PNB's limited gains from housing finance IPO

Apart from some increase in sum-of-parts valuation, the issue will not help in augmenting the bank's capital

The Punjab National Bank (PNB) stock was up 2.7 per cent, after news of the bank’s plan for an Initial Public Offer (IPO) of equity for subsidiary PNB Housing Finance.

The move will help PNB unlock value and possibly lead to some upgrades in PNB’s target prices, as analysts start to assign some value to the subsidiary. Prior to the IPO news, most analysts were assigning negligible value to PNB’s subsidiaries and, hence, were not looking at the bank’s sum-of-the-parts valuation.

Shweta Daptardar, financials analyst at KR Choksey, ascribes a value of Rs 15 a share to the housing finance business (post the holding company discount). This is nine per cent of her target price of Rs 165 a share for PNB. This is after considering that PNB's stake in the housing finance subsidiary will fall from 51 per cent to about 35-37 per cent post IPO.

Will this issue aid PNB’s financials in any way? Unlikely, as the money raised ( (up to Rs 2,500 crore according to  DRHP)) via the issue will flow into the coffers of PNB Housing, as it is a fresh issue of shares. Thus, there will not be any increase in PNB’s capital after the issue. Its tier-1 capital ratio was 8.4 per cent in FY16, among the lowest in the sector. To register profitable growth, the bank needs to increase this.

Apart from capital infusion from the government, PNB is focusing on improving upgrades and recoveries from bad and doubtful debts. This will lead to provisioning write-backs and aid overall capital. However, with economic growth recovering at a slow pace, it remains to be seen how the bank will achieve this target.

PNB is also looking to sell stake in non-core businesses. However, with the smaller size of these businesses, such stake sales might only lead to marginal gains in the capital ratio, estimate analysts.  The Street is also concerned about the bank’s asset quality, which worsened in recent quarters. While the stock has rallied strongly after May, anticipating that most of the asset quality pain is provided for, the bank’s huge watchlist of about Rs 30,000 crore could still throw up some surprises.

Positively, the bank remains strongly levered to reforms in battered sectors such as power and infrastructure, among others, and a faster economic recovery. The valuations also remain undemanding at 0.6 times the FY17 estimated book. However, most analysts are advising that investors await a clearer picture on capital adequacy, as well as asset quality, before investing in the stock.