>PUNJAB NATIONAL BANK

Recommendation: Buy
Price target: Rs920
Current market price: Rs715

Price target revised to Rs920

Result highlights

• Punjab National Bank (PNB)?s Q1FY2013 net earnings grew 12.7% year on year (YoY; Rs1,246 crore) against our estimate of Rs1,302 crore. While the growth in net interest income (NII) was better than expectation, the sharp rise in provisions contained the growth in profits.
• Led by a 10 basis point quarter on quarter (QoQ) increase in net interest margin (NIM; 3.6% vs 3.5% in Q4FY2013) the NII increased by 18.6% YoY. The QoQ expansion in investment yields and advances yields boosted the NIM.
• The business growth was steady as advances grew 21.2% YoY while deposits grew 18.9% YoY. However, the current account savings account (CASA) ratio declined to 34.6% from 35.3% in Q4FY2012. 
• The non-interest income grew 7.6% YoY, though the core fee income grew by 18.6% YoY. The treasury profit was Rs88 crore vs Rs48 crore in Q4FY2012. The employee expenses increased 41% QoQ due to increased provision for employee benefits (switched to quarterly actuarial valuation from annually done earlier).
• A sharp rise in slippages (Rs2,770 crore) overshadowed the pick-up in recoveries, hence leading to an increase in non-performing assets (NPAs; gross NPAs at 3.34% and net NPAs at 1.68%). The bank also restructured Rs1,239 crore of advances, thereby increasing the restructured book to 8.7% of the advances. 

Valuation
PNB?s Q1FY2013 results reflect the mounting pressure on asset quality as the economy slows down. We therefore raise the provision estimates and revise the earnings estimates downwards by 5% for FY2013 and 3.5% for FY2014. Hence our target price gets revised to Rs920 (1x FY2014 adjusted book value [BV]). The bank is likely to maintain its return on equity (RoE) of 17% and return on asset (RoA) of 1% and is trading at 0.7x FY2014 adjusted BV. We retain our Buy rating on the stock.

RISH TRADER