Punjab National Bank Buy Target Price: Rs900 : Centrum

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Punjab National Bank

Buy

Target Price: Rs900

CMP: Rs768          

Upside: 19%

NIMs, asset quality disappoint

PNB reported weak core earnings performance in Q4FY12 with material contraction in NIM and sharp deterioration in asset quality matrices. Slippages were high at +4% and restructured loans inched up to 8.5% of loans – which collectively kept the provisioning cost high at ~1%. While the troubled SEB and aviation exposures have been restructured, we still see asset quality concerns persisting due to challenging macro. Our revised assumptions imply weaker return ratios that lead us to lower our price target to Rs900. We maintain Buy on attractive valuations.

m  Asset quality matrices deteriorate: Asset quality matrices for PNB deteriorated during the quarter with 1) higher delinquency rate of +4% on annualised basis 2) 13% QoQ increase in restructured assets (to 8.5% of advances) led by SEBs. While a large part of the SEB and aviation exposures have been restructured, asset quality pains may remain in quarters to come. Given the large outstanding restructured book and exposure to agri and SME, we have factored in stiff credit cost assumptions at 1.3% for FY13 vs 1% for FY12.

m  Weak core performance: Despite the beat at the bottomline, the core performance of the bank during Q4FY12 was weak with a material 40 bps QoQ contraction in NIM. The NIM contraction can be traced to 1) reversal of interest income related to NPA and 2) lower investment yields. The bottomline beat is the result of higher treasury gains, MTM write back and lower tax rate.

m  Loan growth healthy: Loan portfolio expanded 21% YoY with clear preference towards agriculture (29.5% YoY) and retail (23.6% YoY) segments. From an industry perspective, incremental disbursement remained skewed towards the infra sector as past sanctions come up for disbursals. Meanwhile, on the deposit front, CASA share was maintained at 35.3% as reliance on bulk deposits was reduced. While an above industry credit growth is encouraging, it is a risky strategy to aggressively build up the loan book in adverse economic scenario and hence we remain cautious on asset quality.

m  Non-interest income surprises positively: Non-interest income surprised positively during the quarter led by sequential spike in treasury gains and recoveries. The core fee income growth lagged behind advance growth though it was decent at 15% YoY. The TPD revenue stream is likely to gain more traction as PNB has begun selling insurance products of Metlife Insurance (PNB now holds 30% in the company).

m  Maintain Buy on valuations: PNB continues to report a weakening asset quality matrix with pressures likely to continue for a few more quarters led by incremental restructuring and high slippage rate. However, our stiff assumptions (credit cost and slippage rate) and lowered valuation multiple (1x FY14E) amply factors in asset quality challenges and resulting pressure on return ratios in our view. Current valuation seems reasonable at 0.9x FY14E PABV. Maintain Buy with a revised price target of Rs900.

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