PSU banks came under pressure after Nirav Modi alleged scam came to light for a staggering Rs 11,300 crore. The alleged fraud highlights apparent flaws in PNB’s systems, controls as well as audit systems but it still remains a buy call along with SBI and Bank of Baroda, Nomura said in a report.
Nomura has been positive on PSU banks, as it believes the worst of the credit cycle is behind us, and core PPOP performance for some banks (especially BOB) will continue to improve.
The nature of the alleged scam reduces the confidence level in the bank, and PSUs in general, and this coupled with the RBI’s recent directive on doing away with previous dispensations may restrict a re-rating in the near term for PSU banks, it said in a report.
Nomura expects the operating performance of corporate banks to improve from 2HCY18, hence it maintains a positive view on SBI, and Bank of Baroda. PNB too remains a buy call with a target of Rs210 which translates into an upside of 81 percent.
Nomura ran a sensitivity analysis on PNB’s book valuations for each of Rs 70 billion, Rs 100 billion, and Rs 130 billion in write-offs. The global investment bank believes the impact on PNB’s book will come not only from the write-off from this account but also subsequent dilutions at low prices.
Nomura estimates PNB’s capital requirement will increase Rs 50-100 billion, and its adjusted FY20F book falls by 15-25 percent, assuming a write-off of Rs 70-130 billion relating to the Modi/Gitanjali outcome.
Even after the recent fall of over 20 percent in its share price, PNB trades at 0.7-0.75x FY20F adjusted book (SBI/BOB at 0.7x/0.8x FY20F adjusted book).
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