BUY Most efficient public bank Sector: Banking Sensex: 18,470 CMP (Rs): 1,076 Target price (Rs): 1,370 Upside : 27.3 52 Week h/l (Rs): 1,400 / 900 Market cap (Rscr) : 33,931 6m Avg vol ( 000Nos): 355 No of o/s shares (mn): 315 FV (Rs): 10 Bloomberg code: PNB IN Reuters code: PNBK.BO BSE code: 532461 NSE code: PNB Prices as on 09 Mar, 2011 Shareholding pattern September '10 Promoters 57.8 Institutions 37.1 Non promoter corp hold 1.1 Public & others 4.0 Performance rel. to sensex 1m 3m 1yr PNB 3.2 (4.3) 8.2 SBI (3.2) 1.7 19.7 BOB 6.6 7.2 42.4 BOI 13.2 14.3 30.6 Share price trend PNB Sensex 200 150 100 50 Mar-10 Sep-10 Mar-11 PNB s loan growth is set to remain robust at 25% in FY11 despite a slight moderation in Q4 FY11. In FY12, credit growth would continue to be higher than system. C/D ratio is expected to correct with deposits mobilization having improved in recent months. The bank is confident of sustaining CASA near 39% despite migration to TDs. NIMs, after being resilient in Q4 FY11, are anticipated to witness a modest correction. In the longer term, PNB sees NIM at 3.5-3.7%, a conservative band in our view. Considering the substantial plough backs and headroom of Rs70bn for raising Tier-2 capital, the bank does not anticipate any need to raise equity capital to support growth. Asset quality is expected to stabilize aided by lower slippages from restructured book and credit cost is anticipated to decline. PNB needs to make additional pension provisioning for retiring employees in Q4 FY11. However, like peers, bank is contemplating to reverse substantial gratuity provisions. RoA and RoE are estimated to remain impressive at 1.3-1.4% and 23-25% respectively over FY10-13. We expect bank to deliver 20% PAT CAGR in the aforesaid period. Retain BUY on PNB with 9-month target of Rs1,370. Loan growth to decelerate yet remains strong; deposit mobilization improving With YTD credit expansion at 18.6%, PNB has witnessed higher than system loan growth. The yoy credit growth for the bank in Q3 FY11 was at a robust 30%. The growth momentum is expected to decelerate to 25% in Q4 FY11 mainly due to the higher base (advances grew by significant 9.5% qoq in Q4 FY10). PNB expects system credit growth to moderate to 20-21% by the end of the year. In FY12, the bank plans to grow at least 2-3% above the system. The bank has witnessed improvement in core term deposits mobilization in recent months aided by the material rate hikes implemented. PNB expects significant increase in institutional deposits in the current month. Resultantly, the C/D ratio is expected to correct to 75% over the next 3-6 months. Confident about maintaining CASA near 39% Despite the significant increase in TD rates, PNB is confident about maintaining CASA near 39%. Presently, bank s CASA ratio is second only to SBI amongst PSBs. The bank has been able to sustain CASA around 40% consistently over the past many quarters. PNB s dominant presence in Northern India offers the bank a structural advantage over peers. To retain CASA, bank plans to add 400-450 branches in FY12. Majority of the additions would be in Western region, in Tier 3-6 cities. Financial summary Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Total operating income 119,351 156,469 187,246 226,705 Yoy growth 19.9 31.1 19.7 21.1 Operating profit (pre-provisions) 71,732 90,754 112,331 133,062 Net profit 39,052 43,694 55,194 65,869 yoy growth 26.3 11.9 26.3 19.3 Research Analyst Rajiv Mehta, CFA research@indiainfoline.com EPS (Rs) 123.9 138.6 175.1 208.9 BVPS (Rs) 516.4 627.4 766.5 939.6 P/E (x) 8.7 7.8 6.2 5.2 P/BV (x) 2.1 1.7 1.4 1.1 ROE 25.5 24.2 25.1 24.5 ROA 1.4 1.3 1.4 1.3 CAR 14.2 13.8 13.2 12.7 March 10, 2011
Rural branches take 2-3 years to break-even Lower interest income and time lag in receiving interest subvention from government being the key reasons Bank has been offering competitive rates mainly on the special term deposits Expects CoD to increase by 11-12bps in Q4 FY11 and further 15bps in Q1 FY12 Over the past six months, PNB has increased BPLR by 200 bps and Base Rate by 150 bps YoA is expected to improve by 15-20bps in Q4 FY11 NIM to witness a modest correction of 10-15bps over the next two quarters Over the longer term, bank expects NIM to settle in the range of 3.5-3.7% Substantial plough backs and significant headroom for raising Tier-2 capital to support growth over the next 2-3 years Processing fees and non-fund based income to drive over 20% growth in fee income C/I ratio is estimated to remain at 42-43% Rural branches take more time to breakeven While urban branches turn around in the first year of operation, the bank says its rural branches take 2-3 years to break-even despite significantly lower overheads. The break-even period for rural branches is elongated by substantially lower interest income (lower NIM due to lending rate capping) and time lag (typically 6-month) in receiving interest subvention from the government. Also, rural depositors usually park money in longer term deposits fetching higher rates. CoD may not increase steeply in the near term PNB s CoD is unlikely to increase substantially in the next two quarters despite the significant hike in term deposits rates implemented in the past six months. Term deposits form 40% of the bank s total deposits and the new rates apply only to the incremental term deposits and those coming up for renewal. Further, bank has been offering competitive rates mainly on the special term deposits of 500, 1000 and 1,111 days and these deposits currently form <5% of total deposits. Higher CASA should dilute the impact of bulk deposits (20% of total deposits) re-pricing. Bank estimates its CoD to increase by 11-12bps in Q4 FY11 and further 15bps in Q1 FY12. PNB does not expect any further rate hikes in the near term. YoA may see a decent uptick over the next two quarters Over the past six months, PNB has increased BPLR by 200 bps and Base Rate by 150 bps. As a significant portion of these increases was announced in December and January, the reported YoA was flat qoq in Q3 FY11. It is expected to improve by 15-20bps in Q4 FY11. About 81% of the bank s advances are floating - 59% linked to BPLR and 22% linked to Base Rate and therefore get immediately re-priced. NIM resilient in Q4 FY11; could witness modest correction in the medium term PNB does not see its NIM being materially impacted in the near term and expects a rather modest correction of 10-15bps over the next two quarters from current level of 4% (post adjusting for one-time interest income in Q3 FY11). Over the longer term, bank expects NIM to settle in the range of 3.5-3.7%. We believe this margin outlook is conservative given bank s superior CASA and higher proportion of floating advances. Traditionally, PNB s margin management has been much better than other PSBs. Capital adequacy comfortable to support long term growth At the end of Q3 FY11, PNB s CAR and Tier-1 ratio was 13.3% and 9% respectively. Considering the substantial plough backs, the bank does not foresee any need to raise equity capital over the next 2-3 years. Further, bank has substantial headroom of ~Rs70bn to raise Tier-2 capital for supporting growth. PNB is not expecting significant recapitalization proceeds from the Government as the latter s stake in the bank is near 58%. Core fee income to grow by over 20%; C/I ratio to remain near current levels PNB expects its core fee income to grow by more than 20% pa. The key drivers are expected to be processing fees and non-fund based income currently contributing 60-62% of the fee income combined. Other segments such as distribution of MFs/general insurance and depository services are anticipated to complement growth. The C/I ratio is estimated to remain at 42-43%. Company Report 2
Material deterioration in asset quality over the past three quarters PNB expects GNPL to stabilize near current levels of 2% in medium-term Substantial increase in credit cost over the past four quarters With asset quality likely to stabilize in FY12, the credit cost is expected to decline to 1-1.1% 35,000 employees have opted for pension 2nd option; liability crystallized at Rs36bn PNB needs to take an additional pension provision of Rs3-4bn in Q4 FY11 for retiring employees To reduce the impact on PAT, PNB is contemplating on reversing substantial gratuity provisions like other banks RoA at 1.3% is the best amongst PSBs Even as margins come-off, RoA would be sustained above 1.3% RoE likely to be sustained in the range of 23-25% Current valuation attractive given superior return profile Retain BUY with 9-month price target of Rs1,370 Asset quality to stabilize; credit cost to decline PNB has witnessed material deterioration in its asset quality over the past three quarters with its GNPL increasing from 1.7% to 2%. The key driving segments were agriculture and SME. The bank also witnessed significant slippages (Rs7.6bn) from the restructured book over the past 12 months. Presently, restructured assets stand at ~Rs144bn, 6.5% of net advances (probably the highest amongst PSBs), and till date slippages have been 8.7%. PNB expects GNPL to stabilize around current levels of 2% in the medium-term with lower slippages from restructured book (have been declining over the past two quarters). In line with rising GNPLs, PNB has seen a substantial increase in loanloss provisioning (LLP) and credit cost over the past four quarters. Over Q4 FY10-Q3 FY11, bank has made LLP worth Rs19.3bn increasing the credit cost from 0.7% to 1.3%. Overall provisioning was also boosted by the need to provide 70% on all categories of NPLs so as to sustain PCR above 70%. Including technical write-offs, PCR stood at 78% at the end of Q3 FY11. With asset quality likely to stabilize in FY12, the credit cost is expected to decline to 1-1.1%. Additional pension provision for retirees in Q4 FY11; contemplating on reversing gratuity provisions About 35,000 of PNB s employees have opted for pension 2 nd option. The pension liability towards this got crystallized at Rs36bn (earlier estimated Rs25bn) in Q3 FY11. Resultantly, the bank increased pension provisioning to Rs2.35bn from Rs1.25bn in Q2 FY11 to take annual provisioning to Rs7.2bn (pension liability to be amortized over five years). Recently, the commercial banks have been asked to provide fully (amortization not allowed) for the pension liability towards employees retiring during the year. For PNB, about 4,600 employees are retiring in the current year and therefore the bank would have to take an additional pension provision of Rs3-4bn in Q4 FY11. However, like other banks, PNB is contemplating on reversing substantial gratuity provisions made during the year (headroom for write-back is Rs2.75bn of the Rs3.75bn provided; total estimated liability is Rs4.8bn). RoA to remain at impressive 1.3-1.4%; in-line with some high quality private banks PNB s RoA at 1.3% is the best amongst PSBs. Superior RoA has been driven by robust business growth, handsome NIMs and better operating efficiency. The current RoA fully reflects the headwinds of higher pension and loan-loss provisioning. Even as margins are expected to come-off, we believe RoA would be sustained above 1.3% in the medium term aided by moderation in opex growth and reduction in credit charge. RoE, on the other hand, is likely to be sustained in the range of 23-25%. PNB s RoA and RoE profile is in-line with some of the high quality private banks. Retain BUY on PNB with 9-month target of Rs1,370 Over FY10-13, we estimate PNB to witness robust 24% balance sheet CAGR, 27% NII CAGR and 20% PAT CAGR. Bank s current valuation of 1.2x FY13 P/adj.BV is attractive given its superior return profile. Any sign of stabilization in the bank s asset quality is likely to result in a significant re-rating of the stock. Using our proprietary valuation model for banks, Bank 20, we assign FY13 P/adj.BV multiple of 1.5x to PNB and arrive at 9-month price target of Rs1,370. Retain BUY. Company Report 3
Robust business growth over FY10-13 C/D ratio to correct marginally with improved deposits mobilization 35.0 30.0 Advances Deposits 78.0 76.0 25.0 74.0 20.0 72.0 15.0 70.0 10.0 68.0 5.0 66.0 NIM* to remain elevated even after correction 4.0 3.7 3.4 3.1 2.8 2.5 YoA* to improve driven by lending rate hikes 11.0 10.0 9.0 8.0 7.0 6.0 2.2 5.0 ; * Computed by us CoD* to increase on account of deposit rate hikes 7.0 6.0 5.0 4.0 3.0 2.0 CASA ratio to be sustained near 39% 48.0 45.0 42.0 39.0 36.0 33.0 1.0 30.0 ; * Computed by us Company Report 4
Strong growth in core fee income to support non-interest income % C/I to hover in the range of 41-43% 35.0 50.0 30.0 47.0 25.0 44.0 20.0 41.0 15.0 38.0 10.0 35.0 5.0 32.0 Asset quality to stabilize aided by lower slippages from restructured book 2.5 2.0 1.5 1.0 0.5 GNPL NNPL Provision charge to decline over FY11-13 1.2 1.1 0.9 0.8 0.6 0.5 0.0 FY08 FY09 FY10 FY11E FY12E FY13E 0.3 FY08 FY09 FY10 FY11E FY12E FY13E RoA to remain impressive at 1.3-1.4%; the best amongst PSBs 1.5 1.4 1.2 1.1 0.9 0.8 Adequately capitalized to support growth; significant headroom to raise Tier-2 capital 15.0 13.5 12.0 10.5 9.0 7.5 CAR Tier-1 0.6 6.0 FY08 FY09 FY10 FY11E FY12E FY13E Company Report 5
Bank 20 valuation Punjab National Bank (public sector bank) Valuation Parameters Indicates/Determines Star Rating Nom. Score Weight Wght. Score Loan Book Growth Medium-term income growth 4.00 0.07 0.28 Loan Book Mix Business risk 4.00 0.05 0.20 Branch Network Scale/Reach 4.00 0.04 0.16 CASA Deposits Cost of Deposits 4.50 0.04 0.18 Cost of Funds NIM 5.00 0.04 0.20 Credit/Deposit Ratio NIM 4.50 0.05 0.23 NIM and its management Profitability/ALM 5.00 0.07 0.35 Core Fee Income/Total Income Stability of income 4.50 0.05 0.23 Treasury Management Stability of income 4.00 0.04 0.16 Cost/Income Ratio Operating efficiency 4.50 0.05 0.23 Return on Avg. Assets Operating efficiency 5.00 0.05 0.25 Gross NPL Asset quality 4.00 0.06 0.24 Provisioning Policy & Coverage Conservatism 4.00 0.04 0.16 Equity/Net NPL Risk cover 4.00 0.04 0.16 Capital adequacy Risk cover 3.50 0.07 0.25 Tier-II/Tier-I Capital Room for growth w/o dilution 4.00 0.05 0.20 Equity/Total Assets Leverage 3.50 0.04 0.14 Return on Avg. Equity Profitability 5.00 0.07 0.35 Management Quality Long-term income growth 4.00 0.04 0.16 Brand Long-term income growth 4.50 0.04 0.18 Bank 20 Score 4.29 Source: India Infoline Research # individual parameter rating is relative to the peer group (SBI, BOI, BOB, Can Bank and UBI) - Worst, - Below Average, - Average, - Above Average, - Best Target Price calculation Particulars FY13E Equity (Rs mn) 309,396 Impaired Assets (Rs mn) 24,702 Adj. FY13E Equity (Rs mn) 284,694 Adj. FY13E BVPS (Rs) 902.9 Avg. FY13E P/BV of Peers (x) 1.4 Bank 20 FY13E P/BV (x) 1.6 (Risk)/Prem. adj. (x) (0.1) Assigned FY13E P/BV (x) 1.5 Target Price (Rs) 1,370 CMP (Rs) 1,076 Upside/(Downside) % 27.3 About Bank 20 Bank 20 is our attempt to minimize the subjective element in assignment of appropriate P/BV for every bank. It is a comprehensive model that takes into consideration 20 key valuation parameters, operational and financial, quantitative and qualitative, to arrive at a more refined book value multiple as compared to that from theoretical return differential (ROE-COE) model. Each of the valuation parameter has been assigned weights in the context of its importance in an objective assessment of a bank. Loan book growth, NIM and its management, capital adequacy, sustainable RoE and asset quality are the Top 5 parameters weighing 34% in Bank 20. Though the parameters may remain constant, individual weights may change with phases in economic growth and concurrent concerns and positives of the industry then. Company Report 6
Financials Income statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Interest income 214,670 271,243 349,768 434,779 Interest expense (129,440) (150,601) (205,515) (259,665) Net int income 85,230 120,642 144,253 175,114 Non-int income 34,121 35,827 42,992 51,591 Total op income 119,351 156,469 187,246 226,705 Total op expenses (47,619) (65,714) (74,915) (93,643) Op prof (pre-prov) 71,732 90,754 112,331 133,062 Provisions (14,215) (23,842) (27,808) (32,190) Profit before tax 57,517 66,912 84,524 100,872 Taxes (19,994) (23,219) (29,330) (35,002) Exceptionals 1,529 0 0 0 Net profit 39,052 43,694 55,194 65,869 Balance sheet Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Total cash & equiv 236,224 254,153 345,285 441,065 Investments 772,774 950,512 1,188,140 1,473,294 Advances 1,866,010 2,332,513 2,868,990 3,528,858 Total int-earn assets 2,875,008 3,537,178 4,402,416 5,443,218 Fixed assets 31,162 38,953 46,743 56,092 Other assets 60,242 69,279 79,670 91,621 Total assets 2,966,412 3,645,409 4,528,829 5,590,931 Net worth 177,472 211,943 255,332 309,396 Deposits 2,493,300 3,066,759 3,833,449 4,753,476 Borrowings 56,866 68,240 81,888 98,265 Total int-bearing liab 2,550,166 3,134,999 3,915,336 4,851,742 Non-int-bearing liabs 238,774 298,467 358,161 429,793 Total liabilities 2,788,940 3,433,466 4,273,497 5,281,534 Equity + Total liab 2,966,412 3,645,409 4,528,829 5,590,931 Key ratios Y/e 31 Mar FY10 FY11E FY12E FY13E Growth matrix Net interest income 21.2 41.5 19.6 21.4 Total op income 19.9 31.1 19.7 21.1 Op profit (preprovision) 24.9 26.5 23.8 18.5 Net profit 26.3 11.9 26.3 19.3 Advances 20.6 25.0 23.0 23.0 Deposits 18.9 23.0 25.0 24.0 Total assets 20.1 22.9 24.2 23.5 Profitability Ratios NIM 3.2 3.8 3.6 3.6 Non-int inc/total inc 28.6 22.9 23.0 22.8 Return on Avg Equity 25.5 24.2 25.1 24.5 Return on Avg Assets 1.4 1.3 1.4 1.3 Per share ratios (Rs) EPS 123.9 138.6 175.1 208.9 BVPS 516.4 627.4 766.5 939.6 DPS 22.0 25.0 32.0 32.0 Other key ratios Credit/Deposits 74.8 76.1 74.8 74.2 Cost/Income 39.9 42.0 40.0 41.3 CASA 40.8 38.5 38.0 39.0 CAR 14.2 13.8 13.2 12.7 Tier-I capital 9.2 9.0 8.7 8.5 Gross NPLs/Loans 1.7 2.1 2.1 2.0 Total prov/avg loans 0.8 1.1 1.0 1.0 Net NPLs/Net loans 0.5 0.7 0.7 0.7 Tax rate 34.8 34.7 34.7 34.7 Dividend yield 2.0 2.3 3.0 3.0 Company Report 7
Recommendation parameters for fundamental reports: Buy Absolute return of over +10% Market Performer Absolute return between -10% to +10% Sell Absolute return below -10% Published in 2011. India Infoline Ltd 2011 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013. For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on 91-44 4007 1000