Punjab National Bank - ROAs of 1% inspite of operational slowdown; BUY - Prabhudas Lilladher

PNB's PPOP performance continues to get weaker (7% YoY contraction). However, B/S consolidation and recovery efforts is aiding asset quality though delinquencies continue to remain high. Despite just 4% PPOP growth and elevated credit costs expectations, we expect ~1% ROAs (higher than peers) and with undemanding valuations of 0.8x Sep-14 book, we maintain 'BUY' with PT of Rs900/share. However, re-rating will be restricted, given lower ROEs v/s history + PPOP risks.

- Core PPOP performance gets weaker: PNB's core PPOP contracted 7% YoY, with just 3% loan growth and ~15% contraction in core fees. Key metrics: (1) NIM at 3.5% was flat QoQ but management expressed near-term concerns and guided to 3.35% margins v/s 3.5% in FY13 considering falling rate environment (2) In its effort to consolidate, domestic loan growth was just 3%; positive for credit but our FY14 NII is down 5% (3) Non-interest income was aided by treasury income of Rs1.9bn adjusted for which core fees contracted 3% YoY. With weak guidance on NIMs and risks to B/S and fee income growth, we expect PPOP challenges to continue and expect just 4% PPOP growth in FY14.

- Asset quality-Strong momentum in Recoveries/upgrades continue: PNB reported better-than-expected Gross NPAs, with Rs26bn of upgrades/recoveries in line with management guidance and they expect strong momentum to continue. Incremental slippages continued to remain high at 3.8% and restructuring of ~Rs35bn (excl. SEBs) indicates that stress continues in the system. Slow B/S growth will help and thus, we factor in credit to remain elevated at ~115bps v/s 140bps.

- ROAs of ~1% despite PPOP challenges, Maintain 'BUY': Despite slow PPOP growth and ~115bps of credit costs, we expect ROAs of ~1% in FY14 (better than peers) and hence, maintain 'BUY' as current valuations are undemanding at 0.8x Sep-14 book. However, lower ROEs at ~15.5% v/s +20% historically + operational challenges will limit significant multiple expansion. PT of Rs900/share (0.93x Sep-14 book).

Source : Equity Bulls

Keywords