Focus on containing impairment levels over growth: Our recent interaction with the management highlighted that the business environment—loan impairment and growth—remains challenging in the corporate portfolio. At this stage, there is a greater focus on loan impairment as compared to growth. We maintain our Reduce rating with TP (target price) at R610 (from R550 earlier) as RoEs (returns on equity) are subdued (13%), while earnings growth of >40% in FY15e is primarily driven by better treasury contribution. Earnings (adjusted for treasury income) are likely to grow <10% CAGR (compound annual growth rate) in FY15-16e.
Takeaways: The following were the key takeaways from our discussions with the management: (i) Corporate loan demand remains subdued and the bank has been cautious on taking incremental exposure in this portfolio; (ii) pressure on NIM (net interest margin) will continue as the bank is shifting focus towards low-risk assets; (iii) considerable progress to maintain loan impairment ratios at current levels while any improvement would require better economic growth trends, which is subdued currently; (iv) impact of the change in annuity tables yet to be ascertained but could get crystallised by Q4FY14e (estimates); and (v) no near-term requirement to dilute capital as tier-1 ratio is at 9%.
Earnings driven by better contribution from treasury: We believe Punjab National Bank could deliver a strong earnings growth in FY15e of >40% year-on-year, primarily on the back of strong contribution from treasury income (net treasury income in FY14e was at -9%, which is likely to increase to 17% of PBT—profit before tax-- in FY15e). However, earnings growth, adjusted for treasury contribution, is likely to remain subdued at <10% CAGR for FY2015-16e. NII growth is likely to remain subdued (<10%) as loan mix is shifting towards low-risk lending.
Wait for firm trends of improvement: We maintain our Reduce rating and value the bank at R610 (rolling 12-month basis from R550 earlier). At our target price, the bank would trade at 0.7x (times) book and 5e EPS (earnings per share). RoEs at 10-13% would be closer to a decade low. The bank is currently trading at 15% long-term valuation discount to its public sector peers and closer to the bottom on a ten-year basis.
Our rating is driven by (i) lack of clear trends on impairment ratios as the risk for further slippages, especially from the restructured portfolio, is high, (ii) scope for