Punjab National Bank (PNB) witnessed improvement across many fronts in Q408. Net interest income (NII) rose 12.7% y-o-y in vis-à-vis less than 5% growth in both the second and third quarters. Better asset quality led to a substantial fall in provisioning, which significantly boosted the bottom line.
PNB is running on strong fundamentals as reflected in a high CASA ratio, huge branch network (the second largest in the industry), and high net interest margin.
The Bank’s focus on rural markets brings advantages in the form of the mobilization of low-cost deposits and lending.
While rural lending carries a higher risk of default, the Bank has adopted sound risk management policies and recovery efforts as reflected in a fall in the NPAs.
We have valued PNB using the two-stage Gordon-growth model and have arrived at a target P/B of 1.2x by assuming a RoE of 15%.
This gives a standalone price of Rs502 for FY09. Further, we have valued the investment in its subsidiaries and UTI asset management, taken together at Rs24 per share, which results in a target price of Rs526 for FY09.