Upgrade PNB to BUY - Biggest Beneficiary of Likely Econo Turnaround - Karvy

Punjab National Bank (PNB) is currently trading at 20% discount to its five year average valuation, while the stock has underperformed the Bankex by 40% over last one year reflecting incremental stress in asset quality along with its ballooning restructured assets.

Asset Quality Deterioration Drags Valuation: Punjab National Bank is trading at discount to BoB & UBI mainly on account of higher slippages and restructuring. In earlier interest rate cycle, PNB has mostly traded at premium to its PSU peers on account of its better NIMs & ROE profile.

Credit Cost to Ease: On account of deterioration in its asset book, PNB's credit cost in H1FY13 is the highest for last 10 years. With expected improvement in economy and recovery cycle along with interest rate cuts, the Bank will be the biggest beneficiary.

Best-in-Class NIMs: Despite higher slippages and credit cost during the year, the Bank managed to make RoA of >1% & RoE of >16% in H1FY13, on account of high margin profile. Even after the slide, the Bank makes NIMs of >3.5%, backed by healthy CASA, as it operates in cash-rich northern belt.

Outlook & Valuation

At the CMP, the stock trades at 4.9x & 4.3x FY14E & FY15E earnings, and at 1.0x & 0.9x P/ABV FY14E & FY15E, respectively. Based on 20% discount to its historical mean valuation implying 1.0x P/ABV FY15E, we upgrade our recommendation on Punjab National Bank to "BUY" from "SELL" with upwardly revised target price of Rs. 1,045 per share (from Rs. 695 earlier).

Source : Equity Bulls

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