Punjab Nation Bank - Q3FY14 Results Update - Consolidation shaping well - Centrum

Rating: Hold; Target Price: Rs590; CMP: Rs548; Upside: 8%

Consolidation shaping well

We retain HOLD rating on PNB with a target price of Rs590. We believe consolidation efforts have begun to yield positive results in terms of growth, asset quality and operating ratios as shown in Q3Y14 results. While asset quality concerns seem to have eased, we believe it has not yet peaked as exposure to risky segments, elevated stress and weak macro indicators may act as spoilsports. This, in addition to higher employee related expenses, will remain a drag on profitability and restrict return ratios. The stock trades at 0.6x Dec'15ABV of Rs908, which leaves limited room for an upside.

- Q3FY14 results - Operationally strong quarter: PNB's Q3FY14 results, though on the lower side (to our/ consensus estimates) on the P&L front, were operationally strong with - a) asset quality showing signs of improvement b) growth gaining momentum and c) key ratios of NIM and CASA remaining intact. NII at Rs42.2bn (+13% yoy) was led by 10% yoy growth in loan portfolio and 10bps yoy expansion in NIM (reported) to 3.6%. However, led by higher employee expenses and provisioning (NPA and investment depreciation), PAT at Rs7.5bn, declined 42% yoy.

- Asset quality concerns ease; but yet to peak: Stress asset addition for the quarter at Rs36.5bn (4.7% annualised), has declined when compared to previous periods. We, however, believe that a) exposure to risky segments* in excess of 35% of total portfolio with higher levels of NPA/ restructuring therein and b) weak economy will keep NPA/restructuring levels elevated. Restructured portfolio stood at 9.5% and problem loans comprised 15% of loans. We continue to factor in slippages/ credit costs at 320bps/ 120bps respectively over FY14-16E.

- Retail franchise gearing up well; capital position better: Realignment of balance sheet franchise towards retail is gaining traction with a) retail loan growth at +19% yoy outpacing the overall domestic growth of 10% yoy and 22% incremental yoy domestic growth being retail in nature and b) share of core deposits at 92%. Total CAR (including 9m profits) stood at 11.7% and we believe will enable sustain balance sheet growth for a few more quarters.

- Valuation and view and key risks: We have revised our earnings lower by ~3% each for FY14/FY15E and are now factoring in 12%/ 14% CAGR in NII/ loan portfolio over FY13-16E. The stock has corrected 13% / 15% in the past 1-month / 3-months and trades at 0.6x Dec'15 ABV of Rs908. We believe valuations are reasonable due to a) relatively improved asset quality outlook when compared to peers and b) consolidation strategy showing favourable results. Reversal in NPA trend will lead to further de-rating. On the upside, continued reduction in stress asset addition and improvement in operating metrics will see the stock re-rate.

Source : Equity Bulls

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