Stock Market Result Update on Punjab National Bank for 2QFY2012

Stock Market Result Update on Punjab National Bank for 2QFY2012 with an Accumulate recommendation and a Target Price of `1106 (12 months).

For 2QFY2012, PNB posted modest net profit growth of 12.1% yoy to `1,205cr, well ahead of our estimate, on account of considerably better-than-expected NII and lower-than-expected provisioning expenses. The key positive takeaways from the results were the sequential improvement in NIM as well as slippages remaining under check despite completion of migration to system-based NPA recognition platform. We maintain our Accumulate view on the stock.

Lower slippages but considerably higher restructuring: For 2QFY2012, the bank’s business momentum remained moderate, with advances growing by 19.3% yoy (up 2.5% qoq) and deposits increasing by 25.0% yoy (5.5% qoq). With the persistence of higher FD interest rates, growth in CASA deposits moderated further to 11.7% yoy. Consequently, reported CASA ratio declined by 100bp qoq and a sharp 420bp yoy to 37.1%. Reported NIM of the bank improved by 11bp qoq to 4.0% on the back of a 54bp increase in yield on advances. Fee income growth was muted as fresh loans declined considerably on a yoy basis. On the asset-quality front, the bank surprised positively with slippages rate coming in at the lowest in eight quarters at 1.6%, despite completion of migration to system-based NPA recognition platform. However, the bank proactively restructured loans of ~`4,050cr during the quarter (`4,563cr in 1HFY2012), which were considerably higher than the run-rate witnessed over the past few quarters. More than half of the restructured loans pertained to the power sector, including `1,750cr restructuring done for loan to Tamil Nadu SEB. Management indicated that almost all restructuring was in the form of extension of loan term and there was no sacrifice made on the interest rates. Provision coverage ratio (including technical write-offs) remained at healthy 75.1%. The bank made `110cr higher than the required provisions for investment depreciation considering the sharp spike in G-Sec yields post September 30, 2011.

Outlook and valuation: At the CMP, the stock is trading at 1.1x FY2013E ABV vs. its five-year range of 1.1-1.6x and median of 1.4x. We maintain our Accumulate recommendation on the stock with a target price of `1,106 (`1,085).