Punjab National Bank a market performer: IIFL

“In our recent interaction, PNB reiterated to grow its advances marginally ahead of the system. As compared to 9%+ qoq expansion witnessed in the previous three years, the bank expects lower sequential loan growth in Q4 FY12 at 7-7.5%. The large corp book is expected to grow at steady pace after having declined in Q3 FY12 due to deliberate shedding of short term loans. International loans and vehicle loan portfolio would continue to grow strongly. Bank intends to grow MSME book at healthy pace by focusing on quality and pricing risks adequately via higher yields. We estimate 20% loan CAGR for PNB over FY12-14. Increasing rate differential between savings deposits and retail TDs has driven sharp CASA correction. Recent initiatives towards mobilizing CASA balances are expected to contain the slide.”

“Bank’s NIM is set for contraction over Q4 FY12–Q2 FY13 driven by lowered CASA, higher rates of bulk deposits and quicker repricing of advances (60% floating) in a rate-cut cycle. Aided by relatively strong fee growth and modest increase in employee cost, C/I ratio is expected to remain stable. PNB expects pressure on credit book to persist in the near term with slippages to remain above Rs10bn/quarter. Restructuring remains lofty with Air India (~Rs20bn) and Rajasthan SEB (~Rs15bn) restructured in Q4 FY12 and exposures to UP SEB (~Rs15bn) and HCC to be restructured in Q1 FY13. Margin correction coupled with high provisioning would retain pressure on RoA. Capital infusion of ~Rs28.5bn by Government and LIC before March-end is estimated to shore-up Tier-1 capital by ~90bps. Near-term RoA concerns would preclude upside in stock. Maintain PNB as MP.”

“PNB’s credit growth is expected to remain above the banking system at 18% in FY12; witnessing 20% CAGR over FY11-14. Even in the previous five years, the bank was more aggressive than the system having clocked a robust 27% CAGR. However, sequentially, the annual credit growth run-rate is estimated to moderate from 21% at the end of Q3 FY12. In the backdrop of severe moderation in economic activity over the past four quarters and capex freeze, PNB expects the fiscal-end seasonality in credit to not play out fully in FY12. As compared to 9%+ qoq expansion in advances witnessed in the previous three years, the bank expects sequential growth in Q4 FY12 to be relatively lower at 7-7.5%.”

“Notwithstanding PNB’s stock underperformance over the past 3/6 months, the outlook still remains weak in the near term with limited upside likely. Near-term RoA headwinds would remain the key overhang on the bank’s valuation. Though the 1-year fwd P/adj.BV at 1.2x is below 5-year mean, on relative basis the valuation is above BOB which is expected to continue its resilient performance. We maintain Market Performer rating on PNB and 9-month price target of Rs 1016,” says IIFL research report.

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