Motilal Oswal is bullish on Punjab National Bank has recommended buy rating on the stock with a target price of Rs 250 in its research report dated November 03, 2017.
Motilal Oswal's research report on Punjab National Bank
PNB reported PPoP of INR32.8b (+2%/-1% QoQ/YoY; 10% beat). Lower-than-estimated non-core income was compensated by a 10% beat on operating expenses. Provisions of INR24.4b (in-line) led to PAT of INR5.6b (+63% QoQ on a low base), which beat estimate by 35%. Slippages moderated to INR34.6b (3.5% annualized), of which 30% is fresh debit to existing NPA v/s 10% for 1QFY18. Total net stressed loans (including net NPA and standard restructured assets) stood at 11% of total advances (11.4% in 1Q). Domestic NIM improved 8bp QoQ to 2.64%, with a 4bp decline in cost of funds and a 3bp increase in yield on advances. Loan book grew 3%/4% QoQ/YoY, impacted by muted growth in the corporate segment. Retail loans grew 5%/16% QoQ/YoY, driven by 34% YoY growth in housing loans. Other highlights: a) CASA deposits grew 19% YoY, driven by 21% YoY growth in SA deposits; average CASA ratio stood at ~44.4% v/s 44% a quarter ago and 42.1% a year ago. b) Fee income growth was strong at 15% YoY, helped by better retail fees. c) CET1 ratio of ~7.67% remains a concern – management is looking to raise capital in FY18.
Significant stress is being recognized over the last several quarters, and now resolution (especially under IBC) in key sectors like steel, power, construction and roads remains a key for upgrades and recoveries. Investments in key ventures add ~23% to overall market cap. We have increased FY18/FY19 PAT estimates by 46%/23% to factor in improvement in margins and controlled opex. Due to low RoAs (~0.25%), even a 10bp change in the NIM (30%) and credit cost (20%) can impact profitability significantly. We maintain Buy with an SOTP-based target price of INR250 (v/s our earlier TP of INR184, as we increase core bank valuation multiple to 1x Sept BV from 0.7x June 19 BV in view of improved profitability).
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