PNB: Is The NPA At Its Peak In PSBS ?

127-123 may be a good buying zone for target of 163-180 for PNB

Although Q2FY16 PAT missed estimates, 

NII improvement & sequential NPA fall surprised the street to some extent;

Deleverage & retail banking thrust may help in future.

CMP: 133

Buy either on break out above 137-142 or wait for dips around 127-123

TGT: 152-163-180 (1-3M)

TGT: 215-240-280 (12-36M)

TSL<118

Note: Consecutive closing below 118 for any reason, PNB can fall up to 105-95 zone, where it may be again accumulated for better investment buying average.

Some key takeaways & rationale:

Q2FY16 PAT of PNB was at Rs.621 cr; up by 8% YOY, but down by over 33% sequentially against median expectations of around Rs.929 cr (QOQ-721 & YOY-575).

Q2 EPS was at 3.35 against consensus of 4.21 (QOQ-3.89 & YOY-3.18).

Q2 NII was at Rs.4322 cr up by around 4.1% YOY-4151.20 against estimate of  Rs.4202 cr. 

On stressed asset quality, net NPA declined by 1.34% sequentially but up by 30.7% on YOY at Rs.15187 cr on Q2FY16.

There were both negative impacts of lower other income, slow growth in loan, marginal increase in provisions and positive impact on fall in tax cost on overall Q2 PAT.

The management of PNB is quite optimistic about the Q2 result as the bank is improving in terms of asset quality. 

PNB is also eyeing big on retail banking and as par the CEO, its "shifting gears" to change itself accordingly. It will focus more on small retail & SME loans as new strategy. 

PNB is now also more open to sell its stressed assets to ARCS to counter sticky loan accounts more aggressively apart from thrust in recoveries.

But PNB's restructured loans can turn fast into NPA in the days ahead, if there is no visible recovery in the core sector of our economy as 10% of its total loan is now stands in CDR as on Q2FY16. 

Looking ahead, PSBS are now apparently in control over its NPA front and we may see incrementally lower slippages amid maximum thrust on recoveries and muted growth of fresh corporate loans. 

Thus worst may be behind for the NPA cycle as far as the PSBS are concerned. Recent power sector  & state discoms reform initiative may also be good to some extent for the PSBS, where lots of pains (stressed assets) are there.

Now, on the valuation metrics, PSBS also offer better return & limited risks and should be a part of an ideal portfolio over 2-3 years long term view. Govt may also allow for 49% FDI in PSBS in the days ahead for huge capital requirement and running them in a professional manner.

PNB has already corrected by over 45% in the last 11 months and technically, 127-123 is now a very good support zone.

Monetization of housing & insurance arm (deleveraging) my be another trigger for PNB in the days ahead.

As par BG metrics & current market parameters :

(on TTM & FWD EPS basis)

Present median valuation of PNB may be around: 140 (FY:15/TTM)

Projected fair valuations might be around: 165-186-215 (FY:16-18/FWD)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
PNB	13.21	203.24	10.5	144.64	135.25	139.95	150.82	131.89

PNB

18.25

220.45

10.5

170.00

158.98

164.49

150.82

131.89

PNB

24.5

241.5

10

192.23

179.76

185.99

150.82

131.89

PNB

32.75

267.75

10

222.25

207.83

215.04

150.82

131.89

Analytical Charts: