PNB: Strong 2Q operational earnings; Buy on risk-return :: BofA ML

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Punjab National Bank
Strong 2Q operational
earnings; Buy on risk-return
􀂄 Raise PO to Rs1530; Attractive risk-return
We raise PO to Rs1530 on PNB post their strong operational 2Q earnings,
earnings upgrade of 3/4% for FY11/12 and positive risk return. Earnings upgrade
led by stronger than estimated topline (10% ahead). We now forecast earnings
growth of +24/29% over FY11/12, with RoEs of +24-26% (amongst highest).
Hence, we believe stock can trade up to +2.0x FY12 adj. book (at Gordon
multiples), underpinning our new PO of Rs1530.
2QFY11: Operationally strong, beat estimates
PNB’s earnings (Rs10.7bn), up 16% yoy, were about 4% below est. on higher
credit costs, but operationally (operating earnings, ex treasury) were 4% ahead of
estimates. Topline (10% ahead) was up 49% yoy driven by +27% loan growth and
56bps yoy margin expansion (up 12bps qoq). Pre-provision profits also up +30%
despite Rs2.5bn of pension and gratuity provisions. Fee income up 17% yoy.
CASA up 200bps yoy to +40.5% (flat qoq).
Asset quality: Headline rise but slippages trending down
Headline NPLs increased by 11% each qoq, but gross slippages are down to
Rs9bn vs. Rs12bn in 1QFY11. Almost 25% from a real-estate
developer. Moreover, we think NPL's will continue to trend down in coming
quarters. We estimate net NPL formation at +Rs20bn (~Rs12bn in 1H). Also
restructured Rs5.4bn of loans. Relapse rate is 8.8% on rest. loans (Rs135bn;
6.5% of loans). NPL's remain manageable.