Sharekhan has Maintained its Buy Rating on PNB. Here are the findings from its brokerage report - March 2023
Summary: We believe improvement in the bank’s core RoA is expected to drive strong outperformance in the near to medium term.
Better core RoA would be driven by sustained healthy loan growth, better margins, and normalisation of credit cost.
We believe correction (~18-20%) in the stock seems to be overdone due to Adani-Hindenburg saga and provides good opportunity to add due to improving business outlook
Stock currently trades at 0.6x/0.5x its FY2024E/25E ABV. We reiterate our buy rating on the stock with an unchanged PT of Rs. 64.
PNB had earlier guided that its total outstanding exposure in terms of fund-based, non-fund based and investment book to Adani group companies stands at ~4.7% of loans and it is spread across ~9-10 companies which are backed by strong cash flow generating assets. There is no lumpy exposure and bank has not funded against the shares of group companies. We continue to believe that there is no systematic risk arising here. The street’s concern related to conglomerate in terms of faster business growth with excessive diversification of business with the help of leverage in recent times would abate in the near to medium term through infusion of equity via stake sale. Balance sheet strength for bank has improved substantially from the past cycles– capital ratios are healthy, with Tier-1 Capital at 12.2%. It has healthy CASA share (~44%), higher liquidity (liquidity coverage ratio of 150%). Strong operating profit growth (led by sustained healthy loan growth and better margins) along with normalization of credit costs should drive a strong improvement in return ratios going ahead.
Improving asset quality outlook: Strong recoveries and upgrades have started to outpace slippage formation and lower net slippages trend going ahead would help to normalize credit costs. Bank has guided for 2% slippages & 1.5% credit cost in FY24E. The SMA-2 book (above 5 crore) stands at ~0.2% of loans. Improvement in corporate credit cycle along with the fact that trailing loan growth in corporate segment has been muted in the past few years, should moderate NPL formation further. Provision coverage ratio on GNPL stands at ~69%. Bank is expected to further increase the coverage in Q4FY23. Provisions are largely related to back book (Net NPL 3.3% & Restructured book 1.7%). Thus, market may look through onetime book value adjustment. The credit cost is expected to normalize from H1FY24E. Bank also guided that for all the loans disbursed amounting to Rs. 4.69 trillion from July 2020 to Dec 2023, slippages are at just 0.19% annualised.
Healthy loan growth likely to sustain: System loan growth is strong at ~16% which expected to moderate to 13-14% in FY24E due to higher base in trailing 12 months. Bank is guiding for mid-teens loan growth in FY24E. We believe upside risk to loan growth remains as bank is likely to deliver higher growth due to strong retail traction, better balance sheet strength from past, lower domestic CD ratio (~70%) and excess liquidity (LCR ~150%) in an environment of deposit growth challenges places it well to accelerate loan growth. Bank is guiding for faster loan growth in RAM (Retail, Agri & MSME) segment which is currently 44% of loans and aims to take it to 55% over the medium term.
Margin outlook positive: Delay in interest rate hikes pause will act as tailwinds for the bank. Also majority of the book is on floating rate (~93% of total) under which higher share of MCLR benchmark linked book (36% of total) is there. Floating rate book which is linked to other than MCLR benchmark gets priced in faster. With 250 bps of cumulative rate hike by RBI, bank has passed on ~120-130 bps on the MCLR linked book and remaining 100-120 bps is yet to be passed. We believe margins outlook remains positive with upward bias despite higher repricing of term deposits.
Our Call Valuation – Maintain buy on PNB with an unchanged PT of Rs. 64: We remain positive on PNB as the bank is likely to deliver strong earnings driven by healthy PPoP growth and normalisation of credit costs. We expect Avg. RoAs of 0.8% driving Avg. RoE (return on equity) of 11% over FY24- 25E going ahead. We believe valuations are cheap for PNB as compared to an improvement in return ratio profile expected going ahead. An improvement in Core RoA trajectory of the bank is expected to drive strong outperformance in near to medium term. We believe correction in the stock seems to be overdone due to Adani-Hindenburg saga and provides good opportunity to add due to improving business outlook. The stock currently trades at 0.6x/0.5x its FY2024E/25E ABV. We reiterate our Buy rating on the stock with an unchanged PT of Rs. 64.
Key Risks Economic slowdown due to higher-than-anticipated credit cost and lower loan growth.
Asset quality and credit-cost scenario guidance: Management intends to bring down GNPA ratio to ~ 9% and NNPA ratio below 3.0% at the end of FY2023. The bank expects its slippages and credit cost to be ~2.0% & 1.5% of average advances respectively in FY24E. The bank is on track to target more recoveries than additions and does not foresee slippages from large accounts. With regards to the Adani group exposure, the total sanctioned exposure is ~Rs. 7,000 crore, out of which outstanding is Rs. 3,000 crore as fund-based; Rs. 700 crore as non-fund based and Rs. 42 crore in investment book. The bank has guided that the exposure is well diversified across group companies, backed by strong cash flow generating assets. Bank also guided that for all the loans disbursed amounting to Rs. 4.69 trillion from July 2020 to Dec 2023, slippages are at just 0.19% annualized.
Upside risk to loan growth guidance persist: Net advances grew by 16% y-o-y in 9MFY23. Retail advances rose by 33% y-o-y and 16% q-o-q, driven by secured (mortgages and vehicle loans), unsecured (personal loans), and purchase of IBPC. As far as the corporate book is concerned, it grew by 13% y-o-y. Bank is guiding for mid-teens loan growth in FY24E. We believe upside risk to loan growth remains as bank is likely to deliver higher growth due to strong retail traction, better balance sheet strength from past, lower domestic CD ratio (~70%) and excess liquidity (LCR ~150%) in an environment of deposit growth challenges places it well to accelerate loan growth. Bank is guiding for faster loan growth in RAM (Retail, Agri & MSME) segment which is currently 44% of loans and aims to take it to 55% over the medium term. On Corporate book front, bank is witenessing good demand from – unutilised sanction WCL, road, project infrastructure, NBFCs, steel, cement sector.
Strong NII growth to support PPoP growth: NII growth is expected to remain strong driven by healthy loan growth and margin improvement which should lend support to PPoP growth. Delay in interest rate hikes pause will act as tailwinds for the bank. Also majority of the book is on floating rate (~93% of total) under which higher share of MCLR benchmark linked book (36% of total) is there. Floating rate book which is linked to other than MCLR benchmark gets priced in faster. With 250 bps of cumulative rate hike by RBI, bank has passed on ~120-130 bps on the MCLR linked book and remaining 100-120 bps is yet to be passed. We believe margins outlook remains positive with upward bias despite higher repricing of term deposits.
Outlook and Valuation:
Sector Outlook – Deposits mobilisation to be in focus; Banks with superior liability franchise placed better
System-level credit offtake grew by ~16 % y-o-y in the fortnight ending February 24, 2023, indicating loan growth has been sustaining, given distinct signs of an improving economy, revival of investments and strong demand. On the other hand, deposits rose by ~10%, but still trails advances growth. We should see some moderation in loan growth due to a higher base in FY24 but loan growth is expected to remain healthy. Margins are likely to improve but momentum is expected to moderate and margins are expected to peak out by the end of FY2024. Asset quality is not a big issue on the corporate lending end due to muted growth in past few years. From the retail side, there could be some pressure due to adverse macro situation, but nothing is significant. Asset quality is likely to remain stable in near to medium term. In the past few years, lenders have been cautious about lending to the ‘BB & below’ category, thus the general risk, which they are carrying on the corporate portfolio, is low. On the retail loans front, due to COVID-19, banks have already seen one downcycle. Most of the exposure has been taken into credit costs. In terms of the MSME book, we need to be watchful. At present, we believe the banking sector is likely to see higher risk-off behaviour, with tactical market share gains for well-placed players. We believe banks with a strong capital base, strong deposit franchise, and asset quality (with high coverage and provision buffers) are well placed to capture growth opportunities.
Company Outlook – Benefiting from strong sectoral tailwinds PSU banks are an attractive play on strong sectoral tailwinds in the banking sector due to cheap valuations owing to expected improvement in the earnings profile. Operating profitability is expected to improve led by healthy loan growth and higher margins. Improving asset quality outlook, moderation in slippages and lower credit cost would likely augur well for the bank going ahead along with higher PCR and higher capital adequacy buffers. We believe credit growth would be driven by both retail and corporate segments (as private capex increases). We see upside risk in loan growth & margins and along with lower credit cost given the benign credit cycle should lead to improvement in the return ratio profile.
Valuation – Maintain buy with an unchanged PT of Rs. 64 We remain positive on PNB as the bank is likely to deliver strong earnings driven by healthy PPoP growth and normalisation of credit costs. We expect Avg. RoAs of 0.8% driving Avg. RoE (return on equity) of 11% over FY24-25E going ahead. We believe valuations are cheap for PNB as compared to an improvement in return ratio profile expected going ahead. An improvement in Core RoA trajectory of the bank is expected to drive strong outperformance in near to medium term. We believe correction in the stock seems to be overdone due to Adani-Hindenburg saga and provides good opportunity to add due to improving business outlook. The stock currently trades at 0.6x/0.5x its FY2024E/25E ABV. We reiterate our Buy rating on the stock with an unchanged PT of Rs. 64.
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