Punjab National Bank (PNB) remains highly levered to resolution of policy bottlenecks and expected improvement in economic growth as NSLnet stress loan(ex-SEB and Air India) at 11.2% remains significantly higher than industry and 60% of restructured loans belong to infrastructure and iron & steel sectors.
Balance sheet consolidation helped PNB to structurally improve the liability profile and maintain NIM (net interest margin) in FY14, despite high asset quality strain. However, with focus shifting back to growth, we expect FY15e NIM to moderate 15 bps y-o-y. FY15e PAT is expected to grow 30% y-o-y on a lower base as one large account was written off, net slippages were high and MTM (market-to-market) provisions marred FY14 earnings. Capitalisation (CET1common equity tier 1of 8.6%) is relatively better compared to other state-owned banks.
Valuation and view: We maintain our buy rating on the stock with a target price of R950 (0.8x FY16 BV). PNB trades at 0.8x/0.7x FY15/16 BV (book value) of R1,060/1,189. Despite factoring in high credit cost of 1.3%, FY15 PAT is expected to grow 30% y-o-y as one large account was written off, net slippages were high and MTM provisions marred FY14 earnings.
We expect ROA (return on assets) to remain healthy at 0.7% and ROE (return on equity) to be 13%. The bank has done a commendable work of sustaining margins at 3.5% levels despite higher delinquencies in interest rate over last 18 months. Benefit of better liability profile is reflected in NIMs.
Post two quarters of positive surprise on asset quality, PNB surprised negatively in this quarter, and in our view volatility will continue till we see significant improvement on macros. PNB remains highly levered to macro- economic scenario and continuous improvement in the same can provide significant upside in earnings (led by asset quality).
On a conservative basis, we factor in elevated net slippages over the next few quarters and a credit cost of 1.3% over FY14/16. Considering the focus on growth is returning we are factoring in NIM decline of 15 bps in FY15 .
Asset quality surprises: Gross NPA surprised negatively (+14% q-o-q at R189 bn) as net slippages increased sharply to R23.85 bn (net slippage ratio of 3.1%) as compared to R4.5 bn in Q3FY14 and R15.1 bn in Q2FY14. PCR (provision coverage ratio) improved 2.2% q-o-q to 47.5% (59.1%including technical write-off). For Q4, gross slippages were R44.5 bn. Gross restructuring of R32 bn in Q4; OSRL (outstanding standard restructured loans)