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Punjab National Bank (PNB)
Banks/Financial Institutions
Margins remain a key focus. The PNB management reiterated its strategy to be highly
focused on margins, with a proper mix of credit growth and sustaining asset quality.
While the bank has seen relatively higher level of slippages, we expect that to moderate
in FY2012E, providing immense buffer to sustain earnings growth at 20% levels. For
the near term, we expect margin trend to remain strong and asset quality may not
worsen from current levels. Stock trades at 1.5XFY2012E PBR for about 23% RoEs.
Maintain BUY.
Margins remain the key focus area, followed by diversified growth
The management highlighted its two key priorities—sustaining higher margins and diversified
credit growth. While the bank is not losing focus on deposits, including CASA deposits or asset
quality, prime focus remains on margins and loan growth—which should result in strong return
ratios at about 1.2-1.3% RoA and about 23% RoEs.
While margins may moderate from current levels, we believe that it would still remain much above
the management guided margins of 3.5%. The medium-term target on margins for PNB remains
at 3.5%, much lower than the current quarterly run rate of over 4%. The recent moves by the PNB
management clearly highlight their intent on maintaining strong margins—(1) the bank has hiked
its PLR by 125 bps to 13% and the base rate to 9.5% from 8.0% earlier over the past 6 months,
(2) was one the fastest to respond to the RBI’s monetary policies and (3) a strong CASA ratio of
41% will cushion the pressure on NIMs.
PNB’s margins have expanded by about 50 bps during FY2011E and we expect it to moderate by
25 bps (KS calc.) in FY2012E. On the near-term basis, we expect 4Q margins to moderate by about
10 bps qoq, in line with our earlier expectations.
Credit growth remains robust; getting diversified
As of December 2010, PNB has grown its loan book by 30% yoy and we expect about 25-26%
loan growth for FY2011E. The management intends to grow loan book by 22-23% over the next
couple of years. The recent trend on credit shows that growth is getting diversified. Also, during
the process, the management is focused on reducing the balance sheet risks and has consistently
brought down the share of commercial real estate from about 9% as of FY2009 to less than 5%
as of December 2010, which is also largely through lease rentals. We expect credit to grow at a
CAGR of 18% over the next couple of years for PNB.
Management working on 1.2-1.3% RoA and 22-23% RoE targets
While there might be some negative headwinds to margins, retirement benefits and asset
quality, the management remains confident of delivering a 1.2-1.3% RoA and 22-23% RoE
and is focused on these ratios. Thus, while there could be near-term earnings volatility,
medium- to long-term profitability remains strong and intact.
Slippages have remained high; unlikely to get worse
Over the past 18 months, the management has put excessive focus on cleaning up its
balance sheet—employees have been advised about recognizing all NPLs, including those at
the margin, which hitherto could have been classified as standard. Progressively it has
started to use system-based recognition rather than manual recognition and will completely
graduate to system recognition by FY2011E. During the past five quarters, NPLs/slippages
also increased due to few one-offs—recognition of agri NPL (pertaining to agri waiver),
restructured loans falling in the NPL category and some one-off big loans in the construction
segment becoming NPLs.
While the management targets gross NPLs near 2% over the medium term, we expect the
overall slippages trend to get better in FY2012E over FY2011E, on the back of strong
economic outlook and absence of the one-off NPLs which happened in FY2011E. We expect
slippages to decline to 1.8% in FY2012E from 2.2% in FY2011E. Similarly, loan loss
provisions will decline to 80 bps in FY2012E over 120 bps in FY2011E.
FY2011E also witnessed high employee expenses; will moderate going forward
Employee expenses (including higher pensions and gratuity) are likely to expand by 45% yoy
in FY2011E. This is due to higher pension expenses, on account of the second pension
option given to all employees. The estimated pension liability was Rs36 bn which is likely to
be spread over the next five years. PNB was expected to provide about Rs7.2 bn for pensions
and Rs5 bn for gratuity in FY2011E—an additional expense of about Rs12 bn in FY2011E
which will fall to about Rs7 bn from FY2012E. Thus the absolute employee expense growth
is likely to remain in single digits over the next couple of years.
On the back of the recent RBI circular, PNB may have to make additional provisions for
retired employees in FY2011E, but has the cushion to defer the gratuity provisions for five
years and thus does not expect any material change to its 4QFY11E earnings.
Strong operating metrics while valuations remain attractive; maintain BUY
We remain comfortable with the underlying metrics of PNB and believe that our earnings
estimates broadly capture the underlying pressure on NIMs and asset quality. Valuations are
attractive at 1.5X FY2012E PBR and 7X PER delivering healthy RoEs of over 22% and 20%
CAGR in earnings. We believe that the recent underperformance to peers owing to
somewhat weaker asset quality is completely unwarranted. Maintain BUY; it remains our
preferred stock among banks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank (PNB)
Banks/Financial Institutions
Margins remain a key focus. The PNB management reiterated its strategy to be highly
focused on margins, with a proper mix of credit growth and sustaining asset quality.
While the bank has seen relatively higher level of slippages, we expect that to moderate
in FY2012E, providing immense buffer to sustain earnings growth at 20% levels. For
the near term, we expect margin trend to remain strong and asset quality may not
worsen from current levels. Stock trades at 1.5XFY2012E PBR for about 23% RoEs.
Maintain BUY.
Margins remain the key focus area, followed by diversified growth
The management highlighted its two key priorities—sustaining higher margins and diversified
credit growth. While the bank is not losing focus on deposits, including CASA deposits or asset
quality, prime focus remains on margins and loan growth—which should result in strong return
ratios at about 1.2-1.3% RoA and about 23% RoEs.
While margins may moderate from current levels, we believe that it would still remain much above
the management guided margins of 3.5%. The medium-term target on margins for PNB remains
at 3.5%, much lower than the current quarterly run rate of over 4%. The recent moves by the PNB
management clearly highlight their intent on maintaining strong margins—(1) the bank has hiked
its PLR by 125 bps to 13% and the base rate to 9.5% from 8.0% earlier over the past 6 months,
(2) was one the fastest to respond to the RBI’s monetary policies and (3) a strong CASA ratio of
41% will cushion the pressure on NIMs.
PNB’s margins have expanded by about 50 bps during FY2011E and we expect it to moderate by
25 bps (KS calc.) in FY2012E. On the near-term basis, we expect 4Q margins to moderate by about
10 bps qoq, in line with our earlier expectations.
Credit growth remains robust; getting diversified
As of December 2010, PNB has grown its loan book by 30% yoy and we expect about 25-26%
loan growth for FY2011E. The management intends to grow loan book by 22-23% over the next
couple of years. The recent trend on credit shows that growth is getting diversified. Also, during
the process, the management is focused on reducing the balance sheet risks and has consistently
brought down the share of commercial real estate from about 9% as of FY2009 to less than 5%
as of December 2010, which is also largely through lease rentals. We expect credit to grow at a
CAGR of 18% over the next couple of years for PNB.
Management working on 1.2-1.3% RoA and 22-23% RoE targets
While there might be some negative headwinds to margins, retirement benefits and asset
quality, the management remains confident of delivering a 1.2-1.3% RoA and 22-23% RoE
and is focused on these ratios. Thus, while there could be near-term earnings volatility,
medium- to long-term profitability remains strong and intact.
Slippages have remained high; unlikely to get worse
Over the past 18 months, the management has put excessive focus on cleaning up its
balance sheet—employees have been advised about recognizing all NPLs, including those at
the margin, which hitherto could have been classified as standard. Progressively it has
started to use system-based recognition rather than manual recognition and will completely
graduate to system recognition by FY2011E. During the past five quarters, NPLs/slippages
also increased due to few one-offs—recognition of agri NPL (pertaining to agri waiver),
restructured loans falling in the NPL category and some one-off big loans in the construction
segment becoming NPLs.
While the management targets gross NPLs near 2% over the medium term, we expect the
overall slippages trend to get better in FY2012E over FY2011E, on the back of strong
economic outlook and absence of the one-off NPLs which happened in FY2011E. We expect
slippages to decline to 1.8% in FY2012E from 2.2% in FY2011E. Similarly, loan loss
provisions will decline to 80 bps in FY2012E over 120 bps in FY2011E.
FY2011E also witnessed high employee expenses; will moderate going forward
Employee expenses (including higher pensions and gratuity) are likely to expand by 45% yoy
in FY2011E. This is due to higher pension expenses, on account of the second pension
option given to all employees. The estimated pension liability was Rs36 bn which is likely to
be spread over the next five years. PNB was expected to provide about Rs7.2 bn for pensions
and Rs5 bn for gratuity in FY2011E—an additional expense of about Rs12 bn in FY2011E
which will fall to about Rs7 bn from FY2012E. Thus the absolute employee expense growth
is likely to remain in single digits over the next couple of years.
On the back of the recent RBI circular, PNB may have to make additional provisions for
retired employees in FY2011E, but has the cushion to defer the gratuity provisions for five
years and thus does not expect any material change to its 4QFY11E earnings.
Strong operating metrics while valuations remain attractive; maintain BUY
We remain comfortable with the underlying metrics of PNB and believe that our earnings
estimates broadly capture the underlying pressure on NIMs and asset quality. Valuations are
attractive at 1.5X FY2012E PBR and 7X PER delivering healthy RoEs of over 22% and 20%
CAGR in earnings. We believe that the recent underperformance to peers owing to
somewhat weaker asset quality is completely unwarranted. Maintain BUY; it remains our
preferred stock among banks.
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