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Balance sheet growth to moderate: At 30% in FY11, credit growth
has been healthy. The bank’s market share in deposits improved
slightly from 5.2% to 5.3% and in advances from 5.3% to 5.4% from
FY09 to FY11. The management has guided growth to moderate. We
expect it to follow its earlier strategy of growing in line with the
industry. It has a healthy capital adequacy of 12.4% that will enable it
to grow its balance sheet without capital constraints. With 40% of its
branches in rural areas, it maintains a healthy CASA of 38.5%
NIMs have peaked: NIMs have elevated to 3.8% in FY11 from 3.4% in
FY10 as cost of deposits decreased by 32 bps. We do not expect such
level of NIMs to be sustainable and see it settling at 3.6% for FY12-13,
in line with the management’s expectations. NIMs will also be under
pressure as the bank tries to expand its overseas segment.
Slippage to decrease: Slippage has spiked to 2.0% in FY11 as
compared to 1.7% in FY10. Gross NPA has increased only by 10 bps to
1.8% as it did large write-offs in the fourth quarter. We expect slippage
to ease to 1.8% for FY12-13E, which is still a fairly high number. Credit
costs will fall marginally on account of higher recoveries. It has a high
restructured book of 6.3%, so slippage within needs to be watched out.
Operational efficiency: Cost-to-income ratio has deteriorated on
account of higher one time pension provisioning for retired employees.
We expect improvement in cost-to-income, but it will be less than that
of its PSU peers.
Impressive return ratios: The bank has consistently delivered on
return ratios. Previous year’s average ROE is 23.8% and average ROA is
1.4%. Going forward, we expect such performance to continue.
Valuation: At the CMP the stock is trading at 6.2x and 5.1x FY12E and
FY13E earnings, and at 1.5x and 1.2x P/ABV FY12E and FY13E
respectively, which we feel is reasonable considering its pan-India
presence, strong branch network and consistently high ROE. We expect
an ROA of 1.4% and ROE of 23.9% in FY13E. We believe PNB will
continue to trade at premium valuations. We initiate coverage on the
stock with a HOLD rating and price target of Rs1,180 based on P/ABV
of 1.3x FY13E.
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