First signs of turnaround PNB :Karvy

First signs of turnaround
PNB numbers came in as a positive surprise. Slippages (net of inter‐quarter
recoveries) came in at 0.5% as against 6.2% during the last quarter. GNPA
has improved by 5bps on a sequential basis to 4.6%. Despite relatively
lower NPL provisions, provision coverage improved by 170bps on a
sequential basis to 56%. Cautious approach has lead to a muted growth in
balance sheet. NIMs are stable on a sequential basis to 3.5%.
 Bounce back in asset quality: After 6 consecutive quarters of
deterioration in gross as well as net NPA, we have seen first of
improvement. Incremental slippages (net of inter‐quarter recoveries) of
0.5% as against 6.2% during last quarter. Net restructuring book
increased by Rs25bn (SEB and Suzlon included) and now forms 10.2% of
loan book.
 Muted growth in balance sheet: On account of calibrated approach
adopted by the management, muted growth is seen in deposits (8%) and
advances (13%). Overseas and retail segment contributed to most of the
incremental growth. CASA has improved by 110bps sequentially to
36.9% on the back of sequential deceleration in bulk deposits.
 Stable NIMs: NIMs are stable on sequential basis; however, it has
deteriorated as against last year by 41bps to 3.5%. Despite reduction of
25bps in base rate, management has guided full year NIMs of 3.5%.
Outlook & Valuation
 At the CMP, the stock trades at 5.2x & 4.5x FY14E & FY15E earnings, and
at 1.0x & 0.9x P/ABV FY14E & FY15E, respectively. Based on 20%
discount to its historical mean valuation implying 1.0x P/ABV FY15E, we
reitrate our “BUY” recommendation on Punjab National Bank with
target price of Rs. 1,075 per share.

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