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Healthy core operating performance; NIM to sustain at ~3.5%
Asset quality – the key monitorable; return ratios to remain strong
PNB’s average RoE over FY99-11 was 23%, the highest among peers. RoA improved from 0.8-0.9% in
FY00 to over 1.3% in FY11, driven by strong core operating performance. Core operating profit-toaverage-
assets improved to 2.4% in FY11 from 1.8% over FY99-10 and we expect it to be ~2.4% over
FY11-13E. PNB’s ability to earn higher risk-adjusted returns leads to RoA's being higher-than-peers.
Superior margin performance sustainable: PNB’s margins have been most stable across interest
rate cycles and liquidity scenarios, highlighting its extraordinary asset-liability management. While CASA
ratio has declined to 38% from 40%+, the bank has used bulk deposits to fund bulk loans. Thus, margins
have not been compromised for growth. We expect PNB’s margins to remain the highest among large
PSU banks at 3.4%+ (calculated).
Strong revenue growth to provide cushion against higher credit costs: Slippages continued to be
high over the last two years. However, PNB’s ability to earn higher revenues led to minimal impact on
profits. Strong upgrades from higher slippages over FY09-11 will reduce net slippages. High NIM and
increase in fee income will provide cushion against higher credit costs. Risk-adjusted margins (as a
percentage of average assets) will be over 2.5% (v/s ~2.1% for peers).
Stable and focused top management: Mr KR Kamath has a full five-year term as CMD (till October
2014), ensuring management stability at the top. His focus on “profitable and qualitative growth” and his
execution capabilities have been proven in his earlier stint at Allahabad Bank.
Earnings CAGR of ~19%; trading at 20% below LPA: Although slippages are likely to remain high, as
the bank shifts its portfolio towards system-based NPL recognition and due to a large restructured portfolio
(6.5% of outstanding loans), strong operating performance should help absorb any asset quality shock.
Considering PNB’s superior and sustained margins, and efficiencies of scale, we model in core operating
CAGR of ~20%. Overall, we model in PAT CAGR of ~19% over FY11-13. We expect the bank to report the
RoA of ~1.3% and RoE of ~24% highest among large PSU banks. PNB remains one of our preferred picks
among PSU banks. We maintain Buy with a target price of INR1,300.
Risk adjusted margins best in the industry; healthy return ratios to sustain
We expect PNB to register higher-than-industry
business growth. We have modeled in loan
growth of 21% and deposit growth of 22% for
FY12.
NIM has remained superior at ~3.4% (despite
higher slippages), demonstrating strong assetliability
management and the benefit of high
CASA ratio. In FY11, NIM had improved
sharply. Though we expect a ~40bp moderation
in FY12, NIM would still remain among the best
in the industry.
Along with superior margins, PNB's slippages
too have remained on the higher side. However,
even on a risk-adjusted basis, PNB's margins
have been superior compared to its peers, which
is commendable and reflects its strong earnings
quality.
We expect PNB to record earnings CAGR of
~20% over FY11-13, sustaining healthy return
ratios -average RoA of ~1.3% and average RoE
of ~24%.
1QFY12: Margins stable; higher slippages disappoint
In 1QFY12, yields and costs have largely
moved in tandem with each other. Yield on loans
increased 55bp QoQ, while cost of deposits
increased 64bp QoQ. Yield on investments also
improved by 55bp QoQ due to general increase
in interest rates and higher proportion of shortterm
investments.
Margins have remained largely stable on a QoQ
basis. In 1QFY12, PNB's NIM declined by
~8bp QoQ to 3.84%, which was much better
compared to the margin performance of some
of its peers.
Gross slippages were INR11.8b in 1QFY12 v/s
INR12.5b in 4QFY11. The annualized slippage
ratio for 1QFY12 remained elevated at 1.94%.
Higher slippages were on account of migration
to system-based NPL recognition and slippages
worth INR2.8b from the restructured portfolio.
As a result of higher slippages during the quarter,
credit cost too remained on the higher side.
However, we expect recoveries and upgrades
to gain pace in 2HFY12, resulting in lower credit
cost.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Healthy core operating performance; NIM to sustain at ~3.5%
Asset quality – the key monitorable; return ratios to remain strong
PNB’s average RoE over FY99-11 was 23%, the highest among peers. RoA improved from 0.8-0.9% in
FY00 to over 1.3% in FY11, driven by strong core operating performance. Core operating profit-toaverage-
assets improved to 2.4% in FY11 from 1.8% over FY99-10 and we expect it to be ~2.4% over
FY11-13E. PNB’s ability to earn higher risk-adjusted returns leads to RoA's being higher-than-peers.
Superior margin performance sustainable: PNB’s margins have been most stable across interest
rate cycles and liquidity scenarios, highlighting its extraordinary asset-liability management. While CASA
ratio has declined to 38% from 40%+, the bank has used bulk deposits to fund bulk loans. Thus, margins
have not been compromised for growth. We expect PNB’s margins to remain the highest among large
PSU banks at 3.4%+ (calculated).
Strong revenue growth to provide cushion against higher credit costs: Slippages continued to be
high over the last two years. However, PNB’s ability to earn higher revenues led to minimal impact on
profits. Strong upgrades from higher slippages over FY09-11 will reduce net slippages. High NIM and
increase in fee income will provide cushion against higher credit costs. Risk-adjusted margins (as a
percentage of average assets) will be over 2.5% (v/s ~2.1% for peers).
Stable and focused top management: Mr KR Kamath has a full five-year term as CMD (till October
2014), ensuring management stability at the top. His focus on “profitable and qualitative growth” and his
execution capabilities have been proven in his earlier stint at Allahabad Bank.
Earnings CAGR of ~19%; trading at 20% below LPA: Although slippages are likely to remain high, as
the bank shifts its portfolio towards system-based NPL recognition and due to a large restructured portfolio
(6.5% of outstanding loans), strong operating performance should help absorb any asset quality shock.
Considering PNB’s superior and sustained margins, and efficiencies of scale, we model in core operating
CAGR of ~20%. Overall, we model in PAT CAGR of ~19% over FY11-13. We expect the bank to report the
RoA of ~1.3% and RoE of ~24% highest among large PSU banks. PNB remains one of our preferred picks
among PSU banks. We maintain Buy with a target price of INR1,300.
Risk adjusted margins best in the industry; healthy return ratios to sustain
We expect PNB to register higher-than-industry
business growth. We have modeled in loan
growth of 21% and deposit growth of 22% for
FY12.
NIM has remained superior at ~3.4% (despite
higher slippages), demonstrating strong assetliability
management and the benefit of high
CASA ratio. In FY11, NIM had improved
sharply. Though we expect a ~40bp moderation
in FY12, NIM would still remain among the best
in the industry.
Along with superior margins, PNB's slippages
too have remained on the higher side. However,
even on a risk-adjusted basis, PNB's margins
have been superior compared to its peers, which
is commendable and reflects its strong earnings
quality.
We expect PNB to record earnings CAGR of
~20% over FY11-13, sustaining healthy return
ratios -average RoA of ~1.3% and average RoE
of ~24%.
1QFY12: Margins stable; higher slippages disappoint
In 1QFY12, yields and costs have largely
moved in tandem with each other. Yield on loans
increased 55bp QoQ, while cost of deposits
increased 64bp QoQ. Yield on investments also
improved by 55bp QoQ due to general increase
in interest rates and higher proportion of shortterm
investments.
Margins have remained largely stable on a QoQ
basis. In 1QFY12, PNB's NIM declined by
~8bp QoQ to 3.84%, which was much better
compared to the margin performance of some
of its peers.
Gross slippages were INR11.8b in 1QFY12 v/s
INR12.5b in 4QFY11. The annualized slippage
ratio for 1QFY12 remained elevated at 1.94%.
Higher slippages were on account of migration
to system-based NPL recognition and slippages
worth INR2.8b from the restructured portfolio.
As a result of higher slippages during the quarter,
credit cost too remained on the higher side.
However, we expect recoveries and upgrades
to gain pace in 2HFY12, resulting in lower credit
cost.
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