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Positive 1Q surprises include: PNB's largely stable NIMs qoq vs steep fall at peers; healthy
fee income growth; and higher provision coverage. The bank is slower than peers in moving
to system-based NPL recognition, which could remain a near-term overhang, but we expect
it to maintain superior RoAs. Buy.
1QFY12: ability to maintain margins qoq stood out; strong core earnings
PNB reported largely stable net interest margins (NIMs) qoq at 3.84% in 1QFY12. The cost
of deposits spiked 64bp qoq to about 6.3%, but this was largely offset by the yield on loans
rising 55bp to 11.4%. PNB’s ability to maintain high margins stands out relative to its peers,
which saw NIM declines of 50-60bp in the quarter (see Table 2). Its core fee income rose
about 27% yoy in 1Q. Management guides for NIMs of 3.5% in FY12 (and 3.96% in FY11).
Stable net NPLs qoq; risk of higher slippages in the near term
Slippages were 60bp of loans (on a one-year-lag basis) in 1QFY12 from 70bp in 4QFY11.
Gross NPLs rose by a net Rs5.1bn qoq, but net NPLs remained largely stable \
As a result, the provision coverage ratio rose to 74.3% at end-1Q from 73.2% the previous
quarter. During June 2011, PNB completed the transition of all accounts over the amount of
Rs1m to system-based NPL recognition. However, as PNB’s remaining accounts are moved to
this system, we think its slippages could rise in the near term. Further, the restructured loans
remained high at 5.6% of the loan book as of June 2011. Management maintained its guidance of
a gross NPL ratio of about 2% by March 2012 (2.0% as of June 2011).
Superior NIMs likely to help sustain higher RoAs, despite an increase in credit costs
For FY12, we assume a 30bp yoy decline in NIMs and stable provisions for bad loans. We expect
that margins will improve over FY13-FY14, but will likely be offset by an increase in credit costs.
On balance, we see average RoAs staying at the FY11 level of 1.3% over FY12-FY14, which
remains higher than at peers.
We keep earnings estimates largely unchanged, tweak up our TP and maintain Buy
We keep our FY12-FY14 earnings estimates largely unchanged and fine-tune our target price to
Rs1,369. Given our expectation that PNB will largely maintain superior NIMs to peers and,
therefore, a superior RoA over FY12-14, we reiterate our Buy recommendation. At our new target
price, the stock would trade at 1.8x FY12F book value and 8.2x FY12F earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Positive 1Q surprises include: PNB's largely stable NIMs qoq vs steep fall at peers; healthy
fee income growth; and higher provision coverage. The bank is slower than peers in moving
to system-based NPL recognition, which could remain a near-term overhang, but we expect
it to maintain superior RoAs. Buy.
1QFY12: ability to maintain margins qoq stood out; strong core earnings
PNB reported largely stable net interest margins (NIMs) qoq at 3.84% in 1QFY12. The cost
of deposits spiked 64bp qoq to about 6.3%, but this was largely offset by the yield on loans
rising 55bp to 11.4%. PNB’s ability to maintain high margins stands out relative to its peers,
which saw NIM declines of 50-60bp in the quarter (see Table 2). Its core fee income rose
about 27% yoy in 1Q. Management guides for NIMs of 3.5% in FY12 (and 3.96% in FY11).
Stable net NPLs qoq; risk of higher slippages in the near term
Slippages were 60bp of loans (on a one-year-lag basis) in 1QFY12 from 70bp in 4QFY11.
Gross NPLs rose by a net Rs5.1bn qoq, but net NPLs remained largely stable \
As a result, the provision coverage ratio rose to 74.3% at end-1Q from 73.2% the previous
quarter. During June 2011, PNB completed the transition of all accounts over the amount of
Rs1m to system-based NPL recognition. However, as PNB’s remaining accounts are moved to
this system, we think its slippages could rise in the near term. Further, the restructured loans
remained high at 5.6% of the loan book as of June 2011. Management maintained its guidance of
a gross NPL ratio of about 2% by March 2012 (2.0% as of June 2011).
Superior NIMs likely to help sustain higher RoAs, despite an increase in credit costs
For FY12, we assume a 30bp yoy decline in NIMs and stable provisions for bad loans. We expect
that margins will improve over FY13-FY14, but will likely be offset by an increase in credit costs.
On balance, we see average RoAs staying at the FY11 level of 1.3% over FY12-FY14, which
remains higher than at peers.
We keep earnings estimates largely unchanged, tweak up our TP and maintain Buy
We keep our FY12-FY14 earnings estimates largely unchanged and fine-tune our target price to
Rs1,369. Given our expectation that PNB will largely maintain superior NIMs to peers and,
therefore, a superior RoA over FY12-14, we reiterate our Buy recommendation. At our new target
price, the stock would trade at 1.8x FY12F book value and 8.2x FY12F earnings.
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