Punjab National Bank gets ‘buy’ tag from Edelweiss, TP down to Rs 236 from Rs 256

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Published: February 12, 2018 3:49:00 AM

Fresh slippages curtailed even as business momentum improved; FY18/19e EPS cut 40/8% due to Q3 showing; TP down to Rs 236 from Rs 256.

Punjab National Bank, Punjab National Bank gets buy, PNB buy tag, Punjab National Bank buy tag, EdelweissPNB’s growth is gaining momentum.

Punjab National Bank’s (PNB’s) Q3FY18 PAT slumped to Rs 2.3 bn (in fact, at PBT level, the bank reported loss) due to investment depreciation and softer core. Key highlights: (i) fresh slippages were restricted to <Rs 40 bn, which along with aggressive write-offs kept GNPLs at Rs 575 bn (flat q-o-q); and (ii) from business perspective, loan growth picked up substantially (up 10% q-o-q), but weak domestic NIMs (sub-2.6%) restricted NII to sub-Rs 40 bn (flat q-o-q). While deterioration in the bank’s health has been stemmed to some extent, stress resolution is key. In the backdrop of likely asset quality recovery with recognition being largely done & resolution also kick-starting, valuation of <0.7x FY19e P/BV (core banking business) renders favourable risk-reward. Maintain Buy.

Fresh slippages curtailed; recovery key monitorable

Fresh slippages were restricted to <Rs 40 bn (<4%); this is encouraging as it marked the third consecutive quarter of stable asset quality. This, along with higher write-offs (Rs 23.5 bn versus past eight quarters’ run rate of <Rs 20 bn), led to GNPLs of Rs 575 bn (12.1%, partially also a derivative of higher base on stupendous growth). Overall stress pool continued to be elevated at >14%, which along with ageing provisions and resolutions in large accounts is likely to keep credit cost high.

Business momentum improves; sustenance pivotal

Q3FY18 was characterised by robust momentum in loan growth — up > 17% y-o-y/10% q-o-q — with > 20% rise in domestic book offsetting 9% dip in overseas book. The surge was driven by retail (~22%), agri (16%) and MSME (12%) loans. Having said that, sustained pressure on NIMs (domestic NIM down to sub-2.6% level) restricted NII growth. We believe gaining revenue traction is critical for RoA improvement.

Outlook and valuations: Capital an added succour; maintain ‘BUY’

PNB’s growth is gaining momentum. This, along with asset quality tailwinds, will ensure advancement of normalisation year. While the government’s infusion in first tranche has been lower than we had anticipated, we envisage the bank to be a big beneficiary in the second tranche. Following higher investment depreciation and elevated credit cost, we prune FY18e/FY19e earnings by >40/8%. We maintain ‘BUY/SP’ with target price of Rs 236 (assigning similar multiple of 1x FY20e P/B on diluted book; earlier Rs 256). Key risk: Consolidation in PSU banking space will be an overhang for leading PSBs including PNB.

Investment theme

PNB’s growth is gaining momentum. This, along with asset quality tailwinds, will ensure advancement of normalisation year. While the government’s infusion in first tranche has been lower than we had anticipated, we envisage the bank to be a big beneficiary in the second tranche, which will help sustain business momentum. In the backdrop of likely asset quality recovery with recognition being largely done & resolution also kick-starting, valuation of <0.7x FY20e P/BV (core banking business) renders favourable risk-reward. Maintain Buy.

Key risks

Any downturn in agricultural growth will hurt the bank’s asset quality as it has been growing in this area. Given the historical pace of expansion, delinquencies can rise faster than expected. Higher than expected slippages from restructured assets can risk asset quality. Management is a key factor for the bank to sustain premium valuations (among public sector banks). The key risk to our recommendation is replacement of the present management by a weaker business manager.

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