PNB - Falling asset quality is hard on the knees; downgrade to Reduce - BRICS

PNB's asset quality worsened much more than expected in Q2FY13. Management still remains elusive in spelling out any asset quality guidance even at this stage, as it continues to blame the rising delinquency on weak economic growth. However, management has acknowledged the need to consolidate the balance sheet, although we believe this is a couple of quarters too late. We expect slippages to remain high and are likely to be equally unpredictable, thus lending zero visibility to PNB's earnings trend. Higher slippages will also lead to a faster contraction in NIM, as will a higher SLR holding. PNB's loan growth is also likely to slow down appreciably than in the past. We cut our estimates drastically, forecast a CAGR of 0% in EPS over FY12-14, and downgrade the stock to Reduce with a price target of Rs650 (down from Rs780 earlier). However, our action leaves the stock deep in value should the economic conditions improve rapidly - the key risk to our Reduce recommendation.

Key takeaways: PNB's asset quality issues are unlikely to subside anytime soon, as the lumpiness in slippages from large accounts continues. PNB is also looking to cut its share of bulk deposit and given the consolidation phase, its loan growth will be in line with the sector average, as compared to its usually higher growth of 4-7% recorded in the past. PNB's SLR holding has also increased, highlighting greater risk aversion. With the controlled loan growth, SLR holding is likely to increase further, thereby exerting pressure on NIM.

Key takeaways: PNB's asset quality issues are unlikely to subside anytime soon, as the lumpiness in slippages from large accounts continues. PNB is also looking to cut its share of bulk deposit and given the consolidation phase, its loan growth will be in line with the sector average, as compared to its usually higher growth of 4-7% recorded in the past. PNB's SLR holding has also increased, highlighting greater risk aversion. With the controlled loan growth, SLR holding is likely to increase further, thereby exerting pressure on NIM.

Drastically cutting estimates: We lower loan growth to 17% and 19% (from 19.5% and 22.4%) and NIM to 3.5% and 3.3% (from 3.6% and 3.7%) for FY13 and FY14. We also expect delinquency to remain high and build in credit cost at 1.5% and 1.3% (15bps higher than earlier estimated) for FY13-FY14. This results in EPS falling 17% and 26.5% with a CAGR of 0.2% over FY12-14. A weak RoE will act as a drag on Tier-1 capital, though we do not see any immediate need for recapitalisation.

What to do with the stock: Among PSU banks, we continue to prefer BOB to PNB. We would like to wait for PNB's numbers to do the talking for us before turning positive on the stock. Among private banks, HDFCB, ICICIBC and AXSB remain our preferred stocks.

Valuation: We value the stock at 1.04x 12-month forward adjusted book of Rs623. We are fairly aggressive in our conservative adjustments to book that include an additional slippage of 20% from restructured book.

Source : Equity Bulls

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