Punjab National Bank - Still awaiting Asset Quality woes to recede - Antique

We recently met with the management of Punjab National Bank (PNB) in Delhi to get some insight into how the bank is coping in such a challenging environment. Management highlighted that they are in a phase of balance sheet consolidation and the focus has shifted completely to rein in slippages and maximise recovery efforts. While strong recovery efforts are being undertaken by the bank, volatility in earnings, stressed asset quality and higher restructured book continue to remain the key overhang on the stock. Therefore, we continue to maintain our HOLD recommendation on the stock with a target price of INR 800/share based on 0.8x FY14e P/BV.

Credit growth to be muted at 15% levels for FY13e due to consolidation

PNB management highlighted that they are not chasing credit growth very aggressively and are focusing on retail and MSME segments. They have become extremely selective on sanctioning infrastructure projects and have tightened their underwriting norms further especially for the infrastructure sector. Hence, future sanctioning to the infrastructure sector is only after the project developer has got all the regulatory clearances. The bank has also run down most of its short-term loans to the tune of INR300bn and has also shed bulk deposits significantly. Bulk deposits are currently 15-16% of overall deposits, in line with the directive of the ministry of finance. Management also highlighted that costs of deposits have clearly peaked and are likely to trend downwards given ease in money market rates. Further, margins which were adversely impacted by interest reversal of INR1.6bn in 2Q are likely to remain steady at 3.5-3.6% in the 2HFY13e.

Concerted effort on recoveries but asset quality continues to remain the key monitorable

Asset quality for the bank has been on a declining trend over the last few quarters and 2Q was no different with absolute GNPA accretion at 40% QoQ while net NPA accretion at 60% QoQ. In fact, delinquency ratio at 6.1% has been at the highest level seen in the last 7-8 years. Management commentary on slippages and fresh restructuring in terms of guidance has not been very forthcoming. However, management has highlighted that they have taken various initiatives in order to fasten the recovery process which should yield results in ensuing quarters. Management has also actively started engaging in OTS schemes and is hopeful of recoveries in small ticket accounts. They are also looking at increasing their coverage ratio from 54% as stress on asset quality recedes. We have increased our credit cost assumptions from 93bps to 140bps for FY13e in the previous quarter to reflect asset quality pressure, and continue to believe that asset quality remains a key monitorable.

Source : Equity Bulls

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