PNB: Strong core performance offsets higher provisioning :: Edelweiss

Visit http://indiaer.blogspot.com/ for complete details �� ��


PUNJAB NATIONAL BANK
Strong core performance offsets higher provisioning


􀂄 Robust NII performance
During Q2FY11, Punjab National Bank’s (PNB) profit came in at INR 10.75 bn
(16% growth Y-o-Y) as once again strong core NII performance offset higher
NPL provisions. The bank reported steady core operating performance driven by
better–than-expected improvement in margins (12bps Q-o-Q to 4.06%—highest
amongst PSU peers) and 28% Y-o-Y growth in advances. Net interest income
grew 49% Y-o-Y (14% Q-o-Q) to INR 29.8 bn, ahead of expectation, driven by
improvement in loan yields and controlled funding cost. Slippages for the quarter
came in at 2.2%( annualized one year lag), lower than 3.1% in Q1FY11, in line
with its higher–than-system average run-rate, necessitating higher NPL
provisions. PNB continued to make provisions for INR 2.5 bn towards pension
and gratuity, leading to 38% yoy increase in opex ratio.
􀂄 Margins cross 4%, best in industry; advances jump 28% Y-o-Y
Led by ~27bps sequential improvement in loan yields, a function of increase in
PLRs, coupled with decline in cost of funds (unlike peers which have started to
witness cost pick up), PNB was able to improve margins by 12bps Q-o-Q to
4.06%, against a flat margin expectation. CASA ratio was flat Q-o-Q at 40.6%.
However, traction in saving bank balances (up 7% Q-o-Q) continued to impress.
Advances grew 28% Y-o-Y—growth was largely dominated by industry (up 28%
Y-o-Y) and agriculture advances (29% Y-o-Y). Led by higher–than-expected
margin trajectory, we are revising up our margin estimates by ~15 bps to 3.6%
over FY11/12.

􀂄 Outlook and valuations: Core story intact; maintain ‘BUY’
With its strong franchise and focus on profitable growth, PNB’s margins continue
to remain well above the industry average, driving the bank’s core profitability. A
high level of restructuring is a key area of concern. Led by strong core earning
trajectory we are revising our earnings estimate up 2.8% for FY11. We estimate
23% CAGR in earnings over FY11/12 on back of 23% growth in loans and 3.6%
margins. The stock is currently trading at 1.8x FY12E book, delivering RoEs
consistently in the mid 20s. We maintain ‘BUY’ recommendation.