Punjab National Bank High ROAs v/s High risk exposures: Prabhudas Lilladher,

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􀂄 High ROAs despite high credit costs: High margins and fee income provides
strong top-line resilience and higher ability to absorb delinquencies and credit
costs. Despite ~105bps of credit costs in FY13, we expect ROAs of 1.25% which
is highest among PSUs. Asset quality challenges do remain with high share of
Infra and stress exposures; however, ability to maintain high ROAs with
relatively high credit costs assumptions is positive.
􀂄 Exposure to Infra and stress sectors high: PNB’s ~9% exposure to power
remains highest among large PSU banks. Also, its exposure to other stress
sectors excluding Infra, remains among the highest among large PSUs and we
believe this would continue to impact investor sentiments. Our sensitivity
analysis on stress exposures shows a ~19% impact on PNB’s networth which is
the highest among large PSUs.
􀂄 Possible upsides? Despite the high risk exposure, our positive bias is because of
PNB’s ability to absorb higher credit costs relative to peers. Management has
always been conservative in recognising and providing for NPAs also reflected in
relatively low slippages in Q2FY12, when PNB migrated to system-based NPA
recognition. Also, management efforts on recoveries and upgrades have led to
signifcant improvement over H1FY12 and sustaining the current trend would be
a positive catalyst.
􀂄 Accumulate, PT ‐ Rs1000/share: Our Sep-12 PT of Rs1000/share based on twostage
Gordon growth model implies 13% upside from current levels. Current
stock price implies 1.1x Sep-12 book. Despite a positive bias on PNB’s ability to
relatively maintain higher ROAs, we have an ‘Accumulate’ rating as our
sensitivity analysis on stress sectors and Infra exposures indicate higher impact
on PNB. We prefer Private banks v/s PNB/BOB, given better visibility on nearterm
asset quality.