Fraud-hit PNB stock is a dud investment, caution analysts

Punjab National Bank (PNB) hit its lowest level since June 3, 2016 on Wednesday, falling nearly 12 per cent to Rs 75 levels, after reporting a record loss of Rs 134 billion in the January – March 2018 quarter (Q4FY18) – way higher than the Rs 26-27 billion loss expected by analysts. Operating loss during the recently concluded quarter stood Rs 4.5 billion – the first such instance in the bank’s history.

The results have made analysts cautious on public sector banks (PSBs) that are saddled with a large quantum of non-performing assets (NPAs), especially PNB, which they feel could remain under pressure. 

Most analysts have cut their ratings and price targets for the stock in this backdrop. Post FY18 performance, PNB runs the risk of coming under the prompt corrective action (PCA) framework, they say. That apart, the limited visibility in any structural driver makes it an unpredictable investment story.

Though the stock could see a short-term bounce on news of capital infusion, stake sale or cheap valuation support (given strong liability franchise and subsidiary value), Kunal Shah of Edelweiss Securities prefers to steer clear of the counter on account of structural issues.

“We believe governance issues, operational challenges, uncertain business prospects and diluted franchise makes it a dud investment proposition. FY18 events and weak earnings profile suggest it is on weak terrain (FY19 could also be a year of losses). Hence, we downgrade to 'REDUCE' with a revised target price of Rs 70,” he writes in a co-authored report.

Since the Nirav Modi scam broke in February 2018, PNB has lost nearly 47 per cent on the BSE and is is the worst performing counter in the S&P BSE Bankex index. In comparison, the S&P BSE Bankex has gained 2 per cent, while the S&P BSE Sensex has rallied over eight per cent during this period, ACE Equity data show.

Analysts at Motilal Oswal Securities, too, feel that the bank’s performance in financial year 2018 – 19 (FY19) could remain under pressure given the sharp rise in stressed assets. Though they were expecting a weak performance from the bank in Q4FY18, the actual results came delivered a negative surprise.

“A sharp rise in stressed assets, a steep decline in Common Equity Tier 1 (CET-1) ratio and impending provisions (on gratuity, investment depreciation, IBC etc.) will likely remain an overhang over FY19. We cut FY20E profit after tax (PAT) estimate by 44 per cent and revise our price target to Rs 85 (from Rs 160), valuing the bank at 0.6x Mar’20E book value. Downgrade to Neutral (from Buy),” analysts at Motilal Oswal Securities said in a report.

Though Nilanjan Karfa and Harshit Toshniwal of Jefferies recommend investors continue to hold this stock, they have cut their price target to Rs 80 (from Rs 110 earlier) citing the possibility of near-term operational challenges. 

“We cut our operating profit estimate by 19.5 per cent and 26.5 per cent for FY19/20 factoring in lower growth in a capital constrained situation, lower margins, higher opex. We build in higher credit costs and expect asset quality to remain weak in near term. Forecast loss of Rs 27,966 million in FY19 and cut our FY20 EPS estimate by 40 per cent to 13.2 (21.8 earlier),” they said.