Buy Punjab National Bank - Target Price Rs. 1021 - Dolat Capital

- PNB, post the recent correction of 20% YTD, we believe it now captures most of the negatives. Our key argument remains that asset quality detrioration will show some deceleration and NPL recoveries shall show better trend.

- PNB has also been derisking its loan portfolio during the past 6-7 quarters which has impacted its balance sheet growth. This should help the bank contain fresh slippages going forward.

- PNB has historically delivered ROAs which was higher than most of its peers. While the return ratios dipped in FY13 on asset quality and margin pressures, we expect the return ratios to improve from FY14 onwards. PNB's average ROA of 1.1% during FY14E-15E should be one of the best amongst PSBs.

- We believe that the loan and deposit growth should also start improving and grow at CAGR of 20% during FY13-15E as against the CAGR of 17% during the past two years. We expect PNB's credit cost to decline by around 30bps over the next two years aiding the 21% CAGR in net profit by FY15E.

- PNB has been among the few PSBs which saw a reduction in gross NPLs both in % terms and on absolute basis during Q3FY13. NPL recoveries and upgrades have also shown an improvement and we believe that if the bank is able to keep the momentum of its NPL recoveries, the stock should trade at higher multiples.

- Current valuations at 0.7x FY14E BVPS forecast are extremely attractive in our view. PNB is one our top picks with a Buy rating and target price of Rs. 1,021 based on PBR of 1x on our FY14E BVPS forecasts. Slower than expected NPL recoveries is a key risk to our call.

Source : Equity Bulls

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