Punjab National Bank

Transcription

1 Asset quality under acute stress February 09, 2016 Nitin Kumar Pritesh Bumb Rating Reduce Price Rs88 Target Price Rs65 Implied Upside 26.1% Sensex 24,021 Nifty 7,298 (Prices as on February 09, 2016) Trading data Market Cap. (Rs bn) Shares o/s (m) 1, M Avg. Daily value (Rs m) Major shareholders Promoters 62.08% Foreign 12.10% Domestic Inst % Public & Other 5.67% Stock Performance (%) 1M 6M 12M Absolute (16.5) (45.1) (47.4) Relative (12.8) (30.2) (32.5) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: PNBK.BO, BB: PNB IN) (Rs) Feb 15 Apr 15 Jun 15 Source: Bloomberg Aug 15 Oct 15 Dec 15 Feb 16 PNB reported disappointing quarter wtih GNPLs increasing by 38% QoQ to Rs343.4bn led by 12.9% annualized slippages (Rs55bn due to RBI audit). The outlook also remains equally challenging as the bank accounts for rest of the slippages arising due to the RBI audit (~Rs40 45bn) in the next quarter. We estimate that the Gross Stressed Assets for PNB now equates to ~240% of FY17E Networth while the Net Stressed Assets corresponds to 74% of FY17E networth (Please see exhibit 1 for details). Core performance (besides asset quality) appeared okay with PPoP growing 6% YoY. However steep rise in credit cost at 350bp resulted in 93% YoY decline in net profits (despite tax write back of Rs11.4bn). We cut our estimates sharply and lower our PT to Rs65 based on 0.9x Sep 17 ABV2 and downgrade our rating to REDUCE. NII reports slight pressure; higher recoveries drive other income: PNB reported total revenues of Rs57.9 bn (~5% YoY growth) on the back of higher recoveries even as NII declined by ~5% QoQ. CASA mix remained stable at ~40% while margins declined by 22bp QoQ to 2.75%. We expect NII growth to remain under pressure due to rising share of overseas loans, continued interest reversals and focus on balance sheet de risking. Fresh slippage spikes up to 12.9% annualized; brace up for tough quarter from other PSU banks: Fresh slippages increased to 12.9% annualized (Rs55bn due to RBI audit; Rs40 45bn more to come in next quarter). We note that even beside RBI audit related slippages the NPL formation rate has been much higher this quarter. O/s restructured portfolio declined to Rs350bn (8.9% of total loans) while PNB further sold assets worth Rs13.7bn to ARC and has another pipeline of Rs25bn. 5/25 and SDR outstanding stands at Rs68bn and Rs60bn respectively. We have revised our slippage estimate which has contributed significantly to ~32% decline in our FY17E ABV projection. Capital levels have depleted sharply; Cut to REDUCE with revised PT of Rs65: PNB s Tier I ratio has declined by 84bp QoQ to 8.5% and the bank will soon need a fresh capital infusion as We estimate PNB to report a loss in 4Q FY16 which will further dilute book value. We cut our estimates, lower our PT to Rs65 and downgrade our rating to REDUCE. Key financials ( Y/e March) E 2017E 2018E Net interest income 165, , , ,049 Growth (%) Operating profit 119, , , ,729 PAT 30,615 4,025 31,929 41,907 EPS (Rs) Growth (%) (10.6) (87.4) Net DPS (Rs) Profitability & Valuation E 2017E 2018E NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Company Data; PL Research Q3FY16 Result Update 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 ~74% of projected networth Rs in million FY17E O/s standard restructured assets 367,542 of which SEB restructured 81,360 Exposure under SDR cases 78,000 Exposure under 5/25 88,400 ARC sale outstanding 48,720 Gross NPLs 424,707 Total Gross Stressed Assets 1,007,369 As % of FY17E Networth (excluding revaluation reserves) 240% As % of FY17E loans 22% Net stressed asset calculation 20% slippage from restructured assets (excluding SEB portion) 57,236 30% haircut on SDR cases 23,400 20% on 5/25 exposure 17,680 10% on ARC sale 4,872 70% of Net NPL 206,107 Total damage to Book Value 309,295 As % of FY17E Networth (excluding revaluation reserves) 74% 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 53.0 February 09,

3 NII growth was disappointing mainly on interest reversals from high slippages and soft loan growth Other income growth was strong on back of strong recovery in written off a/c. Treasury gains remained modest, while fee income was tepid Opex remained under control with provisions on wage and pension already provided for in earlier quarters PNB took the benefit of deferred tax asset write back which lowered tax provisions Exhibit 2: PNB Q3FY16 Asset quality continues to drag operating performance; pain to continue going ahead P&L (Rs m) Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) Interest Income 122, , ,450 (1.0) Interest Expense 81,010 73, , Net Interest Income (NII) 41,196 42,331 (2.7) 43,220 (4.7) Treasury income 2,330 2, , Other income 16,706 12, , Total income 57,902 55, , Operating expenses 28,724 27, , Staff expenses 19,912 20,286 (1.8) 18, Other expenses 8,812 7, , Operating profit 29,179 27, ,385 (0.7) Core operating profit 26,849 25, ,215 (1.3) Total provisions 37,755 14, , Profit before tax (8,577) 12,830 (166.8) 10,564 (181.2) Tax (9,087) 5,084 (278.7) 4,354 (308.7) Profit after tax 510 7,746 (93.4) 6,210 (91.8) Balance sheet (Rs m) Deposits 5,485,316 4,841, ,399, Advances 3,929,367 3,624, ,809, Gross NPA (Rs m) 343, , , Net NPA (Rs m) 229, , , O/S Std. restr. assets (Rs m) 350, ,547 (5.5) 418,280 (16.3) Margins were impacted by interest reversals despite sharp reduction in cost of funds Profitability ratios Yield on Advances (39) 9.8 (29) Cost of Deposits (30) 6.0 (14) NIM (46) 3.0 (22) RoaA (50) 0.4 (36) RoaE (782) 6.1 (559) Asset quality deteriorated very sharply on high slippages of Rs134bn of which Rs23bn contributing from restructured book and Rs55bn related to RBI s AQR. PNB also sold Rs13.7bn to ARC and has pipeline of Rs25bn going ahead. Asset Quality Gross NPL ratio Net NPL ratio Coverage ratio (486) 39.1 (606) Std. rest. Assets/ Total (131) 11.0 (207) Business & Other Ratios Low cost deposit mix Cost income ratio (60) Non int. inc / total income Credit deposit ratio (324) CAR (29) 12.2 (95) Tier I (84) February 09,

4 Exhibit 3: Loan growth continues to be soft Exhibit 4: Core fees growth continues to be muted 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% 1Q12 1Q12 Exhibit 5: CASA profile at 40% remains the only positive, best among PSBs post SBI 42.0% 40.0% 38.0% 36.0% 34.0% 32.0% CASA (%) 1Q12 Exhibit 6: NIMs declined sharply on high interest reversals and base rate cuts 4.10% 3.90% NIM (%) 3.70% 3.50% 3.30% 3.10% 2.90% 2.70% 2.50% 1Q12 Exhibit 7: Slippages were highest ever; total stressed assets highest for PNB among PSBs PNB GNPAs 188, , , , , , , ,400 Fresh Addition in Qtr 36,950 29,580 35,650 51,930 74,240 28,020 31, ,120 Annualized Slippages % 4.4% 3.4% 4.0% 5.7% 8.2% 2.9% 3.3% 12.9% O/s std restructured 355, , , , , , , ,040 Restructuring Addition 32,860 14,520 32,970 25,580 78,800 6,760 ARC sale ,720 5/25 refinancing stock 26,000 32,330 68,000 SDR assets stock 70,000 Total stressed loans 543, , , , , , , ,440 % of loans 16.7% 15.4% 16.4% 15.8% 17.7% 17.9% 17.4% 21.8% February 09,

5 Exhibit 8: Credit cost remain at alarming levels with similar level expected in Q4FY16 as well Exhibit 9: Asset quality worsens sharply on high slippages partly relating to RBI s AQR, slippages from restructured & normal slippages 5.00% Credit Cost 10.00% Gross NPA (%) Net NPA (%) 4.00% 8.00% 3.00% 6.00% 2.00% 4.00% 1.00% 2.00% 0.00% 0.00% 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 Loan loss provisions Net profit Exhibit 11: Earnings change table We cut our earnings sharply by 87% for FY16E & 25% for FY17E to factor weak business, hit on margins on high slippages & high credit costs (Rs mn) Old Revised % Change New FY16E FY17E FY16E FY17E FY16E FY17E FY18E Net interest income 173, , , ,602 (2.0) (2.5) 213,049 Operating profit 120, , , ,045 (2.9) (3.5) 149,729 Net profit 31,834 42,733 4,025 31,929 (87.4) (25.3) 41,907 EPS (Rs) (87.4) (25.3) 21.3 ABVPS (Rs) (25.2) (31.7) Price target (Rs) (53.4) Recommendation ACCUMULATE REDUCE February 09,

6 Exhibit 12: We cut our PT to Rs65 (from Rs140) based on 0.5x Sep 17 ABV (0.9x adjusted for stressed assets) PT calculation and upside Fair price EVA 68 Fair price P/ABV 63 Average of the two 65 Target P/ABV 0.5 Target P/ABV adj. for restr/sdr/5:25 assets 0.9 Target P/E 3.5 Current price, Rs 88 Upside (%) 26% Dividend yield (%) 2% Total return (%) 24% Exhibit 13: PNB historical P/ABV trends P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11 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 February 09,

7 Income Statement (Rs m) Int. Earned from Adv. 347, , , ,452 Int. Earned from Invt. 106, , , ,641 Others 9,210 9,980 5,735 5,992 Total Interest Income 463, , , ,085 Interest expense 297, , , ,036 NII 165, , , ,049 Growth (%) Treasury Income 10,227 5,530 5,530 5,530 NTNII 48,680 55,145 61,455 70,297 Non Interest Income 58,907 60,675 66,985 75,827 Total Income 522, , , ,912 Growth (%) Operating Expense 104, , , ,147 Operating Profit 119, , , ,729 Growth (%) 5.0 (2.4) NPA Provisions 79, ,728 79,081 80,614 Investment Provisions (5,670) 1,418 (354) 89 Total Provisions 79, ,790 82,091 86,233 PBT 39,572 4,909 46,955 63,496 Tax Provisions 8, ,025 21,588 Effective Tax Rate (%) PAT 30,615 4,025 31,929 41,907 Growth (%) (8.4) (86.9) 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, , , ,520 Adj. Networth 236, , , ,378 Deposits 5,013,786 5,585,358 6,411,991 7,482,793 Growth (%) Low Cost deposits 1,990,473 2,245,314 2,616,092 3,067,945 % of total deposits Total Liabilities 6,033,336 6,662,866 7,600,818 8,804,161 Net Advances 3,805,344 4,102,161 4,684,668 5,392,053 Growth (%) Investments 1,512,824 1,972,261 2,244,888 2,637,997 Total Assets 6,033,336 6,662,866 7,600,818 8,804,161. Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Interest Income 116, , , ,206 Interest Expense 78,589 79,322 80,231 81,010 Net Interest Income 37,916 41,025 43,220 41,196 Non Interest Income 18,051 13,974 13,569 16,706 CEB 7,520 9,430 7,840 8,230 Treasury 5,380 1,630 2,170 2,330 Net Total Income 55,967 54,998 56,789 57,902 Operating Expenses 23,940 23,677 27,404 28,724 Employee Expenses 15,069 15,496 18,776 19,912 Other Expenses 8,872 8,181 8,628 8,812 Operating Profit 32,027 31,321 29,385 29,179 Core Operating Profit 26,647 29,691 27,215 26,849 Provisions 38,342 18,114 18,821 37,755 Loan loss provisions 32,810 12,910 20,310 37,670 Investment Depreciation 2,860 3,750 (730) 1,230 Profit before tax (6,315) 13,207 10,564 (8,577) Tax (9,381) 6,000 4,354 (9,087) PAT before EO 3,066 7,207 6, Extraordinary item PAT 3,066 7,207 6, Key Ratios CMP (Rs) Equity Shrs. Os. (m) 1,855 1,964 1,964 1,964 Market Cap (Rs m) 162, , , ,307 M/Cap to AUM (%) EPS (Rs) Book Value (Rs) Adj. BV (100%) (Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Profitability (%) NIM RoAA RoAE Efficiency Cost Income Ratio (%) C D Ratio (%) Business per Emp. (Rs m) Profit per Emp. (Rs lacs) Business per Branch (Rs m) 1,355 1,391 1,489 1,614 Profit per Branch (Rs m) Asset Quality Gross NPAs (Rs m) 256, , , ,144 Net NPAs (Rs m) 153, , , ,141 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) February 09,

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