Punjab National Bank MP

Transcription

1 MP Rough patch to continue Sector: Banking Sensex: 17,362 CMP (Rs): 95 Target price (Rs): 1,16 Upside : Week h/l (Rs): 1234 / 751 Market cap (Rscr) : 3,99 6m Avg vol ( Nos): 481 No of o/s shares (mn): 317 FV (Rs): 1 Bloomberg code: PNB IB Reuters code: PNBK.BO BSE code: NSE code: PNB Prices as on 23 Mar, 212 Shareholding pattern December '11 Promoters 58. Institutions 36.5 Non promoter corp hold 1.5 Public & others 4. Performance rel. to sensex 1m 3m 1yr PNB (8.7) BOB (5.5) SBI 1 21 (13) BOI (.) 13.9 (13.3) Share price trend PNB Sensex Mar-11 Jul-11 Nov-11 Mar-12 In our recent interaction, PNB reiterated to grow its advances marginally ahead of the system. As compared to 9%+ qoq expansion witnessed in the previous three years, the bank expects lower sequential loan growth in Q4 at 7-7.5%. The large corp book is expected to grow at steady pace after having declined in due to deliberate shedding of short term loans. International loans and vehicle loan portfolio would continue to grow strongly. Bank intends to grow MSME book at healthy pace by focusing on quality and pricing risks adequately via higher yields. We estimate 2% loan CAGR for PNB over -14. Increasing rate differential between savings deposits and retail TDs has driven sharp CASA correction. Recent initiatives towards mobilizing CASA balances are expected to contain the slide. Bank s NIM is set for contraction over Q4 Q2 FY13 driven by lowered CASA, higher rates of bulk deposits and quicker repricing of advances (6% floating) in a rate-cut cycle. Aided by relatively strong fee growth and modest increase in employee cost, C/I ratio is expected to remain stable. PNB expects pressure on credit book to persist in the near term with slippages to remain above Rs1bn/quarter. Restructuring remains lofty with Air India (~Rs2bn) and Rajasthan SEB (~Rs15bn) restructured in Q4 and exposures to UP SEB (~Rs15bn) and HCC to be restructured in Q1 FY13. Margin correction coupled with high provisioning would retain pressure on RoA. Capital infusion of ~Rs28.5bn by Government and LIC before March-end is estimated to shore-up Tier-1 capital by ~9bps. Near-term RoA concerns would preclude upside in stock. Maintain PNB as MP. Loan growth to remain above system; large corp, international and non-housing retail loans key growth drivers PNB s credit growth is expected to remain above the banking system at 18% in ; witnessing 2% CAGR over -14. Even in the previous five years, the bank was more aggressive than the system having clocked a robust 27% CAGR. However, sequentially, the annual credit growth run-rate is estimated to moderate from 21% at the end of. In the backdrop of severe moderation in economic activity over the past four quarters and capex freeze, PNB expects the fiscal-end seasonality in credit to not play out fully in. As compared to 9%+ qoq expansion in advances witnessed in the previous three years, the bank expects sequential growth in Q4 to be relatively lower at 7-7.5%. Financial summary Y/e 31 Mar (Rs m) FY1 E FY13E Total operating income 154, ,763 23, ,44 Yoy growth Operating profit (pre-provisions) 9,557 15, , ,56 Net profit 44,335 47,59 57,181 73,688 yoy growth Research Analyst Rajiv Mehta Bhavna Sinyal research@indiainfoline.com EPS (Rs) Adj.BVPS (Rs) P/E (x) P/BV (x) ROE ROA CAR March 26, 212

2 Purposeful shedding of short-term corporate loans during Non-housing retail portfolio has been growing at robust pace driven by vehicle loans Share of international advances has risen from 3.7% to 7% over the past eight quarters PNB intends to grow MSME book at healthy pace Bank attributed the absolute decline of 3% in the large corporate book during to purposeful shedding of short-term loans worth Rs1-15bn as they were carrying lower yields. Currently, PNB prefers longer term project-based loans with assured cash flows. As per the bank, AAA rated large corp loans are carrying average yield of 11% while A/AA rated yield %. The delinquency on this book is significantly lower than MSME. Henceforth, large corp loans are likely to contribute in the range of 33-35% of bank s advances. Though the overall retail book has been growing in line with the bank (contribution stable near 1%), the non-housing portion has been growing much faster (27% yoy). The two key reasons behind this has been 1) vehicle loan portfolio has been growing at robust pace (4% yoy) driven by tie-ups with vehicle manufacturers and 2) high competition in home loan segment. The average yield of the book is around 12%. Overall, the retail credit is expected to increase by 2% in FY13. On a small base, the international loan book of PNB has been growing at exceptional pace with its share in overall advances increasing from 3.7% to 7% over the past eight quarters. The strong growth has been driven by the bank s leading presence (amongst Indian PSU banks) in commercial trade centers of Hong Kong and Dubai. The book essentially represents short-term loans (3-6 months) to Indian corporate for trade purposes (buyer s credit, etc). With substantial potential to grow, PNB estimates it international book at Rs2bn+ by March-end representing 55%+ growth. NIM on this book is at %, in-line with other PSU Banks. MSME and Agriculture loan book share has sustained near 11% and 14% respectively over the past many quarters. PNB intends to grow MSME book at healthy pace; focusing on quality and pricing risks adequately through attractive yields. The charged loan yield averages around 13%. Qoq loan growth Q4 seasonality not likely to play out fully Yoy loan growth run-rate has declined over the past few quarters Q4 FY9 Q1 FY1 Q2 FY1 Q3 FY1 Q4 E 15 Q1 FY1 Q2 FY1 Q3 FY1 Company Report 2

3 Share of international book has consistently increased Non-housing retail loan growth has been strong Non-Hsg loans share in Retail Yoy grow th Q1 Q2 Q3 Q4 Q1 Q2 Q3 48. Q4 FY1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1 Decline in large corp book attributable to deliberate shedding of short-term loans PNB would continue to grow ahead of the system 35 3 System PNB FY8 FY9 FY1 E FY13E FY14E Company Report 3

4 CASA ratio has fallen by 6bps over the past six quarters Robust mobilization of retail TDs driven by higher rates and expectations of rate reduction in future Recent initiatives towards CASA mobilization expected to contain the slide in ratio Robust growth in retail term deposits has pressurized CASA Impacted by the increasing rate differential between savings deposits and retail TDs, PNB s CASA ratio has deteriorated significantly over the past six quarters. The ratio has fallen by 6bps to 35%. As per the bank, the CASA ratio would be 38-4% including the auto sweep balances (as shown by some peers). While the savings balance has been growing at 14-15%, the retail term deposits have grown by robust 28-3%. Attractive interest rates being offered (in the range of 9-9.5%) for 1-3 year deposits and expectations of rate reduction in near future have been driving robust mobilization of retail TDs. As per the bank, this phenomenon has also aided in keeping its reliance on Bulk TDs under check. This is significantly favourable in the current tight liquidity environment wherein short-term wholesale funding rates are higher than retail TDs by 1-2bps. In the light of changing deposits mix, PNB launched savings deposits mobilization initiative in that met reasonable success; ~2lac new savings account were added with combined average quarterly balance of Rs25bn. In Q4, the bank started a current account campaign under which it has already mobilized Rs5-6bn. In the longer term, reversal in interest rate cycle would drive improvement in CASA ratio. CASA ratio has witnessed a sustained decline contributing towards increase in cost of deposits Component-wise growth in deposits as on Dec 11 Retail/Bulk TDs replacing CASA Latest deposits mix 4 Bulk TDs Retail TDs SA CA % 7% 24% 16 8 Bulk TDs Retail TDs SA CA 4% Company Report 4

5 NIM set for contraction over Q4 Q2 FY13 driven by multiple structural factors NIM to contract in Q4 ; margin to be materially higher than guidance PNB is likely to beat its annual NIM guidance of 3.5% by a material extent; we reckon by 3bps. This despite factoring a sequential margin contraction of 15-2bps in Q4 driven by change in loan mix, CASA decline and higher cost of retail TDs/bulk deposits. We estimate further margin correction in H1 FY13 as the bank responds to RBI s rate cuts by reducing both deposits and lending rates. With more than 6% of advances floating, the loan book re-pricing would happen faster than deposits narrowing the spread. The NIM compression in FY13 would drive a modest NII growth of 12-13%. Quarterly NIM has moved in a narrow band NIM (calculated) set for decline in the medium term FY8 FY9 FY1 E FY13E FY14E C/I ratio expected to remain stable aided by strong fee growth and modest increase in employee cost Fee income performance better than peers; C/I ratio to stay near impressive 41% PNB has witnessed strong growth of 25% in core fee income despite moderation in fresh project loans. The dismal growth in processing fees (3% yoy) has been offset by robust growth in fees from Bills & Remittances (42% yoy) and ATM operations (53% yoy) and also higher exchange profit (55% yoy). While growth in processing fees may remain subdued for some time, growth in other fees (excluding exchange profits) is likely to remain healthy. The bank expects overall fee growth above 2% in FY13. Trading profits are also expected to improve with bond yields unlikely to harden significantly. On expenditure side, growth in employee cost (excluding employee benefits) is estimated to be modest in due to higher base in (included some wage arrears). Going ahead, the growth in employee cost is expected to remain benign as the high-cost retiring employees are replaced by low-cost new employees. Other operating expenses have been growing in-line with the balance sheet at 2%. Notwithstanding margin correction in medium term, we expect the bank s C/I ratio to remain stable near 41%. Company Report 5

6 PNB s core fee income growth (9m ) has been stronger than peers Fee income growth driven by multiple components PNB BOB Can Bk BOI SBI Core Non- Int Inc Ins & MF Forex ATM operations Bills & Remittance LC/LG Misc Processing Fees PNB expects pressure on credit book to persist in the near term with slippages to remain above Rs1bn/quarter Restructuring remains lofty with Air India and Rajasthan SEB exposures restructured in Q4 ; loans to UP SEB and HCC in Q1 FY13 Weakness in asset quality to persist in the near term Over the past many quarters, PNB s slippages have hovered in the range of %. The gross NPL ratio has increased from 1.7% to 2.4% over - ; in absolute terms NPLs have doubled. Apart from sharp macro slowdown and significant increase in interest rate, brisk balance sheet growth may also have driven elevated delinquencies. PNB expects pressure on the credit book to persist in the near term with some improvement only expected in H2 FY13. Slippages are estimated to remain above Rs1bn/quarter but recovery is expected to improve. We estimate GNPL ratio at 2.5% in and 2.3% in FY13. Restructuring has been substantial in the past two quarters (~Rs41bn in Q2 and Rs19bn in Q3) primarily contributed by GTL (~Rs1bn) and TNEB (~Rs18bn) accounts. The outlook remains tough as Air India (~Rs2bn) and Rajasthan SEB (~Rs15bn) have been restructured in Q4. In Q1 FY13, the exposures to UP SEB (~Rs15bn) and HCC is likely to get restructured. There has been zero NPV loss on SEB restructuring as interest rates have been increased to compensate for delayed repayments. The restructuring has been done with stringent conditions of revision in tariffs, government monetizing previous losses, etc. The NPV loss on Air India is expected to be amortized over eight quarters with RBI s permission whereas on HCC would be booked in the corresponding quarter. Substantial restructuring along with sizeable slippages would keep credit cost high near.9% over the next two quarters, in our view. PNB has the highest restructured loans as a proportion of advances amongst peers. However, the extent of slippages from this book has been relatively lower indicating better quality than peers. Company Report 6

7 Quarterly slippages have been perturbing Resultantly, GNPL ratio has moved up significantly Credit cost has been significant NPL ratios to only improve in the longer term GNPA ratio NNPA ratio FY8 FY9 FY1 E FY13E FY14E O/S Restructured book as a % of advances highest for PNB amongst peers NNPL/Networth () ratio near 14% remains worrisome for PNB PNB BOI SBI Can Bk BOB SBI BOI Can Bk PNB BOB Company Report 7

8 Structural decline in RoA over the past eight quarters; near-term improvement looks improbable Capital raising of Rs28.5bn to shore-up Tier-1 capital by ~9bps NIM contraction and higher credit cost to retain pressure on RoA in near term; capital raising to prop-up Tier-1 ratio Aided by handsome NIMs and efficient operations, PNB has historically delivered one of the best RoAs amongst PSU Banks. However, RoA has been under pressure off-late; weakened from 1.34% in to 1.11% in on account of substantial slippages/credit cost. Any improvement in RoA in the near-term looks improbable as margin contraction would intensify pressure. We estimate 1.18% and 1.25% RoA for FY13 and FY14 respectively. As per the bank, it is likely to receive capital of Rs28.5bn from the Government and LIC before the March-end. This capital raising is estimated to shore-up the Tier-1 capital by ~9bps taking it above 9% despite the substantial credit expansion in Q4. At our assumed 2% loan CAGR over -14, the bank is unlikely to require additional capital in the next months. Structural and secular decline in RoA despite higher NIMs RoA to remain under pressure in near term; recovery likely from H2 FY FY8 FY9 FY1 E FY13E FY14E Capital (Tier-1 %) absorption rate has been high driven by brisk loan growth Expected capital infusion would enhance capital adequacy materially CAR Tier I FY8 FY9 FY1 E FY13E FY14E Company Report 8

9 Near-term RoA headwinds to remain the key overhang on valuation Limited upside; maintain MP rating Notwithstanding PNB s stock underperformance over the past 3/6 months, the outlook still remains weak in the near term with limited upside likely. Near-term RoA headwinds would remain the key overhang on the bank s valuation. Though the 1-year fwd P/adj.BV at 1.2x is below 5-year mean, on relative basis the valuation is above BOB which is expected to continue its resilient performance. We maintain Market Performer rating on PNB and 9-month price target of Rs1,16. Rolling 1-year fwd P/adj.BV fair valuation considering extant fundamentals 1,8 1,5 1, (Rs) 2.2x 1.8x 1.4x 1.x.6x Likely to trade below 5-year mean till RoA recovery becomes apparent (x) 1-yr Fw d P/adj.BV Mean Fw d P/adj.BV.5 Mar-6 Mar-7 Feb-8 Feb-9 Feb-1 Feb-11 Jan-12 Mar-6 Mar-7 Feb-8 Feb-9 Feb-1 Feb-11 Jan-12 PNB reasonably valued than SBI and BOI SBI P/Adj.BV (x) BOI CBK PNB BOB ROA Company Report 9

10 Financials Income statement Y/e 31 Mar (Rs m) E FY13E FY14E Interest income 269, , ,739 49,58 Interest expense (151,791) (23,624) (268,296) (32,852) Net int income 118,73 138,25 156, ,727 Non-int income 36,126 39,738 48,481 57,27 Total op income 154, ,763 24, ,935 Total op expenses (63,642) (72,597) (83,39) (96,988) Op profit (pre-prov) 9,557 15, , ,947 Provisions (24,92) (34,79) (33,783) (36,463) Profit before tax 65,637 7,457 87, ,484 Taxes (21,32) (22,867) (28,48) (36,182) Net profit 44,335 47,59 59,272 75,32 Balance sheet Y/e 31 Mar (Rs m) E FY13E FY14E Net worth 215,7 281,66 328,81 388,826 Preference Cap 3,128,987 3,786,74 4,55,428 5,541,677 Deposits 315, , , ,125 Borrowings 3,444,884 4,149,356 4,941,366 6,64,82 Total int-bearing liab 123, ,857 17,27 199,993 Non-int-bearing liabs 215,7 281,66 328,81 388,826 Total liabilities 3,568,167 4,294,213 5,111,573 6,264,795 Equity + Total liab 3,783,237 4,575,819 5,44,383 6,653,622 Total cash & equiv 296, ,71 428,59 519,86 Investments 951,623 1,28,562 1,462,36 1,813,326 Advances 2,421,67 2,856,859 3,399,662 4,147,588 Total int-earn assets 3,669,586 4,445,121 5,29,81 6,48,774 Fixed assets 31,56 35,714 41,71 47,232 Other assets 82,594 94,983 19, ,615 Total assets 3,783,236 4,575,819 5,44,384 6,653,622 Key ratios Y/e 31 Mar E FY13E FY14E Growth matrix Net interest income Total op income Op profit (preprovision) Net profit Advances Deposits Total assets Profitability Ratios NIM Non-int inc/total inc Return on Avg Equity Return on Avg Assets Per share ratios (Rs) EPS Adj.BVPS DPS Other key ratios Credit/Deposits Cost/Income CASA CAR Tier-I capital Gross NPLs/Loans Total prov/avg loans Net NPLs/Net loans Tax rate Dividend yield Company Report 1

11 Recommendation parameters for fundamental reports: Buy Absolute return of over +1% Market Performer Absolute return between -1% to +1% Sell Absolute return below -1% Published in 212. India Infoline Ltd 212 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai For Research related queries, write to: Amar Ambani, Head of Research at amar@indiainfoline.com or research@indiainfoline.com For Sales and Account related information, write to customer care: info@5pmail.com or call on