PNB results in line with estimates; stock value buy: Angel

Vaibhav Agrawal of Angel Broking feels, Punjab National Bank (PNB), just like other public sector undertakings have reported an increase in gross and net NPAs. However, he is not worried about the rise in net NPAs, taking into consideration the bad economic environment. Going into the next quarter, Agrawal want to be cautious on banks such as PNB because there are no catalysts for improving the asset quality.

Talking about the PNB stock, Agrawal told CNBC-TV18, "These levels are actually good to enter into the stock for a value investor but, you need patience of 18-24 months. In terms of levels clearly the stock has corrected so much and taken lot of the pain. It is a value buy, but the next 2-3 quarters look challenging." Here is the edited transcript of the interview on CNBC-TV18. Q: What are your first thoughts on Punjab National Bank (PNB) numbers?
A: In case of PNB, like a host of other public sector undertaking (PSU) banks, it is not a surprise that the gross and net NPAs have gone up. It was expected that all the macro indicators point towards that. I think the important number to look at is the net NPAs, over there as well there is an increase.
But, I do not think it is so alarming. Of course there is an increase and it is in line with the environment being bad. For the next quarter or so we remain cautious on banks such as PNB wherein there is no catalyst at all for asset quality to suddenly start improving. Also read: PNB Q1 net up 13% at Rs 1,246cr, misses forecast Q: Just wanted to concentrate with regards to a couple of key points in the asset quality, would you be watching out for recovery as a big aspect of what you would be looking out for in terms of commentary?
A: Very clearly because what we have seen in case of slippages for many PSU banks, they have been wildly volatile in the last quarter or so, even above 5-6% on an annualised basis. That indicates scope for large recoveries to come in and that is critical if earnings are to be maintained anywhere close to where they are right now.
Recoveries will definitely be important and at the same time this slippage of level is also an important number to look at.
_PAGEBREAK_ Q: Did you hear anything about potential upgrades of erstwhile restructured assets at PNB or will all that come only in subsequent quarters?
A: I think it's going to be an ongoing event like we have seen. It's very difficult to pinpoint in which quarter it will happen. We saw it in Indian Bank; in this quarter suddenly there was a huge upgrade. Even restructured accounts management indicated substantial upgrades. It could happen in PNB as well. I think we have to see what the management is guiding on this quarter to quarter. Q: What is your view on the stock itself at this point in time at Rs 750?
A: These levels are actually good to enter into the stock for a value investor but, you need patience of 18-24 months. In terms of levels clearly the stock has corrected so much and taken lot of the pain. It is factoring in bad news for years into the future. But, clearly that is excess. It is a value buy but the next 2-3 quarters look challenging. Q: In terms of commentary from the management restructuring as well as fresh slippages what would you assume would be a possibility on both of those?
A: Ultimately what is important is where they have to end up on their credit cost and that if they indicate will be in the range of 1-1.2% of advances. I think that will be decent enough but we have to wait for the commentary from the management on that. Q: PNB has been quite an underperformer in this year itself, how cautious would you be going forward in terms of their earnings and especially asset quality because there was an expectation that it might actually be better this time?
A: For the next few quarters, we are actually building in pretty cautious numbers. Even this quarter our bottomline number was lower than estimate. So on bottomline they have done better than what we had built in. We continue to build in cautious numbers. There is nothing in the environment to suggest that things should improve dramatically, so we will remain cautious. Q: But 3.34 as percentage of total assets, how much worse can it get?
A: As you pointed out Mr Kamath saying that a peak is difficult to identify over here.
_PAGEBREAK_ Q: A couple of other banks like Central Bank which posted a loss the previous quarter or maybe even Bank of India where NIMs have been on an upward trajectory, what would you expect from a couple of these?
A: It’s hazardous to put out estimates right now. They gave 10% annualized slippage rate in the last quarter and from those levels we would expect an improvement. But the point is that the stock is going to remain an underperformer. We have a sell on that stock and in absolute terms the performance is likely to remain weak for the quarters to come. Q: Has Bank of India turned the corner?
A: In case of Bank of India on low base, earnings growth should be quite good. So we are expecting good earnings growth but valuations are factoring in a lot of that turnaround already. We are not very positive on the stock as such. Union Bank of India would be an interesting one to look at. The stock has taken it on its chin, in the last month or so it’s been a huge underperformer. This is the first quarter of the new CMD being in the bank, so probably the markets are also worried about this set of numbers. It probably involves some cleaning up etc, so possibly a bad sort of numbers likely from Union Bank. But at Rs 165-170 level, it would be a good buy. It's trading cheaper than some of the smaller PSU banks as well now.