PNB: 2QFY11 results – in-line: Buy:: IIFL

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2QFY11 results – in-line
Punjab National Bank’s (PNB) net profit increased by 16% to Rs10.8bn, in-line with market consensus
and our estimates. Revenue growth, helped by higher NIM, came ahead of our estimate, but higher
expenses and loan loss provisions (LLP) dragged down profit growth. Additional pension obligations
drove expenses higher, while deterioration in asset quality drove LLP higher. Going forward, higher
expenses and LLP would likely remain an overhang to consensus and our expectation for FY11.
However, these concerns would abate in FY12ii and beyond; higher revenue expectation would likely
drive earnings higher. We raise our earnings forecast for FY12ii /FY13ii. We retain BUY.
2QFY11 results – largely as expected: PNB’s net profit increased by 16%, largely in-line with consensus
and our estimates. Profit growth could have been higher, given the strong growth momentum in revenue.
However, higher expenses, due to additional pension obligations and LLP, capped upside to earnings growth.
New NPL accrual remained high for PNB; however, it has shown improvement on a sequential basis.
Near-term upside to earnings capped; medium-term outlook stronger: We believe higher operating
expenses and LLP would cap upside to FY11ii earnings growth expectation, despite stronger revenue growth.
Potentially, both could surprise on the downside; pension obligations could turn out to be higher, based on
final actuarial assessment, while a switch to the system-based NPL recognition process could result in higher
NPL accrual and LLP. However, we believe high expense growth would moderate, due to higher base and
lower wage inflation. NPL accrual rate would likely abate in FY12ii, due to upswing in economic outlook.
We retain BUY; raise target price to Rs1,600: Notwithstanding the near-term headwinds, PNB remains
as a best pro-cyclical play. Robust medium-term earnings prospects, strong lending and deposit franchise,
and high profitability remain as key investment arguments in favour of PNB. These along with moderate
valuation and favourable tailwind to macro economic outlook should sustain price performance, in our view.