Punjab National Bank (PUNBAN) 145

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1 Result Update Rating matrix Rating : Buy Target : 16 Target Period : 12 months Potential Upside : 1% What s changed? Target Changed from 138 to 16 EPS Changed from 14.6 to 8.3 EPS Changed from 21.2 to 12.3 Rating Changed from Hold to Buy Quarterly performance YoY QoQ NII 3,73.8 4, , Other Income 2, , , PPP 3, , ,312. (4.8) PAT (62.3) Key financials Crore FY16 NII 16,556 15,314 15,96 17,452 PPP 11,955 12,215 13,855 14,474 PAT 3,62 (3,974) 1,768 2,621 Valuation summary FY16 P/E Target P/E 8.4 (6.8) ABV Target P/ABV RoA RoE 8.2 (1.3) Stock data Particular Amount Market Capitalisation Crore GNPA () crore NNPA () crore NIM () 2.3% 52 week H/L 164 /69 Net Worth 4248 Crore Face value 2 DII Holding 18.3 FII Holding 1.4 Price performance 1M 3M 6M 12M SBI BOI PNB Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Moderation in asset quality pain... February 9, 217 Punjab National Bank (PUNBAN) 145 Asset quality pressure was controlled with fresh slippages at ~ 48 crore vs. 589 crore in. GNPA declined marginally QoQ to from crore. NNPA ratio was stable at 9.9% down to crore vs crore QoQ. Restructured assets (RA) of the bank declined further to crore in vs crore in. Stressed book (GNPA + RA) remains high at 18.2% of assets PAT came in below our estimate at 27 crore (I-direct estimate: 517 crore), led by higher-than-expected provisions. Provision rose QoQ to 2936 crore vs crore, with NPA provisions higher at 3363 crore leading to provision coverage ratio also improving to 54.96% from 53.32% QoQ NII declined 9.5% YoY to 3731 crore while global NIM dipped ~2 bps QoQ to 2.31% with domestic NIM declining 1 bps QoQ to 2.78% vs. 2.86%. Credit growth turned negative at -1.8% vs. 3.4% to crore, below estimated 1.7% growth. However, with demonetisation, deposit grew 6.5%QoQ, 11.6%YoY to crore Third largest PSU bank, NPA woes remain steady PNB is the third largest bank in terms of advances among PSU banks ( crore) with ~4.8% market share, declining from 5.45% in September 21. It lost the No.2 position to BoB. PNB has an extensive branch network of >68 branches, with 5% in rural and semi-urban areas giving it unparalleled advantage of domestic CASA of ~4% since FY7 and consequent lower CoF. The bank grew credit at 23-29% in FY6-11 and at 11% CAGR in FY Loss of market share in deposit & loans happened due to a change in focus to manage rising NPAs (GNPA at 13.75% in FY16 from 1.9% in Q2FY1), significantly impacting profit. Asset quality pressure surges in FY16; outlook remains positive RA had grown from 1 crore to 35 crore in FY1- and declined to 2 crore in FY16. GNPA ratio in the past seven years has risen from lows of 1.6% to 12.9% at crore with surge in slippages in Q4 at crore, led by AQR and massive slippages from RA book. The management builds some respite in a few sectors, ambiguity over incremental stress asset formation continues. Accordingly, we factor a gradual improvement in GNPA to 11.9% by to crore. Loan growth to stay muted; NIMs pressured with excess funds too PNB s credit book grew 8.4% YoY in FY16 to crore (-1.8% in ). The loan book is dominated by large corporate (28%) & MSME (19%) segment & has ~12% in international. Deposits saw 19% CAGR to crore in FY1-15 while FY16 growth was 1.3%. In FY17-18E, we raised deposits CAGR to 11.3% due to demonetisation. We expect credit to be muted at 4.9% CAGR to crore. Expect NII to grow at 8.6% CAGR to crore, after growth of 1% in FY1-16 with NIM at ~2.4%. We have revised PAT lower to 177 crore & 2621 crore in,, respectively building in higher provisions. Moderation expected ahead; HF subsidiary adds value, BUY PNB had highest RoA, RoE among PSU banks in FY8-1. However, it has taken a huge knock as deteriorating asset quality led to elevated provisioning, loss of net interest income. In Q2,, NPA accretion moderation has come as positive sign with GNPA, NNPA ratio stable at 13.7%, 9.1%, respectively. Valuing the standalone bank at 1.5x ABV and housing finance subsidiary at 2x ABV, we revise our target price upwards to 16 and upgrade from HOLD to BUY. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3Y17E YoY QoQ Comments NII continues to be under pressure due to asset quality pain and negative credit NII 3,731 3,7 4,12 3, growth NIM bps -18 bps Margin declines 18bps led by writeoffs and asset quality pains contuning Other Income 2,513 2,41 1,671 2, Net Total Income 6,244 6,11 5,79 6, Staff cost 2,12 2,36 1,991 1, Other Operating Expenses 988 1, PPP 3,155 3,37 2,918 3, Provision 2,936 2,298 3,776 2, Higher NPA provisions dent operating performance flowing to PAT PBT Tax Outgo Higher writeoffs leading to lower tax outgo in the quarter PAT Key Metrics GNPA 55,628 56,966 34,338 56, Recovery and writeoffs assist absolute GNPA decline QoQ, GNPA ratio increased by ~7 bps QoQ to 13.7%. Slippages at 48 crore NNPA 34,994 36,122 22,983 35, NNPA ratio is flat QoQ at 9.1% Total Restructured assets 17,216 18,74 35,4 18, Change in estimates ( Crore) Old New % Change Old New % Change Net Interest Income 16,461 15, ,158 17, Margins take a knock with excess funds of demonetisation with no credit growth Pre Provision Profit 13,416 13, ,264 14, NIM (calculated) bps bps PAT 3,17 1, ,513 2, Higher provisions incorporated leading to lower PAT ABV per share ( ) Assumptions Current Earlier FY16 Credit growth Deposit growth CASA ratio - calculated NIM calculated Cost to income ratio GNPA ( crore) 25,695 55,81 57,427 57,352 52,44 48,913 NNPA ( crore) 15,397 33,79 34,14 33,917 31,59 25,899 Slippage ratio Credit cost ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis NPA concerns moderating; performance improves relatively Asset quality pressure was controlled with fresh slippages at ~ 48 crore vs. 589 crore in. Absolute GNPA declined marginally QoQ to from crore (GNPA ratio increased ~7 bps to 13.7%, a numerical surge mainly due to a dip in credit growth). NNPA ratio was stable at 9.9% declining to crore vs crore QoQ. Restructured assets of the bank declined further to crore in vs crore in and 1899 crore in. The stressed asset (GNPA + restructured asset) continues to remain high at 18.2% of assets. Concerns about the bank s asset quality are generally raised owing to its exposure to stressed sectors (15% to infrastructure) and troubled corporates. Power alone (included in infra) forms a major proportion of the loan book. The GNPA ratio in the past seven years has grown from 1.6% to >13%, with a spurt seen in last two fiscals. Further, calculated provision coverage ratio (PCR) had dropped to ~45% from 89% earlier and now brought up to 54%. Credit costs have stayed above 1.1%. The management has indicated at recognition of majority of asset quality issues. Recovery guidance has been maintained at 15-2 crore for. Going ahead, we expect gradual improvement in asset quality. Hence, we have factored in GNPA ratio at 11.8% in from current 13.7% and NNPA ratio of 7.1% from 9.1% during the same period. Exhibit 1: Fresh slippages witness decline but still remain higher The GNPA ratio is expected at 11.8% and NNPA at 7.1% by Q FY16E ( Crore) GNPA NNPA Source: Company Quarterly Presentation, ICICIdirect.com Research Exhibit 2: NNPA rises from bottom of.2% in FY9 to 9.1% in FY12 FY13 FY14 Q1 Q2 FY16E GNPA ratio NNPA ratio ICICI Securities Ltd Retail Equity Research Page 3

4 Small ticket loans including retail to remain in focus now The bank s loan book is largely skewed towards the large corporate segment, which comprises 28% of the total loan book. With a shift in focus towards retail & SME segments, their share has been inching northwards. Since then, the retail loans proportion has risen to 15% as on from 9.9% in FY12. In FY17, growth has not picked up yet with credit declining 1.8% YoY. We expect the same to remain moderate owing to the slower pace of corporate credit demand and due to the fact that the focus is still high on recovery and cleaning up the balance sheet. In FY16, retail and MSME loans grew at a healthy pace of 19.4% and 19.6% YoY, respectively. On the other hand, the corporate book growth remained in single digits at 5.3% YoY to crore. The management had indicated credit growth to be good for small ticket loans including retail, agri and MSME in. These three sectors in all saw just 4.9% growth while retail credit saw 12.3% growth in. Hence, we have factored in further moderation in credit growth at 4.9% YoY from 9% earlier for FY17 and a CAGR of 7.5% in FY17-18E to crore. Exhibit 3: Moderate credit offtake expected ahead Advances growth turned negative sequentially at -1.8% YoY vs. 3.4% YoY to crore, below our estimate of 1.7% YoY growth. However, considering demonetisation, deposits grew 6.5% QoQ and 11.6% YoY to crore ( Crore) FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1 Q2 FY16 Advances Deposits C D Ratio (RHS) Retail loans grew 12.3% YoY to 6135 crore and agri grew 4% with MSME at.5%. Small ticket advances form 56.6% of credit vs. 55% a year earlier. Retail loans growth was led by housing segment, which increased 18%% YoY moderating from 22% earlier to crore Retail loans grew 12.3% YoY to 6135 crore and Agri grew 4% with MSME at.5% in. Small ticket advances form 56.6% of credit vs. 55% a year earlier. Retail loans growth was led by housing segment, which increased 18% YoY moderating from 22% earlier to crore Large corporate loans continue to be flat QoQ to crore Exhibit 4: Domestic credit: Retail loans, 15% Others, 9% Large industry, 35% Exhibit 5: Domestic credit: Retail loans, 17% Others, 1% Large industry, 31% MSME, 23% Agri, 18% MSME, 24% Agri, 18% Source: Company Quarterly Presentation, ICICIdirect.com Research Source: Company Quarterly Presentation, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 4

5 Relatively better deposit franchise, CASA surges on demonetisation Exhibit 6: Growth tapers with slowing economy, demonetisation helps deposits Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1 Q2 FY16 Advances Growth YoY Deposits Growth YoY (RHS) Deposits grew 1.3% YoY to crore in FY16. However, H1FY17 saw slower deposits pace, but demonetisation pushed up savings growth in. Outstanding bulk deposits declined from crore in FY12 to crore in and further to 1354 crore (.24% of deposit) in FY16. This has helped manage the cost of funds in FY16. CASA ratio remained strong but moderated further in the last few years. However, excess deposits flowing to savings bank due to demonetisation boosted CASA ratio to 47% in from 42% in and ~4% in FY16. We expect the same to stay around 44% in next couple of years. Exhibit 7: CASA ratio surging in FY17-18E... ( Crore) Q3FY14 FY14 Q1 Q2 FY16 Saving + Current Term Total Domestic CASA (RHS) Source: Company Quarterly Presentation, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 8: Margin moderates further to 2.3%, excess liquidity and low growth impacting NIM Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1 Q2 Q4 Q4FY16 Yield on Advances Cost of Deposits NIM (RHS) Source: Company Quarterly Presentation, ICICIdirect.com Research Non-interest income consistently adding to bottomline Exhibit 9: Non interest income remains healthy led by higher recovery and treasury gains Q2FY14 Q3FY14 Q4FY14 Q1 Q2 Q4 Q4FY16 Trading Income Commision, exchange and brokerage Recovery Dividend from liquid MF Total Exhibit 1: Cost to income ratio remains near ~45% in FY17-18E Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 FY13 FY14 Q1 Q2 FY16 Cost to Income ratio Exhibit 11: DuPont Analysis FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY16 Net interest income/ avg. total avg. total assets Non-interest income/ avg. total assets Non-operating profit/ avg. total assets Operating expenses/ avg. total assets Operating profit/ avg. total assets Provisions/ Avg. total assets Return on avg. total assets Leverage (x) Return on equity ICICI Securities Ltd Retail Equity Research Page 6

7 Valuation PNB had the highest RoA, RoE among PSU banks in FY8-1. However, the bank has taken a huge knock as deteriorating asset quality led to elevated provisioning and loss of net interest income. In and, NPA accretion moderation has come as a positive sign with GNPA, NNPA ratio stable at 13.7% and 9.1%, respectively. However, uncertainty still looms over continuance of recoveries. Hence, we expect credit cost to stay high in the near term. Thus, return ratios are expected to still stay low at 5-6% in FY17-18E. However, resolution of fews large assets are expected to gradually improve the industry scenario. Valuing the standalone bank at 1.5x ABV and housing finance subsidiary at 2x ABV, we revise our target price upwards to 16 and upgrade our recommendation on the stock from HOLD to BUY. Exhibit 12: Return ratios expected to improve gradually over FY17-18E Q1FY13 Q2FY Q3FY13 FY13 Q1FY Q2FY14 Q3FY14 FY14 FY ROA ROE (RHS) Source: Company Quarterly Presentation, ICICIdirect.com Research Exhibit 13: Valuations FY1 FY11 FY12 FY13 FY14E FY16 P/E (x) Price / Book (x) ABV ( ) Price / Adj Book (x) GNPA NNPA RoNA RoE , From FY16 FV of equity is reduced to 2 from 1 per share ICICI Securities Ltd Retail Equity Research Page 7

8 Recommendation history vs. Consensus ( ) Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Nov-16. Jan-17 Price Idirect target Consensus Target Mean % Consensus with SELL Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Mar-6 Credit growth takes off for all banks as economy booms, and for PNB it was in 23-29% range for FY6-8 Mar-9 Higher business leads to strong NII and profit with return ratios Dec-1 Most PSU banks, including PNB make new peak in stock, profit grew 5% in FY9 and 26% in FY1 Apr-11 For Kingfisher restructuring, the consortium including State Bank of India, IDBI Bank, Bank of Baroda and Punjab National Bank was alloted shares at conversion rate May-11 Pension provisions and rising NPAs start impacting bank Jul-11 Announces acquisition of 3% stake on MetLife Insurance Mar-12 High power and infra exposure lead to increase in restructed assets, with a spurt in March, 212 quarter adding > 861 crore taking total to crore forming 1% of advances May-13 G-Sec yields spike post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI of MSF rate hike etc, impacting PSU banks on treasury and wholesale funded banks on cost of funds Oct-13 Completes acquisition of 3% stake on MetLife Insurance for undisclosed sum, now named PNB Metlife Oct-13 Post liquidity tightening measures like MSF reversed by RBI, stock saw respite Jan-14 Asset quality sees marginal improvement May-14 NPA addition again surges with slippage of 445 crore in a single quarter Sep-15 Government of India infuses 1732 crore of per share Sep-16 Government of India infuses 2112 crore of per share Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Government of India 3-Sep % 1,383.46M M 2 LIC Mutual Fund Asset Management Company Ltd. 3-Sep % M -4.52M 3 Lazard Asset Management, L.L.C. 3-Nov % 8.77M 4 HDFC Asset Management Co., Ltd. 3-Sep % 55.48M +3.67M 5 Franklin Templeton Asset Management (India) Pvt. Ltd. 3-Nov % 1.3M +1.58M 6 The Vanguard Group, Inc. 3-Nov-216.4% 8.54M +.22M 7 DSP BlackRock Investment Managers Pvt. Ltd. 3-Nov % 8.2M +.82M 8 BlackRock Asset Management North Asia Limited 3-Sep % 2.99M +.94M 9 AllianceBernstein L.P. 3-Nov % 2.78M 1 UTI Asset Management Co. Ltd. 3-Nov % 2.7M Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoter FII DII Others Recent Activity Buys Sells Investor name Value (m) Shares (m) Investor name Value (m) Shares (m) Government of India M M Eastspring Investments (Singapore) Limited M -7.47M HDFC Asset Management Co., Ltd M +3.67M LIC Mutual Fund Asset Management Company Ltd M -4.52M Franklin Templeton Asset Management (India) Pvt. Ltd M +1.58M ICICI Prudential Asset Management Co. Ltd M -1.57M BlackRock Asset Management North Asia Limited +1.99M +.94M Wellington Management Company, LLP -.62M -.4M DSP BlackRock Investment Managers Pvt. Ltd M +.82M NNIP Advisors B.V. -.74M -.35M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY16 Interest Earned Interest Expended Net Interest Income growth Non Interest Income Fees and advisory Treasury Income Other income Net Income Staff cost Other operating Expense Operating Profit Provisions PBT Taxes Net Profit growth NA 48.2 EPS ( ) Key Ratios (Year-end March) FY16 Valuation No. of Equity Shares EPS (Rs.) BV (Rs.) ABV (Rs.) P/E (x) P/BV (x) P/ABV (x) Yields & Margins Net Interest Margins Yield on assets Avg. cost on funds Yield on average advances Avg. Cost of Deposits Quality and Efficiency Cost to income ratio Credit/Deposit ratio GNPA NNPA ROE ROA Balance sheet Crore (Year-end March) FY16 Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total Application of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total Growth ratios (Year-end March) FY16 Total assets Advances Deposit Total Income Net interest income Operating expenses Operating profit Net profit Net worth EPS -1.6 NA NA ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA RoE Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY16 FY16 FY16 FY16 Bank of Baroda (BANBAR) Hold 42, Punjab National Bank (PUNBAN) Buy 28, State Bank of India (STABAN) Buy 2,4, Indian Bank (INDIBA) Buy 14, Axis Bank (AXIBAN) Hold 1,16, City Union Bank (CITUNI) Buy 8, DCB Bank (DCB) Hold 3, Federal Bank (FEDBAN) Buy 14, HDFC Bank (HDFBAN) 1,297 1,5 Buy 3,24, IndusInd Bank (INDBA) 1,299 1,35 Buy 77, Jammu & Kashmir Bk(JAMKAS) 69 8 Buy 3, Kotak Mahindra Bank (KOTMAH) Hold 1,4, Yes Bank (YESBAN) 1,43 1,4 Hold 58, ICICI Securities Ltd Retail Equity Research Page 1

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, 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: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. 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