Rating: Hold; Target Price: Rs590; CMP: Rs548; Upside: 8%
Consolidation shaping well
We retain HOLD rating on PNB with a target price of Rs590. We believe
consolidation efforts have begun to yield positive results in terms of
growth, asset quality and operating ratios as shown in Q3Y14 results.
While asset quality concerns seem to have eased, we believe it has not
yet peaked as exposure to risky segments, elevated stress and weak
macro indicators may act as spoilsports. This, in addition to higher
employee related expenses, will remain a drag on profitability and
restrict return ratios. The stock trades at 0.6x Dec'15ABV of Rs908,
which leaves limited room for an upside.
$ Q3FY14 results - Operationally strong quarter: PNB's Q3FY14 results,
though on the lower side (to our/ consensus estimates) on the P&L
front, were operationally strong with - a) asset quality showing signs
of improvement b) growth gaining momentum and c) key ratios of NIM and
CASA remaining intact. NII at Rs42.2bn (+13% yoy) was led by 10% yoy
growth in loan portfolio and 10bps yoy expansion in NIM (reported) to
3.6%. However, led by higher employee expenses and provisioning (NPA
and investment depreciation), PAT at Rs7.5bn, declined 42% yoy.
$ Asset quality concerns ease; but yet to peak: Stress asset addition
for the quarter at Rs36.5bn (4.7% annualised), has declined when
compared to previous periods. We, however, believe that a) exposure to
risky segments* in excess of 35% of total portfolio with higher levels
of NPA/ restructuring therein and b) weak economy will keep NPA/
restructuring levels elevated. Restructured portfolio stood at 9.5%
and problem loans comprised 15% of loans. We continue to factor in
slippages/ credit costs at 320bps/ 120bps respectively over FY14-16E.
$ Retail franchise gearing up well; capital position better:
Realignment of balance sheet franchise towards retail is gaining
traction with a) retail loan growth at +19% yoy outpacing the overall
domestic growth of 10% yoy and 22% incremental yoy domestic growth
being retail in nature and b) share of core deposits at 92%. Total CAR
(including 9m profits) stood at 11.7% and we believe will enable
sustain balance sheet growth for a few more quarters.
$ Valuation and view and key risks: We have revised our earnings lower
by ~3% each for FY14/FY15E and are now factoring in 12%/ 14% CAGR in
NII/ loan portfolio over FY13-16E. The stock has corrected 13% / 15%
in the past 1-month / 3-months and trades at 0.6x Dec'15 ABV of Rs908.
We believe valuations are reasonable due to a) relatively improved
asset quality outlook when compared to peers and b) consolidation
strategy showing favourable results. Reversal in NPA trend will lead
to further de-rating. On the upside, continued reduction in stress
asset addition and improvement in operating metrics will see the stock
re-rate.
Thanks & Regards
--
��
Consolidation shaping well
We retain HOLD rating on PNB with a target price of Rs590. We believe
consolidation efforts have begun to yield positive results in terms of
growth, asset quality and operating ratios as shown in Q3Y14 results.
While asset quality concerns seem to have eased, we believe it has not
yet peaked as exposure to risky segments, elevated stress and weak
macro indicators may act as spoilsports. This, in addition to higher
employee related expenses, will remain a drag on profitability and
restrict return ratios. The stock trades at 0.6x Dec'15ABV of Rs908,
which leaves limited room for an upside.
$ Q3FY14 results - Operationally strong quarter: PNB's Q3FY14 results,
though on the lower side (to our/ consensus estimates) on the P&L
front, were operationally strong with - a) asset quality showing signs
of improvement b) growth gaining momentum and c) key ratios of NIM and
CASA remaining intact. NII at Rs42.2bn (+13% yoy) was led by 10% yoy
growth in loan portfolio and 10bps yoy expansion in NIM (reported) to
3.6%. However, led by higher employee expenses and provisioning (NPA
and investment depreciation), PAT at Rs7.5bn, declined 42% yoy.
$ Asset quality concerns ease; but yet to peak: Stress asset addition
for the quarter at Rs36.5bn (4.7% annualised), has declined when
compared to previous periods. We, however, believe that a) exposure to
risky segments* in excess of 35% of total portfolio with higher levels
of NPA/ restructuring therein and b) weak economy will keep NPA/
restructuring levels elevated. Restructured portfolio stood at 9.5%
and problem loans comprised 15% of loans. We continue to factor in
slippages/ credit costs at 320bps/ 120bps respectively over FY14-16E.
$ Retail franchise gearing up well; capital position better:
Realignment of balance sheet franchise towards retail is gaining
traction with a) retail loan growth at +19% yoy outpacing the overall
domestic growth of 10% yoy and 22% incremental yoy domestic growth
being retail in nature and b) share of core deposits at 92%. Total CAR
(including 9m profits) stood at 11.7% and we believe will enable
sustain balance sheet growth for a few more quarters.
$ Valuation and view and key risks: We have revised our earnings lower
by ~3% each for FY14/FY15E and are now factoring in 12%/ 14% CAGR in
NII/ loan portfolio over FY13-16E. The stock has corrected 13% / 15%
in the past 1-month / 3-months and trades at 0.6x Dec'15 ABV of Rs908.
We believe valuations are reasonable due to a) relatively improved
asset quality outlook when compared to peers and b) consolidation
strategy showing favourable results. Reversal in NPA trend will lead
to further de-rating. On the upside, continued reduction in stress
asset addition and improvement in operating metrics will see the stock
re-rate.
Thanks & Regards
--
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