoveries and up-gradations.
The restructured assets book pegs at 6.3% of loans out of which 11.3% have slipped. Any negative
surprise from this pool of restructured assets is the key earning risk to our recommendation. The
gross NPA and net NPA stood at 1.79% and 0.85% respectively in FY11. The management expects
gross NPA and net NPA to remain below 2% and 1% respectively during FY12.
Valuation & Recommendation
We believe moderation in balance sheet growth and focus on asset quality are key positives for
the bank. Strong liability franchise, superior margins and healthy return ratios are key value
drivers for the stock. We believe strong fee income growth, lower credit costs and higher
operating leverage will drive earnings over FY11-FY13. We expect earnings to grow at 21% CAGR
over FY11-FY13. RoA is expected to remain stable at ~1.3%, going forward. At Rs 1,089, the stock
is trading at 6.5x FY12 earnings and 1.5x FY12 Adjusted book, attractive valuation. We maintain
BUY rating on the stock with a target price of Rs 1,380. (Potential upside ~27%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Equity Institutional Research | Banking Management Visit Note
Punjab National Bank Rs 1,089
Near term margin pressure & delinquencies are key concerns BUY
We recently met the management of the bank and the key highlights of our interaction are as
follows:
Growth likely to moderate
Considering continuous upward bias in interest rates, credit growth is likely to moderate. RBI is
expected to hike key policy rates by another 50-75bps in FY12 in order to tame inflationary
expectations. However, the bank is finding it difficult in passing on the rise in cost of funds. We
expect net interest income to increase by 17.2% CAGR over FY11-13e driven by 20.5% CAGR in
loans.
Strong growth in fee income
The bank is investing heavily into HR initiatives to train the staff for cross selling of financial
products. It is also increasingly focusing on LC and guarantee business on consortium lending to
boost its fee income. It expects 20% growth in fee income in FY12.
Margin to remain under pressure
During Q4FY11, our analysis suggests that margin contracted by ~45bps q-o-q. The bank has been
able to protect its healthy margin despite increasing pressure in cost of funds as it has re-priced
the assets faster than the liabilities. Recent hike in saving deposit rates by 50bps, general rise in
cost of funds coupled with moderation in credit demand is likely to mount further pressure on the
margin. We are factoring in 28bps margin compression in FY12. However, the management is
confident of maintaining 3.5% margin in FY12.
Asset quality remains a matter of concern
The slippages were quite high increasing 40% q-o-q to Rs 4,353 crore in Q4FY11 which equivalent
to 1.86% of advances. Asset quality was comfortable due to higher recoveries and up-gradations.
The restructured assets book pegs at 6.3% of loans out of which 11.3% have slipped. Any negative
surprise from this pool of restructured assets is the key earning risk to our recommendation. The
gross NPA and net NPA stood at 1.79% and 0.85% respectively in FY11. The management expects
gross NPA and net NPA to remain below 2% and 1% respectively during FY12.
Valuation & Recommendation
We believe moderation in balance sheet growth and focus on asset quality are key positives for
the bank. Strong liability franchise, superior margins and healthy return ratios are key value
drivers for the stock. We believe strong fee income growth, lower credit costs and higher
operating leverage will drive earnings over FY11-FY13. We expect earnings to grow at 21% CAGR
over FY11-FY13. RoA is expected to remain stable at ~1.3%, going forward. At Rs 1,089, the stock
is trading at 6.5x FY12 earnings and 1.5x FY12 Adjusted book, attractive valuation. We maintain
BUY rating on the stock with a target price of Rs 1,380. (Potential upside ~27%).
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