We reiterate ‘buy’ rating on Punjab National Bank (PNB) and assign a six-month target price of Rs 850 based on Gordon Growth Model, implying an FY15 price-to-book (P/B) ratio of 0.75x. While we cut our FY14 earnings forecast by 8.6% due to the high mark-to-market losses seen this year, we increase our FY15 earnings forecasts by a similar amount as we expect the losses to be written back in FY15.
The stock is trading at a one-year rolling forward P/B of 0.5x, a significant discount to its respective past three-year and past five-year trading average P/B of 1x and 1.1x. A major chunk of its asset-quality woes are already priced into the stock’s past-1o-year-low P/B valuation.
The market appears to be worried about two main issues at PNB. First, high provisions that could continue for the next two quarters due to bond losses, and second, a further rise in NPL provisions due to the ageing of NPLs. However, we believe government-bond yields will fall in next 2-3 months as inflationary expectations slow, leading to a write-back of bond losses, while high NPL recoveries shall reduce provisions.
We believe NPL recoveries should pick up over next one year, as the economy should see some signs of revival. The outlook for certain sectors such as agriculture, textiles, power, and iron and steel is improving, and we believe PNB should benefit the most from this in next two years. After consolidating its balance sheet in FY13, the bank is expected to expand loan book, at a CAGR of 15.6% for FY13-16, based on our forecasts. Its RoE, which we expect to decline to 14% for FY14, should bounce back and touch 17-18% for FY15-16. In Q2 FY14, PNB’s asset quality deterioration has slowed, with net NPL additions declining by 37% q-o-q.