India Equity Research: Recommendation SELL PNB, Target Price Rs. 193

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PNB,

PUNJAB NATIONAL BANK

PRICE: RS.222 RECOMMENDATION: SELL

TARGET PRICE: RS.193 FY16 P/E: 10.0X, P/ABV: 1.4X

Asset quality pain likely to persist…

We believe PNB's asset quality pain continues to remain unabated as fresh

impairments (gross slippage + fresh restructuring) remained elevated during

previous several quarters. High share (~13% of advances) of stressed assets,

lower coverage ratio (59.1%) and unrelenting fresh delinquencies makes us

cautious on the stock. We are also modeling subdued return ratios during

FY15/16E (RoE: ~10%; RoA: 60bps), which justifies lower P/ABV multiple for

PNB vis-à-vis its peers. We are retaining SELL recommendation on the stock

with revised TP of Rs.193 (Rs.170 earlier) based on 1.25x of FY16EABV. We

are assigning higher multiple to PNB (1.25x vs. 1.1x earlier), post RBI's

extension of flexible refinancing scheme (5:25 scheme) to existing

infrastructure projects. However, we believe PNB is likely to underperform

its peers on continued asset quality pressures, given its higher exposure to

stressed assets.

Although recent extension of 5:25 scheme comes as a breather,

we believe asset quality pain to persist for PNB.

The extension of flexible refinancing scheme (5:25 scheme) to existing infrastructure

projects will help banks by aligning the repayment cycle with the cash flow of the

projects. Banks had been asking developers to pay back within a shorter duration

even though cash flows were much longer. PSU banks including PNB have been

facing restructuring pressure in the prevailing economic environment when borrowers

are facing slippage on cash flows. This new scheme would allow banks to lend

to a developer for 25 years, with an option of rewriting terms or transferring loans to

another financial institution after 5 years.

PNB has witnessed sharp rise in restructured portfolio (Rs.340 bn; 9.4% of advances),

much higher than the industry average, which continues to be a drag. Although

we believe, PNB has completed the restructuring of Discoms, potential risk

lies in terms of its sticky portfolio like SEBs and Air India etc. The sectors which

mainly contribute to the formation of restructured portfolio are Infrastructure (especially

power), Iron & Steel, Aviation, Textiles Chemicals, Hotels, Sugar and Education

etc.

LINK

http://www.kotaksecurities.com/pdf/pdfs/FUNDPNB29122014094900.pdf

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