BUY Punjab National Bank : Q2FY15 Update: ICICI Securities, PDF link

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Disappointing performance; long term positive
• PNB’s earnings were significantly below our & Street estimates
owing to higher provisions & opex. Profit grew 11.8% YoY (down
59% QoQ) to | 575 crore, vs. our estimate of | 1314 crore, which
factored in 155% YoY growth. Higher-than-expected provisions of
| 1768 crore (I-direct estimate: | 1100 crore) and opex of | 2834
crore (I-direct estimate: | 2515 crore) contributed to lower profits
• During Q2, provisions were higher as the bank made ~| 680 crore of
additional provisions, which was over & above the regulatory
provision required. Further, operating expenses were higher as the
bank made additional provision of | 273 crore with regard to AS-15
• Slippages were higher at | 3974 crore vs. 2958 crore in Q1FY15
while fresh RA were at | 3297 crore vs. | 1300 crore in Q1FY15
• Credit & deposits grew higher than estimated at 13.8% YoY and
16.7% YoY, respectively. Margins declined to 3.18% from 3.42%
mainly on account of an interest reversal of | 294 crore
Third largest PSU bank, grappling with surge in NPA, RA
PNB is the third largest bank in terms of advances among PSU banks
(| 313852 crore) with 4.94% market share (September 2013), declining
from 5.45% in September 2010. It lost the No.2 position to BoB. PNB has
an extensive branch network of >6200 branches, with 50% in rural areas
giving it unparalleled advantage of domestic CASA of 40.7% since FY07
and consequent lower CoF. This has kept NIM high at ~3.5-4%. The bank
grew credit at 23-29% in FY06-11 and at 16.3% CAGR in FY10-13. Loss of
market share in deposit & loans happened due to a change in focus to
manage rising NPAs (5.2% of credit from 1.9% in September 2010). This
impacted profit significantly over time.
Margins improving, profit ratios to remain muted
PNB has been in a consolidation stage in FY14, when credit grew 13.1%
YoY to | 349269 crore. The loan book is dominated by large corporate
(26%) & MSME (13.4%) segment and has 10% in international. The
management is aiming to grow credit at ~15% in FY15E, which seem
achievable. On the deposit front, we saw 18.2% CAGR to | 346510 crore
in FY10-13 while FY14 growth was 15.3%. Going ahead, the management
guided for NIM to be maintained at ~3.25-3.5%. We expect NII to grow at
a marginal 11% CAGR to | 19902 crore after growth of 9% in FY14 and
21% in FY10-13. PAT is expected to grow steadily at 17% CAGR after a
sharp cut of 25% in FY14 to reach | 4544 crore by FY16E.
Asset quality under pressure relative to large peers
The restructured book (RA) has grown from | 10000 crore to | 35000
crore in FY10-14, | 36793 crore as on Q2FY15 (10% of advances vs. ~6-
7% for industry). The GNPA ratio in the past seven years has grown from
lows of 1.6% to 5.65% at | 20752 crore. We expect GNPA and NNPA
ratios to hover around~5% and 2.7%, respectively, by FY16E.
Maintain BUY from long term perspective but reduced target price
PNB had highest RoA, RoE among PSU banks in FY08-10 but took a huge
knock as deteriorating asset quality led to elevated provisioning. Return
ratios improvement is unlikely in the near term on provision for stressed
assets. PNB will be a major beneficiary of MTM reversal on investment
book (AFS book proportion of 29%). We have raised our NPA estimates &
accordingly the provisioning cost. Thus, our PAT CAGR in FY14-16E falls
to 17% from 22% earlier. We maintain our BUY rating from a long term
perspective but reduce TP to | 1060 based on 1.3x revised ABV of | 820.

LINK
http://content.icicidirect.com/mailimages/IDirect_PNB_Q2FY15.pdf