We cut our earnings estimates and downgrade Punjab National Bank (PNB) to ?underperform? from ?outperform?, given the unexpected sharp deterioration in asset quality and on belief that credit costs will remain elevated for a long period. The management has not guided when NPLs will peak and cautioned that weak macro data could keep them high.
Our new price target of R695 is based on 0.7x P/BV FY14e. Target multiple of 0.7x is below the five-year average multiple of 1.3x, which we believe is justified, given the sharp deterioration in asset quality with stress loans now at 128% of book value.
PNB’s new NPLs (slippage) rose to R4m800 crore for Q2FY13, or 7.7% of lagged loans, which is uncomfortably high. The q-o-q increase in slippage was high at 92%.
More importantly, the slippage curve was not lumpy and was spread across segments, reflecting not only a weak macro environment, but also weak risk-assessment skills. Increasingly, state-owned banks’ earnings are reflecting their weak risk-assessment skills relative to private banks.
PNB now has the second highest level of NPLs at 4.66% after SBI (4.99%). Net NPLs for PNB are at 2.7%, higher even than SBI’s 2.2%. Not only are NPLs high for PNB, even outstanding restructured loans are also among the highest in the sector at 8.8%. Total stress assets (net NPLs plus restructured loans) for PNB are now at 11% of total loans, among the highest in the sector, amounting to 128% of the bank’s March 2012 book value.
As we change our view on PNB, we close our ACT call. We had made an ACT call ?buy? PNB, ?switch from Union on 16 July 2012. We had believed at that time that while PNB’s NPLs were high, they would stabilise for the next few quarters and then improve given management’s focus on recoveries.
However, following Q2 earnings, we believe asset quality is unlikely to stabilise soon. Union Bank has not announced earnings. Our broad sector view, preferring private banks over state-owned banks remains, unchanged.
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