Punjab National Bank - Structural de-rating in the making ::Macquarie Research,

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Punjab National Bank
Structural de-rating in the making
Event
 Downgrade the stock to Underperform with a new TP of Rs880: We believe
PNB is in for a structural de-rating considering the high risk lending that it has
been doing as well as the large restructured book that it has been carrying. We
cut earnings sharply by 15-20% driven by higher credit costs. We reduce our TP
by 32% to Rs880 owing to a lower target multiple emanating out of a lower ROE.
Impact
 We are just not comfortable with the book any longer: PNB has one of the
highest restructured assets in the industry and slippages consistently have
been high. Moreover a part of its higher margins is a function of its high risk
lending as reflected in its relatively higher yield on advances. We expected
PNB’s stressed assets to net-worth ratio to increase from 80% in FY11 to
116% in FY13E driven by large-scale restructurings and NPLs.
 Steady erosion of liabilities franchise worries us: CASA has steadily
declined from a high of 43% to 38%. The bank has opportunistically gone for
mobilisation of bulk deposits/CDs whose share has gone up from 18% to 24%
in a year. Hence it makes PNB vulnerable to any sudden tightness in money
markets.
 May require capital soon: PNB’s tier-1 ratio is at 8.5% which is comfortable
as of now. However, with loan growth expected to be around 18-20% we do
expect a capital raising to happen in FY13E. We haven’t factored any equity
dilution into our estimates.
 Fee income growth has been unsatisfactory however expected to gather
some steam: Fee income growth for PNB has been quite sedate. However
with the recent tie up with insurance company Metlife (unlisted) we expect
third party distribution fees to gain momentum. The 30% equity stake that
PNB is proposing to take in Metlife however is waiting for regulatory approvals
and hence may contribute to fee income from FY13E only in our view.
Earnings and target price revision
 We are cutting earnings by 15% and 17% respectively for FY13E and FY14E
driven by higher credit costs. We reduce TP by 32% to Rs880 mainly on
account of a lower target multiple from 1.4x to 1.05x and a lower ROE and
earnings growth.
Price catalyst
 12-month price target: Rs880.00 based on a Gordon Growth Model
methodology.
 Catalyst: Sharp increase in slippages and restructured assets
Action and recommendation
 Doesn’t deserve any longer premium valuations: The book is increasingly
getting riskier in our view and doesn’t reflect the true state of affairs. Even the
stellar deposit franchise that PNB had has been steadily deteriorating. We
downgrade to Underperform from Outperform with a new TP of Rs880.

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