Maintain 'HOLD' on Punjab National Bank – TP reduced to Rs.803 - Geojit BNP Paribas

- PNB's performance on asset quality came as a negative surprise with GNPAs up from 3.3% to 4.7%, QoQ.

- As a result, higher slippages are being factored in for FY13 and FY14, from 2.3% and 2% to 4% and 3.5% for FY13 and Fy14 e, respectively.

- Recoveries and upgradations can positively swing the financials and the asset quality performance for the bank, which will be a key factor to watch, going forward.

- Infrastructure loans account for 30% of its YoY incremental loans, where asset quality risks persist.

- Despite asset quality pressures and fee income being down 27%, QoQ, due to waiver of retail processing fees, NIMs at 3.5% down 10 bps, due to an interest reversal (Rs.160 crores) and the 110bp increase in CASA ratio remain the only positives in an otherwise disappointing quarter.

- Due to the changed slippage assumptions, the earnings forecasts have been cut by 13% and 23% for FY13e and FY14e, respectively, and due to this earnings cut the TP has been reduced to Rs.803 (from Rs.868 earlier) and Hold rating is maintained on the stock.

- PNB is preferred over other PSU peers, albeit with higher risk, to play the turnaround scenario (although it will take few quarters) as the bank has an inherently robust earnings driver in its higher margins. Its asset quality trend has been the worst which should mean a more pronounced turnaround.

- Upside/downside risks: lower/higher slippages and higher/lower recoveries.

Source : Equity Bulls

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