we believe asset quality trajectory would offer tactical opportunities into PSUs.
How does the valuation stack up for large PSU banks? We have seen tight co-movement between valuation of PSU banks and their incremental impairment. Within our coverage, SBI and BOB are yet to report a meaningful turn in their asset impairment trends, and are relatively richly priced. On the other hand, for PNB the turn in NPL (non-performing loan) cycle is more visible while valuation comfort is much bigger. We upgrade PNB to Buy with a target price of R625. We also upgrade both SBI and BOB to Neutral from Reduce, but we would wait for more asset quality data points on their mid-corporate loan book before turning more positive.
Key risks to our thesis:
*Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.
*Low core equity ratios make PSUs dependent perennially on government for capital infusion.
*Increasing trends on opex ratios—with any increase in pension and wage revision provisioning, in the absence of higher growth, the opex ratios are likely to trend higher for PSUs.
*Ceding market share in CASA deposits and retail assets—with private sector banks gaining incremental share of CASA (current account, savings account) and retail assets like mortgage; PSU banks would continuously feel some pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchisebut in the longer term they are likely to see some return erosion on account of these factors.
Punjab National Bank
We upgrade PNB with a revised target price. While we think immediate relief in impairment trends is not yet visible for PSU banks, we see improvement in underlying operating margins for loan-intensive corporate, particularly in the export-driven sectors. We expect this, along with potentially a benign macro environment, to drive strong recoveries going into FY15F.We revise our H2FY14F earnings by 3% on marginally lower LLPs (loan loss provisioning) while building in capital infusion announced by GoI.
While delinquency trends have improved for Punjab National Bank , recovery has been much stronger. PNB has shown improvement in GNPL (gross NPL) accretion across