Company Report - Punjab National Bank ( INR 571, Maintain Accumulate)

Punjab National Bank (PNB) delivered Q4FY08 results that were ahead of expectations, driven by robust advances growth, lower operating expenses, and a strong turnaround in asset quality. On a Y-o-Y basis, PAT more-than–doubled to INR 5.4 bn, while it remained flat on a Q-o-Q basis. NII for Q4FY08 grew 6.6% Q-o-Q and 6.5% Y-o-Y to INR 15.1 bn.

In FY08, NII grew 7% to INR 56 bn, while strong treasury profits, lower operating expenses, and lower provisions supported 33% net profit growth to INR 20 bn.

We are revising our earnings estimates upwards by 2-3% for FY09-10. The stock is currently trading at 1.4x FY09 and 1.2x FY10E book. We expect EPS to grow at 15% CAGR and deliver RoE’s of ~20% over FY08-10E. However, we remain cautious on stateowned banks (SoB) as we believe headwinds in the form of effect of farm loan waiver on asset quality, continued government intervention, and tight monetary conditions will limit stock performance. We maintain ‘ACCUMULATE’.

Key highlights of the quarter:

Advances grew 18% Q-o-Q and 24% Y-o-Y to INR 1,195 bn, while deposit growth was lower at 9% Q-o-Q and 19% Y-o-Y to INR 1,665.

CD ratio improved to 72% sequentially from 67% in Q3FY08, while CASA improved to 43% from 41% in Q3FY08.

Quality of assets improved sequentially with gross NPAs declining 22% (absolute basis) to INR 33 bn from INR 43 bn. Gross NPA is currently at 2.8% compared with 4.1% in Q3FY08. Net NPA declined 44% Q-o-Q to INR 7.5 bn and is at 0.67%. bn.

Cost-income ratio was on the lower side, at 40%, compared to the 49% average in the previous three quarters, mainly due to lower staff expenses. Transitional liability pertaining to pension, gratuity, and leave encashment (INR 9.3 bn) has been adjusted to revenue reserves, while transitional liability pertaining to other long-term benefits is amortized in the P/L. Provisions of INR 1 bn have been made for wage revision.

Fee-based income grew 34% Q-o-Q and 30% Y-o-Y to INR 4.7 bn. Profit on sale of investments was INR 685 mn.

Tax rate was higher, at 49%, compared to 12% in Q4FY07 and 35% in Q3FY08 mainly due to INR 1.8 bn of tax provision, which is not related to the current year’s income. Adjusting for this, PAT growth was higher, at 204% Y-o-Y and 34% Q-o-Q to INR 7.2 bn.

Key Risks :

Any downturn in agricultural growth will hurt the banks asset quality
Post loan waiver announcement asset quality risk has increased
Given the pace of expansion delinquencies can rise faster than expected

MatrixCap