impairment trends, and are relatively richly priced. On the other hand, for PNB the turn in NPL (non-performing loan) cycle is more visible while valuation comfort is much bigger. We upgrade PNB to Buy with a target price of R625. We also upgrade both SBI and BOB to Neutral from Reduce, but we would wait for more asset quality data points on their mid-corporate loan book before turning more positive.
Key risks to our thesis:
*Low provision coverage for PSU banks implies stickiness in loan loss provisions even if impairments start declining rapidly.
*Low core equity ratios make PSUs dependent perennially on government for capital infusion.
*Increasing trends on opex ratios—with any increase in pension and wage revision provisioning, in the absence of higher growth, the opex ratios are likely to trend higher for PSUs.
*Ceding market share in CASA deposits and retail assets—with private sector banks gaining incremental share of CASA (current account, savings account) and retail assets like mortgage; PSU banks would continuously feel some pressure on their NIMs. Some of the larger PSUs continue to enjoy a stickier retail franchisebut in the longer term they are likely to see some return erosion on account of these factors.
Punjab National Bank
We upgrade PNB with a revised target price. While we think immediate relief in impairment trends is not yet visible for PSU banks, we see improvement in underlying operating margins for loan-intensive corporate, particularly in the export-driven sectors. We expect this, along with potentially a benign macro environment, to drive strong recoveries going into FY15F.We revise our H2FY14F earnings by 3% on marginally lower LLPs (loan loss provisioning) while building in capital infusion announced by GoI.
While delinquency trends have improved for Punjab National Bank , recovery has been much stronger. PNB has shown improvement in GNPL (gross NPL) accretion across retail, agri and industry sectors. As well, with the highest exposure to discoms among large PSUs, PNB has benefited more from the recent FRP implementation. In addition, PNB offers the most valuation comfort among the three PSUs in our coverage. While low provision coverage, high MTM (mark-to-market) outgo and pressure on NIMs would be dampeners, we expect this stock to be the best positioned for a re-rating once the asset quality trends start improving.
Valuation: Our target price implies 0.63x 1-year forward ABV of (adjusted book value) R994 and 0.93x on NNPL (net NPL) adjusted 1-year forward book of R670