Punjab National Bank: Karvy Research Report

Karvy is bullish on Punjab National Bank (PNB) and have called it an OUT-PERFORMER and have recommended a BUY with the following investment rationale:

In a recent development, Punjab National Bank (PNB)) and other seven banks’ exposure to Zoom developers (a Mumbai based project development company) has come into light. Punjab National Bank‘ total exposure to the account is close to Rs26 bn (non-fund based exposure), out of this Punjab National Bank‘s (the lead banker) exposure is close to Rs4.5 bn. In accordance with the media reporting, in Q1FY11, Punjab National Bank already recognized Rs3.0 bn as NPAs and made provisions. According to our communication with other banks’ managements some of the banks made provisions in Q4FY10 itself. Around 76% of the banks’ exposure is insured with ECGC (Export Credit Guarantee Corporation).

Though, it appears that ECGC may not fulfill the banks’ claim for the account, and banks are pushing the matter for corporate debt restructuring (CDR). The CDR package could provide short term relief to the borrower and to ECGC. The borrower has been aggressively trying to raise short-term funds for fulfilling liabilities on account of employees’ costs and overheads. Given the status of the borrower, CDR package might not revive the borrower and banks could have to write off the entire exposure.

Central Bureau of Investigation (CBI) would be investigating the foreign currency irregularities and the central bank would investigate huge amount of banks’ non-fund exposure to single account.

In case of Punjab National Bank (PNB), as on end-March’ 10, Punjab National Bank (PNB)‘s total gross NPAs was Rs32.1 bn (1.71% of gross advances) and increased to Rs36.1 bn (1.82% of gross advances). Out of total exposure, Rs3.0 bn has been recognized as NPAs and provided for in Q1FY11 but extent of provisioning is unknown. In a worst case scenario, if Punjab National Bank (PNB) writes-off entire exposure in FY11, EPS would decline by close to 6.5% to Rs 131 and book value would drift by close to 1.4% to Rs613. We await complete clarity on the issue to effect the change in earning estimates and target price. We maintain our earning estimates and Out Performer rating with a target price of Rs1,562 at 2.2x adjusted book value FY12