PNB

Investments with a one-two year time horizon can be considered in the stock of Punjab National Bank (PNB), as the bank despite its size, holds strong growth prospects. The overall pick-up in credit growth augurs well for PNB, which has been steadily improving its market share. The bank's ability to source funds at a low cost to finance lending would mean strong core earnings.



The return of 24 per cent on equity and of 1.3 per cent on assets ranks the bank amongst the best ; high growth could be sustainable going forward.

At current market price of Rs 1,067.7, the stock discounts the estimated FY11 adjusted book 1.8 times and earnings 7.2 times. In terms of P/BV valuation, the stock is at a premium to all other public sector banks, barring State Bank of India. We expect that the bank – given its better profitability ratios, superior credit-deposit ratio of (74.8 per cent), good margins and asset quality – should narrow the gap with SBI's valuations in the near future. Improved cost efficiencies (cost-income ratio of 39.39 per cent) and maintenance of asset quality are key positives. The management also plans to leverage on technology to improve other fee income streams. Over the next two years, earnings growth will be predominantly driven by advances .

The net interest margin (NIM) was at 3.99 per cent and 3.57 per cent respectively for the quarter and the year ended March 31, 2010. While the margins are likely to moderate , they are likely to remain healthy (above 3.5 per cent). The change in savings interest computation (around 15 bps), 100 bps hike in CRR and repo rate hike may pressure costs.

However, with lending rates likely to trend up from their lows, margins may be protected, especially with the bank announcing a higher base rate. The bank continues to be comfortably capitalised with Tier-1 ratio of 9.15 per cent. With a government holding of 57 per cent giving it sufficient head room to raise capital, the CRAR may continue to be maintained above 12 per cent for the next two years, even with strong credit growth.

Asset quality concerns are also diminishing given the improving business confidence . PNB's net NPA as of March 31, 2010, stood at 0.35 per cent.

Restructured assets comprise 6.5 per cent of the total credit, a high proportion. However, as majority of its restructured assets are from corporate accounts, these may be upgraded to standard advances once the interest payments kick in. Rising yields will expose investment portfolio to interest rate risk.

via BL