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UBS Investment Research
Punjab National Bank
Adverse loan mix
NPL risks should increase as economy slows
Among the Indian banks under our coverage, we think Punjab National Bank’s
(PNB) loan book has the highest risk. Its high exposure to the power, SME, and
commercial real estate sectors could face greater risk given sector-specific issues
and slowing economic growth. Moreover, a complete transition to system-based
NPL recognition may lead to higher slippage in Q2.
Lower earnings estimates by 5-10% due to higher loan loss charges
We increase our FY12/13 loan loss charges assumptions by 15%/30%. We believe
slowing loan growth, higher NPL additions, and a re-pricing of term deposits will
lead to a 20bp decline in margins over the next three quarters. We lower our
FY12/13 earnings estimates by 5%/10% and forecast a 7% earnings CAGR over
FY11-13.
Falling ROA and adverse loan mix could lead to a de-rating
We estimate its ROA will decline from 1.4% in FY11 to 1.1% in FY13, which
would lead to lower-than-historical valuations. We expect consensus to cut
earnings over the next two quarters by 10% for FY12/13. Although we think it has
a good management team, its P/BV could de-rate due to an adverse loan mix and
lower ROA.
Valuation: lower price target to Rs1,050.00; downgrade to Sell
The stock is trading at 1.5x FY13E adjusted book value and 6.5x FY13E earnings.
We derive our price target using the residual income method, assuming a terminal
ROE and cost of equity of 13.5%. We adjust our FY12/13/14 EPS estimates from
Rs155.6/178.7/211.7 to Rs147.5/160.2/198.1. We downgrade our rating from
Neutral to Sell.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Punjab National Bank
Adverse loan mix
NPL risks should increase as economy slows
Among the Indian banks under our coverage, we think Punjab National Bank’s
(PNB) loan book has the highest risk. Its high exposure to the power, SME, and
commercial real estate sectors could face greater risk given sector-specific issues
and slowing economic growth. Moreover, a complete transition to system-based
NPL recognition may lead to higher slippage in Q2.
Lower earnings estimates by 5-10% due to higher loan loss charges
We increase our FY12/13 loan loss charges assumptions by 15%/30%. We believe
slowing loan growth, higher NPL additions, and a re-pricing of term deposits will
lead to a 20bp decline in margins over the next three quarters. We lower our
FY12/13 earnings estimates by 5%/10% and forecast a 7% earnings CAGR over
FY11-13.
Falling ROA and adverse loan mix could lead to a de-rating
We estimate its ROA will decline from 1.4% in FY11 to 1.1% in FY13, which
would lead to lower-than-historical valuations. We expect consensus to cut
earnings over the next two quarters by 10% for FY12/13. Although we think it has
a good management team, its P/BV could de-rate due to an adverse loan mix and
lower ROA.
Valuation: lower price target to Rs1,050.00; downgrade to Sell
The stock is trading at 1.5x FY13E adjusted book value and 6.5x FY13E earnings.
We derive our price target using the residual income method, assuming a terminal
ROE and cost of equity of 13.5%. We adjust our FY12/13/14 EPS estimates from
Rs155.6/178.7/211.7 to Rs147.5/160.2/198.1. We downgrade our rating from
Neutral to Sell.
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