Punjab National Bank (PNB) reported
disappointing results for Q4FY2006 with its net
interest income (NII) and fee income recording a tepid
growth and operating expenses increasing
substantially.
PNB's NII grew by a low 10.1% year
on year (yoy) as the interest income on the
investments and the balances with the Reserve Bank of
India (RBI) and the other banks declined. The NII in
fact declined by 2.5% quarter on quarter (qoq).
While PNB's total assets have grown
by 16% yoy and 9% qoq, the NII has grown at much
slower pace, which implies that the bank is facing
pressure on its net interest margin (NIM).
The core fee income declined by
2.5% for Q4FY2006. The bank is facing the heat of
competition from the other players in the market. Its
total other income grew by 11.7%, as it stepped up
recoveries.
The operating profit adjusted for
the extraordinary items and treasury profit fell by
6.5% as the operating expenses grew by 32.4% coupled
with a very low growth in the total income.
The provision of Rs600 crore on
account of the mark-to-market (MTM) losses on its
"available for sale" (AFS) bond portfolio further
pulled down the net profit, which declined by 77%,
adjusted for the extraordinary items.
PNB has transferred securities
worth Rs6,200 crore to the "held till maturity" (HTM)
portfolio to cut its MTM losses. The bank has also
indicated that further investments in bonds will be in
the HTM portfolio only. However, PNB's exposure to
interest risk remains high as the yield on its
investments is falling while the duration of the bond
portfolio is high.
The net non-performing asset (NPA)
as a percentage of the net advances has gone up
marginally by nine basis points yoy to 0.29%.
We have downgraded our FY2007E
earnings per share (EPS) estimate for PNB by 14% from
Rs64.8 to Rs55.8 to take into account the lower fee
income, higher operating expenses and rising
provisioning requirements.
At the current market price of
Rs416, the stock is trading at 6.4x its FY2008E EPS
and 1.1x its FY2008E adjusted book value. We maintain
our Buy recommendation on the stock with the price
target of Rs500.
