Edelweiss on PNB: Maintain ‘buy’ with target price of Rs 180

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Published: August 4, 2017 4:30:13 AM

Punjab National Bank’s (PNB) Q1FY18 PAT at Rs 3.4 billion surpassed estimate due to higher treasury income.

On the positive side, PNB’s liability franchise continued to strengthen with CASA jumping >23% y-o-y, propelling CASA ratio to 44.0%, ~41.6% in FY16. (Image: PTI)

Punjab National Bank’s (PNB) Q1FY18 PAT at Rs 3.4 billion surpassed estimate due to higher treasury income. However, from a business perspective, things were no different from previous quarters, reflected in the sustenance of muted revenue momentum, a derivative of languishing loan growth, 8th quarter of sub-10% growth and weaker NIMs, domestic NIMs down to 2.56% from >3.0% in FY16. Lower OPEX and higher treasury supported earnings. While slippages at Rs 66 billion continued to be elevated, trend therein indicates that large part of recognition has been completed. However, recovery trend has been slower than we would prefer and is a key monitorable.

On the positive side, PNB’s liability franchise continued to strengthen with CASA jumping >23% y-o-y, propelling CASA ratio to 44.0%, ~41.6% in FY16. Though weak RoE remains a concern, valuation of <0.8x FY19E P/BV factoring in potential stress and strategic stakes in subsidiaries renders favourable risk-reward. Maintain ‘buy’ with TP of Rs 180. However, consolidation in PSU banking space, given the uncertainty, execution risk, pricing, etc, is key risk to our call.

Slippages were elevated at >6%, Rs 66 billion, of which Rs 33 billion was from the corporate/mid-corporate segment and ~Rs 26 billion from small-ticket loans, the impact of farm loan waiver plus demonetisation. Overall stress pool (5:25/SDR/S4A/SRs/Restructured book/NNPLs) continued to be elevated at >15%, which along with ageing provisions and resolutions in large accounts is likely to keep credit cost high, in our view.

Revenue momentum was soft on below-trend NII, a derivative of muted loan growth and weak NIMs. Loan growth was up ~2.1% y-o-y, with 6.6% rise in a domestic book, while rundown in overseas book continued. Meanwhile, retail loans grew >15%, in line with guidance. We believe, gaining revenue traction is critical for RoA improvement. We believe PNB faces relatively higher dilution risk at weaker multiples. However, government’s capital support assurance to leading PSU banks will cushion the impact in case of PNB.

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