PNB - Consolidation on cards; asset quality key monitorable - Edelweiss

We recently met the senior management of Punjab National Bank (PNB). Management reiterated its focus on consolidating balance sheet growth given the uncertain business environment, where focus on containing asset quality will take precedence over growth. The bank believes challenges on slippages persist(lumpy gems& jewellery account to elevate Q1 slippages) however; focus on recoveries will offset pressure from slippages. Deliberate efforts towards conservative growth will help stabilise asset quality, though current level of stressed pool at 15% remains a key monitorable (GNPLs of 4.3% + restructured pool of 9.9%). Maintain 'HOLD' with TP of INR875.

Pursuing consolidation strategy

Management stated that it continues to pursue the strategy of consolidating balance sheet in uncertain times. It believes, in the interim, loan growth will come in below industry growth. PNB will continue to focus on average advance growth during Q1FY14 against the peer set trend of period end growth. Building retail assets will be a key focus area, but PNB believes the result will be slow and steady given the competitive pressures and the bank's culture of focusing more on corporate; introduction of retail asset branches will help in this direction. Reclassification of indirect agriculture has resulted in PNB not meeting its priority sector requirements.

Anticipating robust treasury performance

Treasury performance will be better in Q1FY14 than Q4FY13. However, the reversal in yields over the past couple of weeks has restricted some gains. In Q4FY13, bank positioned its bond portfolio for yield rally -inching up duration of its AFS portfolio to 4.4years. 28% of investment in AFS should help post a strong treasury performance.

Outlook and valuations: Asset quality key; maintain 'HOLD'

In FY13, the bank treaded the conservative growth path with focused efforts on recoveries and managing asset quality. While it can reap the benefits of consolidation in terms of moderation in high level of stress pool, asset quality performance will be a key. Trading at 0.7x FY15E P/ABV, we maintain 'HOLD/SP'.

Source : Equity Bulls

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