Punjab National Bank (PNBK.BO)
Sell: Asset Quality Remains a Concern
Introducing CIRA's New Stock Rating System — Citi Investment Research and
Analysis (CIRA) recently announced its new stock rating system. CIRA's investment
ratings are Buy, Neutral and Sell. Our ratings are a function of analyst expectations of
expected total return (“ETR”) and risk. Risk rating takes into account both price volatility
and fundamental criteria. Stocks will either have no risk rating or a High risk rating
assigned. The sidebar and table on this page show our new rating, target price, and
estimates for PNB. See “Guide to Citi Investment Research & Analysis (CIRA)
Fundamental Research Investment Ratings” in the Important Disclosures section of
Appendix A1 of this report for a description of our rating system.
Reducing earnings 5-8%, TP to Rs930, maintain Sell — We reduce FY12-14E
earnings 5-8% on higher-than-expected operating and credit costs. PNB’s asset quality
has remained under higher pressure than peers and is likely to limit valuations. We
maintain our Sell with a revised EVA-based TP of Rs930 (prev. Rs1,100), benchmarked
to 1.1x 1Yr Fwd P/BV. We remain near-term cautious on the sector given macro
uncertainty, and prefer private banks over public sector (top picks Axis, ICICI, SBI).
Asset quality concerns higher than peers — Asset quality remains our key concern
for PNB given its higher mid-market exposures and relatively high loan growth in FY07-
11 vs. industry (26% CAGR vs. 20% for industry). Over the last 18 months, its
incremental slippages have been high – 3.4% of loans cumulatively, with quarterly
trends going up. Moreover, its Gross NPLs have increased 60% during this period and
Net NPLs by 113% - significantly higher than peers. Our comparative analysis suggests
PNB’s asset quality has been closer to mid-cap PSU banks than other large cap peers.
High restructured assets, could see continued slippages — PNB’s restructured
assets are not only high (8% of loans), but also ongoing – cumulative restructuring in
last 18 months is 3.1% of total loans vs. 1.3% peer average. Of total restructured loans,
11% have slipped to NPLs so far, however a vintage analysis of the slippages shows
slippages increase rapidly with age (28% slippage from loans restructured in FY09 vs.
5% from those in FY11), which suggests continued caution ahead
Sell: Asset Quality Remains a Concern
Introducing CIRA's New Stock Rating System — Citi Investment Research and
Analysis (CIRA) recently announced its new stock rating system. CIRA's investment
ratings are Buy, Neutral and Sell. Our ratings are a function of analyst expectations of
expected total return (“ETR”) and risk. Risk rating takes into account both price volatility
and fundamental criteria. Stocks will either have no risk rating or a High risk rating
assigned. The sidebar and table on this page show our new rating, target price, and
estimates for PNB. See “Guide to Citi Investment Research & Analysis (CIRA)
Fundamental Research Investment Ratings” in the Important Disclosures section of
Appendix A1 of this report for a description of our rating system.
Reducing earnings 5-8%, TP to Rs930, maintain Sell — We reduce FY12-14E
earnings 5-8% on higher-than-expected operating and credit costs. PNB’s asset quality
has remained under higher pressure than peers and is likely to limit valuations. We
maintain our Sell with a revised EVA-based TP of Rs930 (prev. Rs1,100), benchmarked
to 1.1x 1Yr Fwd P/BV. We remain near-term cautious on the sector given macro
uncertainty, and prefer private banks over public sector (top picks Axis, ICICI, SBI).
Asset quality concerns higher than peers — Asset quality remains our key concern
for PNB given its higher mid-market exposures and relatively high loan growth in FY07-
11 vs. industry (26% CAGR vs. 20% for industry). Over the last 18 months, its
incremental slippages have been high – 3.4% of loans cumulatively, with quarterly
trends going up. Moreover, its Gross NPLs have increased 60% during this period and
Net NPLs by 113% - significantly higher than peers. Our comparative analysis suggests
PNB’s asset quality has been closer to mid-cap PSU banks than other large cap peers.
High restructured assets, could see continued slippages — PNB’s restructured
assets are not only high (8% of loans), but also ongoing – cumulative restructuring in
last 18 months is 3.1% of total loans vs. 1.3% peer average. Of total restructured loans,
11% have slipped to NPLs so far, however a vintage analysis of the slippages shows
slippages increase rapidly with age (28% slippage from loans restructured in FY09 vs.
5% from those in FY11), which suggests continued caution ahead
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