Recommendation: Buy
CMP = Rs 550
Price target: Rs 675
Result highlights:
- Punjab National Bank's (PNB) Q2FY2008 profit after tax (PAT) grew by 6.6% year on year (yoy) to Rs 538.5 crore. The PAT was higher than our expectations of Rs 510.5 crore and was mainly driven by the higher non-interest income.
- The net interest income (NII) adjusted for amortisation expenses was stagnant at Rs 1,368.5 crore as higher deposit costs put a significant pressure on the net interest margin (NIM). The NIM declined by 11 basis points (bps) on a year-on-year (y-o-y) basis to 3.75%.
- The non-interest income grew by 26.1% yoy to Rs 467.8 crore mainly driven by the higher treasury income that grew by 67.2% yoy to Rs 107 crore and a fee income that rose by 20.7% yoy to Rs 262 crore.
- The operating expenses grew by 19.3% yoy to Rs 855 crore mainly on the back of a 25.6% y-o-y increase in the staff expenses to Rs 641.8 crore. The sharp increase in the staff expenses was on account of Rs 200-crore additional provisions made by the bank to meet its shortfall in pension liabilities.
- The management has stated that the shortfall is likely to be around Rs 900 crore and is to be written over the next five years. Thus, the operating profit declined by 5% yoy, whereas the core operating profit was down by 10.3% yoy.
- Despite the dismal performance on the core operating side, PNB continues to enjoy a high level of current account and savings account (CASA) at 44% and margins at around 3.8%. The bank owns a 25% stake in the Unit Trust of India (UTI) mutual fund. UTI is likely to come out with an initial public offer (IPO) in early CY2008. The stake in the UTI mutual fund contributes around Rs 32 to each share of PNB.
- With its high return on equity (RoE) of around 17.8%, I feel the valuations are attractive at current levels. At the current market price of Rs 550, the stock is quoting at 7.8x its FY2009E earnings per share (EPS), 4x pre-provisioning profit (PPP) and 1.3x FY2009E book value (BV).
- I maintain Buy recommendation on the stock with a 12-month price target of Rs 675.
