We maintain a ‘buy’ rating on Punjab National Bank (PNB) with a target price of Rs 1,193 per share, valuing the stock at 1.0x FY16 base value. Despite factoring a high credit cost of 1.6% and 36% tax rate, FY15e PAT is expected to grow 27% y-o-y. Focus on profitable growth, healthy core NIM, CET1 of ~8.4% are certain positives for PNB. We expect ROA/ROE improve gradually to 0.9%/~16% by FY17. PNB trades at 0.7x/0.6x FY15/16 BV.
Net stress addition increased significantly q-o-q led by though macro environment. PNB remains highly levered to resolution of policy bottlenecks and improvement in economic growth. NSL (ex SEB and AI) at 11% remains significantly higher than industry however, ~57% of RL belong to infrastructure and iron & steel, and kick start in these segments could allay concerns.
Balance sheet consolidation helped PNB to structurally improve the liability profile and maintain NIM, despite high asset quality strain and volatility in interest rate ? which is a positive.
We have cut our PAT estimates by 20%+ to factor in higher credit costs and weak margin outlook. Despite factoring in high credit cost of 1.6% and 36% tax rate, FY15 PAT is expected to grow 27% YoY. Focus on profitable growth, healthy core NIM, CET1 of ~8.4% PNB are some of the positives.
PNB reported weak Q2FY15 results as PAT was at 49%, lower than estimates (Rs 5.8 billion, up 14% y-o-y), despite higher non-interest income (40% above estimate and driven by strong recoveries from written off accounts of Rs 4.83 billion Rs 0.7 billion in Q2FY14). Lower profitability was a result of NIM decline of 24 bps q-o-q, high one-off employee expenses and high credit costs (1.9%) and tax rate of 49%.
Motilal Oswal
