Punjab National Bank (PNB)TP: INR950 Buy :: Motilal Oswal

Asset quality deteriorates; asset-liability well-matched
Highlights of FY12 Annual Report
 Though growth in overall industrial exposure moderated, funded exposure growth
remained high in the Power and NBFC segments. These two segments constituted
over 25% of incremental funded exposure and 15% of overall funded exposure.
 Net slippages increased from 1.5% in FY11 to 1.8%. Outstanding restructured loans
increased to 7.9% (of which 3% relate to state government entities) v/s 4.2% in FY11.
 Discounting factor for pension liability increased to 8.8% and is in line with 8.7-9% for
peers. However, salary escalation assumption at 5% is higher than peers’ 4%.
 Healthy core operating performance would enable better absorption of credit cost.
Expect RoA of 1.1% and RoE of ~19% in FY13/14. Maintain Buy.

��


Strong growth in exposure to Power and NBFC segments: The funded exposure
details of Punjab National Bank (PNB) reveal highly concentrated growth in the
Power (including electricity - up 28%) and NBFC (up 93%) segments. Growth in
other industrial segments moderated/declined, and these two segments
constituted over 25% of incremental funded exposure and 15% of overall funded
exposure. Since FY08, funded exposure to the Power segment has increased
from 4.2% to 9.8%. Funded exposure to Textiles (down 32%) and Gems & Jewelry
(down 45%) declined, while exposure to Commercial Real Estate was stable.
Exposure to 100%+ risk weight assets (RWAs) increased to 11% v/s 6.9% in FY11.
Growth in overall RWAs was 17% v/s 21%+ growth in loans and balance sheet.
Net slippages at 1.8%; higher restructuring led by state government entities:
Net slippage increased significantly from 1.5% in FY11 to 1.8%, led by sharp rise
in slippages in 2HFY12, though recoveries and upgradations improved (INR22b
v/s INR15.8b in FY11). Restructuring relating to some large-ticket government
entity accounts led to sharp increase in outstanding restructured loans to 7.9%
(of which 3% relate to state government entities) v/s 4.2% in FY11. During the
year, PNB restructured loans of INR21b under the CDR (corporate debt
restructuring) mechanism, on which it took a sacrifice of INR2.9b (14% of loans
restructured under CDR). GNPAs increased across segments, with sharp increases
in Services (3.5% v/s 1.4% in FY11) and Agriculture (5% v/s 3.6% in FY11).
Other highlights: (1) Employee benefit assumption largely in line with peers,
with discount rate at 8.8% v/s 8.7-9% for peers and salary escalation at 5% v/s 4%
for peers, (2) Concentration of top-20 deposit accounts up from 4.9% to 7.9%;
domestic CASA ratio at 36% (v/s 39% in FY11), (3) Well-matched asset-liability –
39% of deposits and 35% of loans maturing within a year, (4) Proportion of
secured loans up from 87.6% in FY11 to 91.6%, (5) Core tier-I ratio stood at 8.6%.
Trades at 0.6x FY14E BV, with RoE of ~19%; maintain Buy: In the current
macroeconomic environment, higher upgradations and recoveries would be
the key for asset quality. Healthy core operating performance would enable
better absorption of higher credit cost. We expect RoA to remain healthy at
~1.1% and RoE at ~19% in FY13/14, led by superior margins and fee income growth.