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Corrections overdone; upgrade to BUY
q PNB has corrected sharply since its Q2FY11 results due to spike in slippage and arrest of its senior banker by CBI in loan scam along with rise
in concerns over microfinance & 2G/3G lending by the banks (especially
PSU banks). We believe, the correction in stock price is overdone and
hence we upgrade the stock to BUY from ACCUMULATE earlier with
~14% upside from the current level.
q We like PNB due to its positioning strategy of a dominant player in the
Indo-Gangetic belt. It is also better placed than its peers in rising interest
rate environment with its strong liability franchise (CASA mix at ~41%)
along with lower dependence on wholesale deposits.
q Reported NIM for H1FY11 is ~4.0%, again on the higher side vis-à-vis its
peers. This has come on the back of sequential improvement in yield on
advances (31bps QoQ; driven by increase in PLR and base rate during
Q2FY11) and containment of cost of deposits (due to better liability management).
q Slippage was on higher side at Rs.9.11 bn (annualized slippage ratio:
1.95%) during Q2FY11; however it was down from Rs.12.16 bn (annualized slippage ratio: 2.61%) during Q1FY11. Important thing to watch out
would be its cumulative restructured book which stands at Rs.135.5 bn
(6.5% of advances). Out of this Rs.11.95 bn (8.8%) has already slipped
into NPA.
q We have slightly tweaked our earning estimate for FY11E & FY12E. We
are upgrading the stock to BUY from ACCUMULATE earlier with the revised TP of Rs.1450 (Rs.1400 earlier) on back of recent price correction. At
target price, stock would trade at 2.0x its FY12E adjusted book value.
PNB has corrected sharply since its Q2FY11 results; we upgrade
the stock to BUY as correction is overdone in our view
PNB has corrected sharply since its Q2FY11 results due to spike in slippage (average
run rate in last four quarters has been ~10 bn) and arrest of its senior banker by CBI
in loan scam along with rise in concerns over microfinance & 2G/3G lending by the
banks (especially PSU banks). We believe, the correction in stock price is overdone
and hence we upgrade the stock to BUY from ACCUMULATE earlier with ~14%
upside from the current level.
We believe, recent arrest of a senior banker (Mr. Venkoba Gujjal, DGM PNB) by CBI
in housing loan scam is an isolated incident and has to do nothing with the overall
asset quality of the bank. We like PNB due to its positioning strategy of a dominant
player in the Indo-Gangetic belt. It is also better placed than its peers in rising interest rate environment with its strong liability franchise (CASA mix at ~41%) along
with lower dependence on wholesale deposits.
Robust loan growth (27.6% in Q2FY11); likely to moderate going
forward as C/D ratio is near its peak
Gross advances grew 27.6% YoY (6.0% QoQ) to Rs.2087.6 bn in Q2FY11 from
Rs.1635.6 bn in Q2FY10 mainly driven by MSME manufacturing, retail, large Industry and agriculture & allied segments.
n MSME manufacturing loan book grew 45.9% YoY to 234.7 bn at the end of
Q2FY11 from Rs.160.9 bn at the end of Q2FY10.
n Retail book grew 32.7% YoY to Rs.226.0 bn at the end of Q2FY11 from Rs.170.3
bn at the end of Q2FY10.
n Large Industry grew 23.6% YoY to Rs.726.6 bn at the end of Q2FY11 from
Rs.587.9 bn at the end of Q2FY10.
n Agriculture loan increased 29.0% to Rs.322.7 bn at the end of Q2FY11 from
Rs.250.1 bn at the end of Q2FY10.
However, total deposits rose moderately at 18.4% YoY (7.1% QoQ) to Rs.2733.9 bn
at the end of Q2FY11 from Rs.2308.2 bn at the end of Q2FY10. CASA mix improved
from 38.5% at the end of Q2FY10 to 40.6% at the end of Q2FY11.
CASA mix improved due to healthy growth in both saving account deposits (25.1%
YoY) and current account deposits (24.3% YoY) during Q2FY11 as against 14.4%
growth in term deposits during the same period.
We believe loan growth is likely to moderate, going forward, as bank has to mobilize more term deposits to finance loan growth as there is little scope to further increase the C/D ratio (increased from 70.9% at the end of Q2FY10 to 76.4% at the
end of Q2FY11). Future loan growth has be financed from deposit mobilisation
which could take place wtih rise in interest rate offered on deposits.
Reported NIM for H1FY11 is ~4.0%, higher than its peers; likely to
stabilize ~3.8% during FY11-12E, in our view
Reported NIM for H1FY11 is ~4.0%, again on the higher side vis-à-vis its peers. This
has come on the back of sequential improvement in yield on advances (31 bps QoQ)
and containment of cost of deposits (decline of 6 bps QoQ).
NIM has improved both YoY as well as QoQ to 4.06% in Q2FY11 from 3.50% in
Q2FY10 and 3.94% in Q1FY11 driven by better liability management as CASA mix
improved from 38.5% at the end of Q2FY10 to 40.6% at the end of Q2FY11, increase in PLR & base rate during Q2FY11 along with rising C/D ratio (76.4% at the
end of Q2FY11 vs. 70.9% at the end of Q2FY10).
During Q2FY11, yield on advances improved by 31 bps (QoQ) whereas cost of deposits declined by 6 bps (QoQ). We believe with its C/D ratio already at peak along
with low investment yields, its NIM is likely to contract by ~20 bps. We expect it to
stabilize around 3.8% during FY11-12E; still it would be better than many of its
peers, in our view.
Spike in slippage during Q2FY11; however it was down from
Q1FY11.
Slippage was on higher side at Rs.9.11 bn (annualized slippage ratio: 1.95%) during
Q2FY11; however it was down from Rs.12.16 bn (annualized slippage ratio: 2.61%)
during Q1FY11. Out of this Rs.9.11 bn, Rs.2.2 bn was on account of one large real
estate account while Rs.1.6 bn came from restructured book.
We have to watchful about its slippage, going forward. The average run rate on
delinquencies for last 4 quarter has been ~Rs.10 bn implying slippage ratio greater
than 2.0% (annualized). Another important thing to watch out would be its cumulative restructured book which stands at Rs.135.5 bn (6.5% of advances). Out of this
Rs.11.95 bn (8.8%) has already slipped into NPA. During Q2FY11, Rs.5.39 bn of
loans were restructured.
Gross NPA and net NPA deteriorated both YoY as well as QoQ - gross NPA rose
53.7% YoY (11.4% QoQ); similarly net NPA rose 512.7% YoY and 11.1% QoQ.
In percentage terms, its gross NPA increased to 1.91% at the end of Q2FY11 from
1.58% at the end of Q2FY10 and 1.82% at the end of Q1FY11. During the same
period, net NPA rose to 0.69% at the end of Q2FY11 from 0.14% and 0.66%, respectively.
Valuation & recommendation
We have slightly tweaked our earning estimates for FY11E and FY12E and now expect net profit for FY11E and FY12E to be Rs.44.94 bn and 53.73 bn, respectively.
This would result into an EPS of Rs.142.5 and Rs.170.4 for FY11E and FY12E, respectively. The ABV is forecast at Rs.581.7 and Rs.721.2 respectively for FY11E & FY12E.
At the current market price of Rs.1274, the stock is trading at 7.5x its FY12E earnings and 1.8x its FY12E ABV. We like the bank's strategy of positioning itself as a
dominant player in the Indo-Gangetic belt. It is also better placed than its peers in
rising interest rate environment with its strong liability franchise (CASA mix at
~41%) along with lower dependence on wholesale deposits.
We are upgrading the stock to BUY from ACCUMULATE earlier with the revised TP
of Rs.1450 (Rs.1400 earlier) on back of recent price correction. At target price, stock
would trade at 2.0x its FY12E adjusted book value.
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