Punjab National Bank

Transcription

1 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Q4FY16 Result Update Asset quality showing no respite May 18, 2016 Nitin Kumar / Pritesh Bumb / Vidhi Shah / Rating Reduce Price Rs74 Target Price Rs60 Implied Upside -18.9% Sensex 25,705 Nifty 7,870 (Prices as on May 18, 2016) Trading data Market Cap. (Rs bn) Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 62.08% Foreign 10.36% Domestic Inst % Public & Other 6.77% Stock Performance (%) 1M 6M 12M Absolute (10.2) (45.6) (50.1) Relative (9.8) (46.5) (43.0) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: PNBK.BO, BB: PNB IN) (Rs) Source: Bloomberg PNB continues to disappoint as it reported net loss of Rs53.67bn (PLe: Loss of Rs880mn) while GNPLs increased 63% QoQ to Rs558bn (24% annualized slippages). PNB has thus reported total slippages of Rs422bn in FY16 (Rs166bn in FY15) and has disclosed SMA-2 advances of Rs110bn. Large part of the slippages this quarter occurred from the restructured assets which thus declined 42% QoQ to Rs201bn (4.9% of total loans). While we expect NPL formation rate to improve materially we believe that ~13% GNPL ratio and modest coverage ratio of 36.5% will continue to keep a pressure on provisioning expenses, particularly as the bad loans age. We fine-tune our estimates and note that the Gross Stressed Assets for PNB now equates to ~225% of FY17E Networth. (Please see exhibit 1 for details). We lower our PT to Rs60 based on 1.1x Sep 17E ABV2 and retain our REDUCE rating. NII remains under pressure; higher recoveries drive other income: PNB reported total revenues of Rs52.2 bn (~3% YoY growth) on the back of higher recoveries even as NII declined by sharp ~27% YoY. CASA mix improved by 125bp QoQ to 41.6% led by steady growth in savings deposits, the share of which in total deposits stands at strong 34.3%. Margins declined 27bp QoQ impacted by high interest reversals even as CD ratio increased by 292bp QoQ. We expect NII growth to remain modest due to rising share of overseas loans, continued slippages (albeit modest) and focus on balance sheet de risking. Asset quality deteriorates rapidly; gross stressed assets stands at 21.7% of loans: Fresh slippages increased to 24% annualized thus driving 63% QoQ increase in GNPLs. Large part of the slippages occurred from the restructured assets which thus declined 42% QoQ to Rs201bn (4.9% of total loans). While we expect NPL formation rate to improve materially we believe that ~13% GNPL ratio and modest coverage ratio of 36.5% will keep credit cost high, particularly as the bad loans age. PNB has disclosed SMA-2 advances of Rs110bn. Capital levels remain relatively weak; retain REDUCE with revised PT of Rs60: PNB s Tier I ratio has declined by 11bp QoQ to 8.41% (CET-1: 7.87%) due to loss of Rs39.7bn during FY16 even as it benefitted from RBI's relaxation on DTA/FCTR/Reval reserve. We believe that the bank will soon need a fresh capital infusion (Rs17.3 bn infused during FY16). Retain REDUCE with PT of Rs60. Key financials ( Y/e March) E 2017E 2018E Net interest income 165, , , ,813 Growth (%) 2.5 (7.5) Operating profit 119, , , ,013 PAT 30,615 (39,742) 25,079 47,367 EPS (Rs) 16.7 (20.8) Growth (%) (10.6) (224.6) (161.3) 88.9 Net DPS (Rs) Profitability & Valuation E 2017E 2018E NIM (%) RoAE (%) 8.2 (10.3) RoAA (%) 0.53 (0.63) P / BV (x) P / ABV (x) PE (x) 4.4 (3.6) Net dividend yield (%) Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Net stressed assets for PNB now accounts for ~83% of projected networth Rs in million FY17E O/s standard restructured assets 211,512 - of which SEB restructured 19,040 Exposure under SDR cases 78,000 Exposure under 5/25 88,400 ARC sale outstanding 35,000 Gross NPLs 501,468 Total Gross Stressed Assets 914,380 - As % of FY17E Networth (excluding revaluation reserves) 225% - As % of FY17E loans 19.7% Net stressed asset calculation - 20% slippage from restructured assets (excluding SEB portion) 38,494-30% haircut on SDR cases 23,400-20% on 5/25 exposure 17,680-10% on ARC sale 3,500-70% of Net NPL 231,245 Total damage to Book Value 314,320 - As % of FY17E Networth (excluding revaluation reserves) 83% - As % of FY17E loans 7% Book Value per share, Rs ABV per share adjusted for 70% Net NPLs, Rs - ABV ABV per share adjusted for all other exposure (SDR, 5/25, ARC & restr) - ABV Damage to FY17E ABV due to others 42.0 May 18,

3 Exhibit 2: PNB Q4FY16 Asset quality issues at peak; high provisions drag earnings P&L (Rs m) Q4FY16 Q4FY15 YoY gr. (%) Q3FY16 QoQ gr. (%) Interest Income 108, ,505 (7.1) 122,206 (11.4) Interest Expense 80,563 78, ,010 (0.6) Net Interest Income (NII) 27,677 37,916 (27.0) 41,196 (32.8) - Treasury income 1,140 5,380 (78.8) 2,330 (51.1) Other income 24,522 18, , Total income 52,199 55,967 (6.7) 57,902 (9.9) Operating expenses 19,920 23,940 (16.8) 28,724 (30.6) -Staff expenses 10,076 15,069 (33.1) 19,912 (49.4) -Other expenses 9,845 8, , Operating profit 32,279 32, , Core operating profit 31,139 26, , Total provisions 104,852 38, , Profit before tax (72,574) (6,315) NA (8,577) NA Tax (18,902) (9,381) NA (9,087) NA Profit after tax (53,671) 3,066 NA 510 NA Balance sheet (Rs m) Deposits 5,530,511 5,013, ,485, Advances 4,123,258 3,805, ,929, Gross NPA (Rs m) 558, , , Net NPA (Rs m) 354, , , O/S Std. restr. assets (Rs m) 201, ,387 (52.4) 350,040 (42.5) Profitability ratios Yield on Advances (41) 9.5 (37) Cost of Deposits (19) NIM (19) 2.8 (15) RoaA (3.2) 0.2 (338) 0.0 (321) RoaE NA Asset Quality Gross NPL ratio Net NPL ratio Coverage ratio (354) Std. rest. Assets/ Total (624) 8.9 (402) advances Business & Other Ratios Low-cost deposit mix Cost-income ratio (461) 49.6 (1,144) Non int. inc / total income , ,813 Credit deposit ratio (134) CAR (93) Tier-I (89) 8.5 (11) May 18,

4 2Q12 3Q12 2Q12 3Q12 2Q12 3Q12 2Q12 3Q12 Exhibit 3: Loan growth remains mainly on back of slower overseas book, but retail loan growth was strong Exhibit 4: Core fees growth sees some improvement mainly better loan processing fees & ATM interchange fee 25.0% Advances growth YoY(%) 40.0% Core fee growth (%) 20.0% 30.0% 15.0% 10.0% 20.0% 10.0% 0.0% 5.0% -10.0% 0.0% -20.0% Exhibit 5: CASA profile saw improvement mainly on better SA deposit growth 44.0% 42.0% 40.0% 38.0% 36.0% 34.0% 32.0% CASA (%) Exhibit 6: Margins continue downward trends on high interest reversals 4.10% 3.90% NIM (%) 3.70% 3.50% 3.30% 3.10% 2.90% 2.70% 2.50% Exhibit 7: Slippages in H2FY16 at Rs362.6bn which remains one of the worst among banks historically PNB GNPAs 188, , , , , , , , ,183 - Fresh Addition in Qtr 36,950 29,580 35,650 51,930 74,240 28,020 31, , ,480 Annualized Slippages % 4.4% 3.4% 4.0% 5.7% 8.2% 2.9% 3.3% 12.9% 24.0% O/s std restructured 355, , , , , , , , ,440 - Restructuring Addition 32,860 14,520 32,970 25,580 78,800 6, ARC sale ,720-5/25 refinancing stock 26,000 32,330 68,000 68,000 SDR assets stock - 70,000 70,000 Total stressed loans 543, , , , , , , , ,623 % of loans 16.7% 15.4% 16.4% 15.8% 17.7% 17.9% 17.4% 21.8% 21.7% May 18,

5 3Q12 Exhibit 8: Credit cost remain at alarming levels Exhibit 9: Asset quality worsens sharply on high slippages 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Credit Cost 14.00% Gross NPA (%) Net NPA (%) 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2Q12 Exhibit 10: RoA decomposition tree RoA decomposition FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Interest income Interest expenses Net interest income Treasury income Other Inc. from operations Total income Employee expenses Other operating expenses Operating profit Tax (0.28) Loan loss provisions Net profit (0.63) Exhibit 11: Earnings change table We cut our earnings sharply for FY16E & FY17E to factor weak business, hit on margins on high slippages & high credit costs (Rs mn) Old Revised % Change FY17E FY18E FY17E FY18E FY17E FY18E Net interest income 187, , , ,813 (10.2) (8.1) Operating profit 129, , , , Net profit 31,929 41,907 25,079 47,367 (21.5) 13.0 EPS (Rs) (21.5) 13.0 ABVPS (Rs) (31.5) (19.8) Price target (Rs) (7.9) Recommendation REDUCE REDUCE May 18,

6 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Exhibit 12: We cut our PT to Rs60 (from Rs65) based on 0.6x Sep 17 ABV (1.1x adjusted for stressed assets) PT calculation and upside Fair price - EVA 61 Fair price - P/ABV 59 Average of the two 60 Target P/ABV 0.6 Target P/ABV adj. for restr/sdr/5:25 assets 1.1 Target P/E 3.2 Current price, Rs 76 Upside (%) -21% Dividend yield (%) 0% Total return (%) -21% Exhibit 13: PNB historical P/ABV trends P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD May 18,

7 Income Statement (Rs m) Int. Earned from Adv. 347, , , ,629 Int. Earned from Invt. 106, , , ,971 Others 9,210 9,452 8,399 5,810 Total Interest Income 463, , , ,409 Interest expense 297, , , ,596 NII 165, , , ,813 Growth (%) 2.5 (7.5) Treasury Income 10,227 7,260 5,530 5,530 NTNII 48,680 61,510 72,937 84,864 Non Interest Income 58,907 68,770 78,467 90,394 Total Income 522, , , ,803 Growth (%) Operating Expense 104,916 99, , ,194 Operating Profit 119, , , ,013 Growth (%) NPA Provisions 79, ,690 92,043 84,531 Investment Provisions (5,670) 3,450 (863) 216 Total Provisions 79, ,540 96,404 89,356 PBT 39,572 (57,377) 36,880 69,657 Tax Provisions 8,957 (17,635) 11,802 22,290 Effective Tax Rate (%) PAT 30,615 (39,742) 25,079 47,367 Growth (%) (8.4) (229.8) (163.1) 88.9 Balance Sheet (Rs m) Par Value No. of equity shares 1,855 1,964 1,964 1,964 Equity 3,709 3,927 3,927 3,927 Networth 390, , , ,128 Adj. Networth 236,830 28,871 75, ,927 Deposits 5,013,786 5,530,511 6,282,661 7,250,191 Growth (%) Low Cost deposits 2,005,514 2,055,830 2,462,803 2,885,576 % of total deposits Total Liabilities 6,033,336 6,673,905 7,535,841 8,652,200 Net Advances 3,805,344 4,123,258 4,642,789 5,302,064 Growth (%) Investments 1,512,823 1,578,459 2,183,876 2,538,221 Total Assets 6,033,335 6,673,905 7,535,841 8,652,200. Quarterly Financials (Rs m) Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Interest Income 120, , , ,240 Interest Expense 79,322 80,231 81,010 80,563 Net Interest Income 41,025 43,220 41,196 27,677 Non Interest Income 13,974 13,569 16,706 24,522 CEB 9,430 7,840 8,230 8,110 Treasury 1,630 2,170 2,330 1,140 Net Total Income 54,998 56,789 57,902 52,199 Operating Expenses 23,677 27,404 28,724 19,920 Employee Expenses 15,496 18,776 19,912 10,076 Other Expenses 8,181 8,628 8,812 9,845 Operating Profit 31,321 29,385 29,179 32,279 Core Operating Profit 29,691 27,215 26,849 31,139 Provisions 18,114 18,821 37, ,852 Loan loss provisions 12,910 20,310 37, ,800 Investment Depreciation 3,750 (730) 1,230 (800) Profit before tax 13,207 10,564 (8,577) (72,574) Tax 6,000 4,354 (9,087) (18,902) PAT before EO 7,207 6, (53,671) Extraordinary item PAT 7,207 6, (53,671) Key Ratios CMP (Rs) Equity Shrs. Os. (m) 1,855 1,964 1,964 1,964 Market Cap (Rs m) 137, , , ,405 M/Cap to AUM (%) EPS (Rs) 16.7 (20.8) Book Value (Rs) Adj. BV (100%) (Rs) P/E (x) 4.4 (3.6) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Profitability (%) NIM RoAA 0.5 (0.6) RoAE 8.2 (10.3) Efficiency Cost-Income Ratio (%) C-D Ratio (%) Business per Emp. (Rs m) Profit per Emp. (Rs lacs) 4.1 (4.6) Business per Branch (Rs m) 1,355 1,386 1,466 1,574 Profit per Branch (Rs m) 5 (6) 3 6 Asset Quality Gross NPAs (Rs m) 256, , , ,980 Net NPAs (Rs m) 153, , , ,201 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) May 18,

8 % of Total Coverage Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature 50% 40% 30% 20% 10% 0% 42.1% 42.1% 15.8% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commod ity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co-managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Nitin Kumar (B.E, PGDM, CFA), Mr. Pritesh Bumb (MBA, M.com), Ms. Vidhi Shah (CA), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regardi ng, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Inst itutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. May 18,