PNB: TP at Rs 180, 32% upside from current level

After the 24% correction in the past two months, we believe incremental risk reward is turning favourable again for PNB. Our adjusted book valuation of 0.55x Mar-19 book factors in Rs 790 billion of total stress vs gross NPAs of Rs 554 billion (FY17) adequately captures any asset quality risks. Near-term provisioning will remain elevated given the lower coverage of 41%, but the large stock of prudentially written-off NPAs provides comfort on recoveries/ upgrades. Subsidiaries now contribute 33% of PNB’s valuation, and will continue to accrete value. We maintain our TP of Rs 180, which is based on 0.8x Mar-19 book and implies 32% upside from current levels. While we previously believed street expectations from the resolution of NPAs were high, with the recent 24% correction, we believe expectations are more realistic now. We factor in 60% loss given default, system loan growth remains anaemic at 5% y-o-y, and coupled with MCLR migration implies that PPOP pressure will continue for corporate banks, including PNB.

We highlighted in our May-17 downgrade note that PNB’s large one-off income in FY17 will not recur, and hence we factor in PPOP of Rs 125 billion/ Rs 132 billion in FY1Y18/19F vs Rs 160 billion of PPOP in FY17. Without much reliance on such one-off income, we expect ROE of 10% by end-FY19F.

We revise down FY18F PAT by 56%, but FY19F remains largely unchanged. With ~10% ROEs, current valuation at 0.55x Mar-19 book is undemanding, in our view. We value PNB’s subsidiaries at Rs 46/share after applying a 15% holding discount. Our TP implies 0.8x Mar-19 adjusted book. Subsidiaries now contribute 33% of PNB’s valuation, and will continue to accrete value.

We maintain our TP of Rs 180, which is based on 0.8x March 2019 book and implies 32% upside from current levels. Risks: Sharperthan-expected moderation in PPOP/assets and higher-than-expected LGD are the key downside risks, in our view.

Punjab National Bank