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PNB + Canara Bank – Modest Quarter

July 27, 2007

Punjab National Bank’s [PNB] profits are ahead of our 10% growth expectations, but qualitatively, it remains a modest quarter. Margins continue to face pressures, cost increases are also relatively high and overall profitability has been supported by provisioning write-backs.

Falling margins and high costs pressure overall profitability; excluding trading gains, profit expansion is likely to be lower still. PNB’s well above industry and 400bp+ margins were always likely to erode; however, the erosion appears to be coming in a rate environment that should have bolstered PNB’s margins, given its balance-sheet structure. PNB is expected to report an EPS of Rs 60.08 below Dalal Street Analysts consensus of Rs 64.49. Stock price target is Rs 615.

Canara Bank 1Q08 profits up 26% yoy, 9% higher than our expectations. Qualitatively though, they fall short, with a drop in NIIs the primary and a large disappointment. Margins dipped almost 50bp; well below industry levels, its own historical lows, and in a quarter that saw little growth. The asset book itself provides comfort; limited asset deterioration over quarter, continuing asset recoveries, increase in coverage levels, and loan growth moderation to sub 20% levels.

Canara Bank is expected to report an EPS of Rs 35.86 for FY2008 and the stock price target is Rs 300.

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