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Punjab National Bank
Asset quality concerns overdone; initiate with OUTPERFORM
We initiate with OUTPERFORM and price target of
Rs1,410 based on target P/BV of 1.9x FY12E.
PNB has reported high slippages in the past four
quarters. We believe slippages have peaked as the
restructured portfolio has seasoned – slippages to fall to
1.4% in FY12E, lower than 2.4% in 9M FY11.
PNB is the only bank that is in the advantageous
position to show a qoq decline in pension/gratuity
expenses in 4Q FY11 as it carries substantial excess
gratuity provisions.
High CASA and higher-than-sector RoA and RoE justify
PNB’s premium to other state banks.
Slippages will ease in our view – PNB has
underperformed the Bankex over the past one year as it
reported high slippages over 3Q FY10-3Q FY11. Slippage
for 9M FY11 at 2.4% is higher than the sector average of
2.1%. We believe asset quality concerns are overdone as
the restructured portfolio has seasoned. We expect
slippages to ease to 1.4% of lagged loans in FY12E.
Strong earnings outlook – We expect PNB to grow
earnings by 20% over FY11-13E. Rising qoq pension costs
is a key risk to earnings for state-owned banks in 4Q FY11.
Not so for PNB, as it has excess gratuity provisions. If the
bank chooses to reverse the entire surplus in gratuity
provisions, pension + gratuity costs can actually decline qoq
for PNB against a rising trend for the rest of the sector.
Warrants a re-rating – We believe PNB deserves to trade
higher than its current multiples because of its higher-thansector
RoA, RoE and CASA ratio. PNB has the fourth
highest CASA among Indian banks, a key positive in the
current rising rate environment. The current chairman, who
will be with the bank until 2014, has substantially improved
financial disclosures. PNB is the only bank to give granular
details on bad loans and sensitive sector exposures at
analyst meets.
Key risks – Deregulation of the savings rate, continued
slippages in the restructured book and faster-than-expected
rise in rates are key downside risks.
Valuation
Our price target of Rs1,410 is based on 1.9x FY12E P/BV. We have used sustainable RoE of
18%, cost of equity of 13% and sustainable growth rate of 7%. Our target multiple is lower than
the high multiple of 2x. Over the past five years, the stock has traded at a low multiple of 0.6x and
an average multiple of 1.4x one-year forward P/BV. The stock currently trades at 1.6x FY12E
P/BV. The stock has underperformed the Bankex over the past one year and over the last three
months.
We believe the stock will likely trade higher for the following reasons: 1) PNB has the fourth
highest CASA ratio in the sector at 39%, which is of great advantage in a rising rate environment.
2) PNB has consistently delivered high RoAs of 1.3-1.4% over the past seven quarters. 3) The
current chairman will be with the bank until FY14, lending continuity to business strategy. 4)
PNB’s financial disclosures have improved significantly over the past one year, which will
strengthen investor confidence in the stock.
Company profile
Punjab National Bank is the second-largest public sector bank with government ownership of
58%. It has assets of over Rs800bn and operates through a network of 5,017 domestic branches,
and five overseas branches. The bank operates through subsidiaries in the UK, Bhutan and
Kazakhstan; a joint-venture in Nepal and representative offices in China, UAE and Norway. In
addition, the bank has non-banking subsidiaries including PNB Gilts and PNB Housing Finance,
as well as joint ventures in asset management, insurance broking and life insurance.
Management team
Chairman & Managing Director: K.R. Kamath
He was CMD of Allahabad Bank before being appointed CMD of PNB and has served with BoI as
Executive Director, and earlier with Corporation Bank as General Manager. He holds a Bachelor
of Commerce from the University of Mysore and is also a Certified Associate of Indian Institute of
Bankers.
Executive Director: M.V. Tanksale
Holds a B.Sc., M.A., AICWA, CS (Inter), CAIIB and has more than 34 years of experience in
banking in the field of Credit Monitoring, Planning, Research & Development, Third Party
Products and International Banking.
Executive Director: Rakesh Sethi
Joined PNB in January of this year from Andhra Bank where he served as a General Manager,
handling risk management, deposit planning, corporate communications, and government
business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank
Asset quality concerns overdone; initiate with OUTPERFORM
We initiate with OUTPERFORM and price target of
Rs1,410 based on target P/BV of 1.9x FY12E.
PNB has reported high slippages in the past four
quarters. We believe slippages have peaked as the
restructured portfolio has seasoned – slippages to fall to
1.4% in FY12E, lower than 2.4% in 9M FY11.
PNB is the only bank that is in the advantageous
position to show a qoq decline in pension/gratuity
expenses in 4Q FY11 as it carries substantial excess
gratuity provisions.
High CASA and higher-than-sector RoA and RoE justify
PNB’s premium to other state banks.
Slippages will ease in our view – PNB has
underperformed the Bankex over the past one year as it
reported high slippages over 3Q FY10-3Q FY11. Slippage
for 9M FY11 at 2.4% is higher than the sector average of
2.1%. We believe asset quality concerns are overdone as
the restructured portfolio has seasoned. We expect
slippages to ease to 1.4% of lagged loans in FY12E.
Strong earnings outlook – We expect PNB to grow
earnings by 20% over FY11-13E. Rising qoq pension costs
is a key risk to earnings for state-owned banks in 4Q FY11.
Not so for PNB, as it has excess gratuity provisions. If the
bank chooses to reverse the entire surplus in gratuity
provisions, pension + gratuity costs can actually decline qoq
for PNB against a rising trend for the rest of the sector.
Warrants a re-rating – We believe PNB deserves to trade
higher than its current multiples because of its higher-thansector
RoA, RoE and CASA ratio. PNB has the fourth
highest CASA among Indian banks, a key positive in the
current rising rate environment. The current chairman, who
will be with the bank until 2014, has substantially improved
financial disclosures. PNB is the only bank to give granular
details on bad loans and sensitive sector exposures at
analyst meets.
Key risks – Deregulation of the savings rate, continued
slippages in the restructured book and faster-than-expected
rise in rates are key downside risks.
Valuation
Our price target of Rs1,410 is based on 1.9x FY12E P/BV. We have used sustainable RoE of
18%, cost of equity of 13% and sustainable growth rate of 7%. Our target multiple is lower than
the high multiple of 2x. Over the past five years, the stock has traded at a low multiple of 0.6x and
an average multiple of 1.4x one-year forward P/BV. The stock currently trades at 1.6x FY12E
P/BV. The stock has underperformed the Bankex over the past one year and over the last three
months.
We believe the stock will likely trade higher for the following reasons: 1) PNB has the fourth
highest CASA ratio in the sector at 39%, which is of great advantage in a rising rate environment.
2) PNB has consistently delivered high RoAs of 1.3-1.4% over the past seven quarters. 3) The
current chairman will be with the bank until FY14, lending continuity to business strategy. 4)
PNB’s financial disclosures have improved significantly over the past one year, which will
strengthen investor confidence in the stock.
Company profile
Punjab National Bank is the second-largest public sector bank with government ownership of
58%. It has assets of over Rs800bn and operates through a network of 5,017 domestic branches,
and five overseas branches. The bank operates through subsidiaries in the UK, Bhutan and
Kazakhstan; a joint-venture in Nepal and representative offices in China, UAE and Norway. In
addition, the bank has non-banking subsidiaries including PNB Gilts and PNB Housing Finance,
as well as joint ventures in asset management, insurance broking and life insurance.
Management team
Chairman & Managing Director: K.R. Kamath
He was CMD of Allahabad Bank before being appointed CMD of PNB and has served with BoI as
Executive Director, and earlier with Corporation Bank as General Manager. He holds a Bachelor
of Commerce from the University of Mysore and is also a Certified Associate of Indian Institute of
Bankers.
Executive Director: M.V. Tanksale
Holds a B.Sc., M.A., AICWA, CS (Inter), CAIIB and has more than 34 years of experience in
banking in the field of Credit Monitoring, Planning, Research & Development, Third Party
Products and International Banking.
Executive Director: Rakesh Sethi
Joined PNB in January of this year from Andhra Bank where he served as a General Manager,
handling risk management, deposit planning, corporate communications, and government
business.
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