Accumulate Punjab National Bank; target Rs 975: KRChoksey

KRChoksey is bullish on Punjab National Bank (PNB) and has recommended accumulate rating on the stock with a target price of Rs 975 in its February 01, 2013 research report.

"Punjab National Bank reported strong recovery in quarterly performance with PAT of Rs1,306 crore down 13.5% Y-o-Y & 22.6% Q-o-Q, ahead of our estimate. NII slowed down to 5.6% Y-o-Y & 2.3% Q-o-Q primarily attributable to moderation in loan book growth (13.2% y/y vs. 18% y/y in Q2FY13). Core fee income was down 9.8% Y-o-Y primarily attributable to sharp decline in LC/LG income, processing fees and bills & remittance income. Trading gains went up 24% Q-o-Q to Rs73 crore. Operating expenses increased 11.4% y-o-y on the back of ad hock employee related provisions. Loan loss provision declined significantly 59.1% q-o-q owing to improvement in asset quality sequentially. Incremental slippage ratio declined sharply from 6.3% in Q2FY13 to 0.5% in Q3FY13. Sharp decline in fresh slippages coupled with steady up gradation and recoveries have contained gross NPAs during the quarter. The bank has also restructured loans amounting to Rs2500cr, lower than the last quarter (Rs2700 crore). Advances and Deposits growth were 13.2% Y-o-Y & 8.2% Y-o-Y respectively. CASA ratio increased 144bps Q-o-Q 38.4% on the back of steady growth in saving deposits (14.0% Y-o-Y) and healthy recovery in current deposits (9% y-o-y).

Subdued loan growth led to muted NII growth: Net interest income increased only 5.6% y/y & 2.3% q/q on slower loan book growth (13.2% y/y). Yield on loans declined 18bps Q-o-Q largely attributable to interest reversal (Rs80 crore). During the quarter, cost of deposits decreased by 2bps Q-o-Q to 6.5%. While investment yield increased by 36bps q-o-q to 7.8%.The management has guided NIM to sustain 3.5% in FY13.

Strong cash recoveries and higher trading gains boosted non interest income: Non-interest income increased only 2.0% Y-o-Y & 7% Q-o-Q to Rs 971 crore driven by strong cash recoveries (up 142% Q-o-Q) and higher trading gains (Up 24% Q-o-Q). Core fee based income continued to be subdued due to balance sheet slowdown while fee from distribution of financial products has seen meaningful improvement during the quarter. Trading gains were Rs73 crore vs. 59 crore in Q2FY13, up 24% q-o-q.

Asset quality held up well: The Bank reported Rs364 crore of fresh slippage against Rs4544crore in Q2FY13. As a result, incremental delinquency rate marginally went down sharply to 0.5% from 6.3% in Q2FY13 and 2.7% a year ago. Gross NPA and Net NPA stood 4.6% and 2.6% respectively with provision coverage 56% (including technical write offs. The bank has also restructured loans amounting to Rs2500cr (0.8%) lower than the last quarter (Rs2700 crore). The management has articulated that key focus continues to be on containing higher slippages and better credit monitoring to check NPAs. We are building 110bps & 140bps credit costs in FY13 & FY14 respectively.

Outlook & Recommendation: PNB showed good recovery in core operating performance and reported earnings during the quarter. Containment in higher slippages business growth slowdown, subdued fee income and lower provisions were key highlights from the numbers. We have tweaked our earnings estimates FY13 & FY14 factor in higher recoveries and moderation in margins due to base rate cut. We expect the bank to deliver 8.3% CAGR in net earnings over FY12-FY14. At Rs 912, the stock is trading at 5.2x FY14 earnings, 1.0x FY14 Adjusted book and 3.6% dividend yield, largely priced in incremental improvement in asset quality our view. We maintain ACUMULATE rating on the stock with a target price of Rs 975," says KRChoksey research report.

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