Monday, July 30, 2012


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. 
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.