Punjab National Bank - Buy

31 AUGUST, 2009

INITIATING COVERAGE

PUNJAB NATIONAL BANK CMP

RESEARCH

: Rs. 682

TARGET : Rs. 794

BUY COMPANY DETAILS

Punjab National Bank PNB is the second largest bank in public sector. Despite the slowdown in economy, where banks have slowed down their business, the bank has

BSE Code

532461

NSE Code

PNB

Bloomberg

PNB IN

Market Cap (Rs. Crs)

21530.25

Free Float (%)

42.2

been continuously growing at healthy pace. It's bottom line has been

52-wk H/L (Rs.)

751.8 / 286.2

adequately supported by core lending as well as treasury activities. We

Dividend Yield %

2.92

believe that the near term negatives for the sector like rising yields, slowing

P/E Ratio

6.31

advance growth and asset quality is adequately discounted in the price and

P/BV

1.63

Beta

0.86

we would probably see positive surprises from the company, ahead of what the market is expecting. Considering the technological improvement and attitude towards growth coupled with sound risk management, we believe

SHARE HOLDING PATTERN (%)

there would be good growth in it's book value and fundamental numbers

Promoter Group

along with improvement in valuation ratios.

FII

17.98 %

Other Institutions

18.68 %

INVESTMENT ARGUMENTS

57.8 %

Other

5.54 %

Total

100 %

• Business Growth Business for the bank has been growing very strongly over the quarters.

FINANCIAL DETAILS (Rs. Crs.) Share Capital

315.3

Net Sales (Cons)

19777.65

Net Sales (Standalone)

19326.16

PAT (Cons) PAT (Standalone)

3195.9 3089.69

EPS (Cons) (Rs.)

96.73

EPS (Standalone) (Rs.)

94.63

PNB Price Chart Source: Company, Eureka Research

When the growth by most of the banks had been capped due to liquidity concerns and asset quality fear, the strong balance sheet and liquidity position coupled with it's penetration in different industry segments has kept the growth momentum buoyant for the company. For FY09, the advance growth was 29%, compared to an average of 26.1% for public sector and 15% for private sector. We expect the advance growth momentum to continue going forward with advances clocking a growth of

ANALYST Mohammad Riazuddin [email protected] 099030 62346 / 91-33-3918 0386 - 87

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

22% (though the management expects 25%) due to higher base effect and slowdown in demand for funds in H1FY10. We expect the private demand for funds to pick-up for the industry by second half. As we have seen in the GDP release for the quarter June 09', private consumption expenditure has increased as a percentage of GDP has inched up a bit. With significant part of borrowing programme ending in September, and the borrowed money getting back in the system through Govt. spending, we would soon see demand for credit in Infrastructure and industrials space. • Asset Quality PNB has one of the best asset quality amongst its peers, if we go by GNPA and NNPA ratio. GNPA ratio has come down significantly from 2.74% to 1.77% in FY09. Despite bad market conditions, GNPA did not cross 1.8% in June 09. With the slowdown in economic activity in Q4FY09 and Q1FY10, coupled with robust growth in loan book, we expect the GNPA ratio to inch up to 2% level by next quarter. However, if the economic turnaround happens and demand and investments pick up, as expected, due to govt. stimulus, we would see GNPA ratio at around 1.97% for FY10, which itself is not very high

(Amount, Rs. Crs.) Source: Company, Eureka Research

compared to industry. • High Provision Coverage Ratio The bank maintains among the highest provision coverage ratio in the industry of close to 90%. Such high provision coverage ratio would restrict high provisioning requirements hitting the profitability in case of asset quality deterioration. As of March 09, ~40% of it's asset were in substandard category only, requiring only 10% provisioning. Hence, we can see that the bank has enough head room in terms of reducing it's coverage ratio in case of temporary asset quality deterioration without hurting the it's profits. • New initiatives to boost non-interest income The non-interest income, comprising of fees and brokerages income, is poised for significant improvement subsequent to this period of turbulence by the virtue of the fact that the bank has a robust customer base, both in retail and corporate side. Core non-interest income (excluding profit from sale of investments) rose by 45% in FY09.The bank has got the requisite permission to set up FIM Bank for factoring, forfeiting and trade finance. The bank has also set up an 100% Merchant Banking subsidiary to boost it's other income component on consolidated basis. Given the penetration of the bank, and revised guidelines of IRDA, bancassurance would be the most cost effective mode of roping in fresh investors. Hence, we would see a good opportunity for the bank going forward from distribution of insurance products and other investment schemes like mutual funds etc. The bank has launched it's Global Visa Credit Card and e-broking services to it's clients. • Healthy margins The NIMS for the bank stood at 3.49% for FY09 and 3.41% for Q1FY10. Though no significant amount of re-pricing happened

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

in Q1FY10, we expect to see an improvement in margins through deposit re-pricing in coming quarters. We expect the NIM for FY10 to be lower at 3%, however the decline is less sharper than what experienced by other PSU banks, mainly because PNB was among the first ones to reduce deposit rates and did not garner huge funds at high costs like SBI at the end of last cycle. The NIMs are expected to improve significantly in FY11 to 3.34%. • Valuations attractive after considering negatives The negatives relating to rising NPAs and firming up of interest rates has already been discounted in the prices. Even if we factor in slower advance growth and some losses on it's investment book, we still see that at CMP of Rs. 682the stock is trading at 1.22 times it's FY10 Adj. Book Value per share (ABVPS) of Rs. 503 and 0.96 times it's FY11 ABVPS of Rs. 640, which we believe is cheap considering it's high ROE. (22% for FY10E and 26% for FY11E)

ADVANCE - DEPOSIT PROFILE ADVANCES Industry Exposures Infra.

Amt. (Rs. Crs.)

% of Total

22082

29%

Iron & Steel

7118

9%

Electricity

5003

7%

Textile

4200

5%

Construction

3868

5%

Engineering

3304

4%

Food processing

2763

4%

Sugar

2319

3%

Other

26006

34%

Total

76663

100%

The advance book of PNB constitutes largely of corporate (49%) however, SME is the fastest growing segment. The success of a bank building up good quality SME depends on it's reach and understanding of the borrowers business. Considering the depth of it's penetration and the untapped unbanked areas of small ticket financing, the bank has been doing reasonably well on a risk adjusted basis. The yield in this segment is high, and risk management depends on how prudent the management is. Educational loan is a fast growing area for the bank, where the bank happens to be the leader with a portfolio of Rs. 1662 crs, growing at a pace of ~50% annually. Corporate hiring was very low last year, leading to slight deterioration in educational loan book. However with economy stabilizing and hiring resuming, we expect this segment to continue to grow. The housing segment is also fast catching market share and is a strategic fit into it's existing business. If we look at sectoral fund based exposures, Infrastructure sector accounted for 29% of the industrial exposure. This exhibits the banks capability in financing infrastructure projects, either solely or in consortium. We expect the PPP mode for infrastructure build to further increase the want of funds and the ban has to benefit a lot in this sector. Moreover considering the penetration of bank in rural areas, bank might want to expand it's retail portfolio in these unbanked areas.

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

DEPOSIT PNB has been successful in managing the liquidity and streamlining the deposit and advance growth. Deposits have been growing by 26% in FY09, very much in line with it's advance growth of 29%. The bank manatains it's CASA at 39% and a similar level is expected to be maintained in future. Bulk deposits form 19-20% of the deposits and have an effective duration of about 1 year. With the 100% of it's branches coming under CBS and introduction of facilities like RTGS, NEFT branches, increased number of ATMs and debit card, bank would be offering services at par with other private banks. Asset Liability Management and Interest Rate Risk

As we can see in the graphs above, the maturity pattern of advances and deposits portfolio are closely aligned. The maturity profile of investment and borrowing are however quite different from each other. This gives us an idea about when respective assets and liabilities get re-priced and what effect changes in interest rates might have on their values. However, to understand the net effect of the maturity pattern of assets and liabilities on Net Interest Income we should also consider that individual assets (advances) and liabilities might get re-priced before their maturity if they are floating. To analyse the net interest rate risk of the bank we look at the following data : The adjoining data is as on March 09. The negative figure for 3 - 6 months and 6 mnths - 1 year, implies that Risk Sensitive Liabilities are more than Rate Sensitive Assets. Hence, if the rates fall for these periods, i.e June- Sep, and Sep-Dec quarter, their liabilities would fall greater than asset and hence improve NII. For the 6 months from March, a fall in 0.5% in interest rates would boost the NII by Rs. 60 crs. We have actually seen the rates coming down significantly from March onwards both on deposits and advance side. Though the margins have moderated in June quarter, for September quarter we might actually see improvement in margins.

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

ASSET QUALITY As we can see above, GNPA has reduced significantly, and

Mar - 09

Mar - 08

that too on the back of recoveries and upgrades, rather

Op. GNPA

3319

3391

than write-offs. The bank has increased it's coverage ratio

Add: Additions

1731

1953

significantly to keep Net NPA at 0.17%, lowest in the

Less: Reduction -O/W Cash Recoveries

industry. As on date PNB has restructured loans worth Rs. 5000 crs, out of which most of it come from standard category. This

2025 1039

- Upgradation

448

365

- Write off

466

621

Closing GNPA

forms 3% of the advance portfolio. Though this is on the

2283 1369

%age of Advances

2767

3319

1.77%

2.74%

264

754

0.17%

0.64%

higher side, we believe that most of the restructured loans would turn standard and would not add significantly to

Net NPA

GNPA. However, even if we consider significant slippage,

%age of Advances

the existing high level of provision for NPA and a Floating provision of Rs. 1080 crs would provide a cushion for such decline in asset quality. INVESTMENTS Investments for the bank as on June 09' stood at Rs. 65,229 Crs. This amounts to 30% of the deposits. Govt. and other approved securities form 86% of the portfolio. This boils down to a SLR of 26%. Further 86% of the SLR portfolio ins in HTM category. HTM portfolio as a percentage of Deposits stands at ~23%. Hence it still has a cushion of around 200 bps in increasing it's HTM portfolio to the limit of 25% of NDTL. However, we are expecting RBI to revise this limit in order to absorb the huge govt. issue. We might see some losses coming in from mark to market of the AFS and HFT category, which has a duration of 2.4%. Moreover, there is not enough provision for depreciation in investment to cushion such losses. In FY09, Rs. 544 crs of the Rs. 920 crs provision got written back. Hence only Rs. 375 crs remains on this account as on Mar 2009, which would further get reduced in last quarter. However the write off would not be very massive considering low duration of the portfolio. VALUATION AND RECOMMENDATION Looking at the fundamentals as discussed above, we believe there are few headwinds and concerns in the form of slowing loan growth in the sector, rising assets quality concern and rising yields affecting the investment book. However, the current valuation for the company has already discounted the above factors and the actual outcome might be better than what the markets are expecting. At current price of Rs. 682, the bank is trading at 1.2 times it's FY10E Adjusted Book Value Per Share (ABVPS), and 0.95 times it's FY11 ABVPS. We have a FY10 price target of Rs. 794 for the stock, which is 16% from the current levels. We have come to the valuation after giving significant discount to management guidance's and there still lies some chance for the company to outperform our expectations. We recommend 'Buy' for the stock for medium to long term horizon.

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

VALUATION MATRIX Valuation

Basis

Multiple

Value

Stake

Price (Rs.)

Core Banking

FY10 Adj. BVPS

1.5

503.45

100%

755.2

PNB Gilt

FY10 Adj. BVPS

1

17.44

74%

12.9

FY09' BVPS

0.8

32.67

100%

26.1

PNB Intl. & Other Target Price

794.2

VALUATION RATIOS Valuation Ratios

FY09

FY10E

FY11E

P/E

6.47

5.51

3.78

P/ABVPS

1.43

1.22

0.96

Yields Rs. Crs.

FY08

FY09

FY10E

FY11E

Cost of Deposits (calculated)

5.59%

6.15%

5.80%

6.00%

Yield on Advances (calculated)

9.66%

10.68%

9.8%

10.50%

Net Interest Margin

3.85%

3.49%

3.01%

3.34%

Important Ratios FY08

FY09

FY10E

FY11E

GNPA Ratio

2.74%

1.77%

1.97%

1.73%

NNPA Ratio

0.63%

0.17%

0.35%

0.30%

Coverage Ratio

66%

88%

75%

77%

13.46%

14.03%

12.56%

12.62%

- Tier-I

8.97%

8.98%

8.68%

9.05%

- Tier - II

4.49%

5.05%

3.88%

3.58%

Credit Deposit Ratio

72%

74%

73%

74%

Investment Deposit Ratio

32%

30%

32%

30%

CAR

Cost to Income Ratio

46.8%

42.5%

40%

38%

CASA

43%

39%

38%

40%

RONW

19%

23%

22%

26%

1.13%

1.39%

1.29%

1.55%

Return on Assets

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

FINANCIALS Profit & Loss Account (Rs. Crs.) Particulars

2008

Interest Earned -Advances -Invest.

2009

14265

2010E

19272

10589

14840

3611

2011E

21666

28107

16945

4409

22529

4721

5578

Other Income

1998

2919

2907

3541

Total Income

16263

22191

24573

31648

Interest Expenese

8730

12295

14187

17952

Net Interest Income

5535

6977

7479

10155

NIM

3.85%

3.49%

3.01%

3.34%

3526

4206

4154

5204

46.8%

42.5%

40%

38%

4007

5690

6231

8491

Operating Expenses Efficiency ratio Operating Profit Provisions & Contingencies PBT Provision for Taxes Effective Tax Rate

710

923.48

838

637

3297

4767

5393

7854

1247

1676

1888

2749

37.83%

35.16%

35%

35%

2048

3090.88

3506

5105

No. of shares

31.53

31.53

31.53

31.53

EPS (Rs.)

62.77

94.63

111.19

161.92

Net Profit

Dividend+ Div Tax Dividend%

479

737

922

922

130%

200%

250%

250%

Balance Sheet Rs. Crs.

FY07

FY08

FY09

FY10E

FY11E

SOURCES OF FUNDS : Capital Reserves Total Deposits Borrowings Other Liabilities & Provisions

315

315

315

315

315

10120

12003

14338

16922

21105

139860

166457

209761

255907

317325

1949

5447

4374

3500

3600

10285

14827

18151

Sub-Debt Others TOTAL LIABILITIES

19500

20600

8500

8600

11000

12000

162529

199049

246940

296144

362945

12372

15258

17058

14295

20539

APPLICATION OF FUNDS : Cash & Balances with RBI

3273

3573

4355

3800

3500

Investments

45190

53992

63385

81890

95197

Advances

Balances with Banks & money at Call

96597

119502

154703

188087

235108

Fixed Assets

1010

2316

2397

3000

3100

Other Assets

4087

4409

5041

5072

5500

162529

199049

246940

296144

362945

TOTAL ASSETS

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PUNJAB NATIONAL BANK INITIATING COVERAGE 31, AUGUST, 2009

GROWTH Growth

FY09

FY10E

FY11E

Deposits

26.01%

22%

24%

CASA

13.83%

19%

31%

29%

22%

25%

-16.61%

35.94%

9.53%

17.4%

29.2%

16.3%

42.02%

9.52%

36.27%

19%

20%

26%

Advances GNPA Investments Operating Profits Networth

DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, but we do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute our judgement as of this date and are subject to change without notice. Eureka Research will not be responsible for the consequence of reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID. Analyst

:

Mohammad Riazuddin

Email

:

[email protected]

Phone

:

099030 62346 / 91-33-3918 0386 - 87

Registered Office : 7 Lyons Range, 2nd Floor, Room No. 1, Kolkata - 700001 Corporate Office : B3/4, Gillander House, 8 N S Road, 3rd Floor, Kolkata - 700001 Phone : 91-33-2210 7500 / 01 / 02, Fax: 91-33-2210 5184 e: [email protected] Mumbai Office

: 909 Raheja Chamber, 213 Nariman Point, Mumbai-400021 Phone : 91-22-2202 5941 / 5942 e: [email protected]

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