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 nitinkumar@plindia.com / +91-22-66322236 Pritesh Bumb priteshbumb@plindia.com / +91-22-66322232 Vidhi Shah vidhishah@plindia.com / +91-22-66322258 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) 145.4 Shares o/s (m) 1,963.6 3M Avg. Daily value (Rs m) 769.5 Major shareholders Promoters 62.08% Foreign 10.36% Domestic Inst. 20.79% 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. 2017 12.8 13.9-8.3 2018 24.1 20.1 19.9 Price Performance (RIC: PNBK.BO, BB: PNB IN) (Rs) 200 150 100 50 0 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) 2015 2016E 2017E 2018E Net interest income 165,556 153,118 168,524 195,813 Growth (%) 2.5 (7.5) 10.1 16.2 Operating profit 119,547 122,163 133,284 159,013 PAT 30,615 (39,742) 25,079 47,367 EPS (Rs) 16.7 (20.8) 12.8 24.1 Growth (%) (10.6) (224.6) (161.3) 88.9 Net DPS (Rs) 3.3 0.8 1.5 Profitability & Valuation 2015 2016E 2017E 2018E NIM (%) 2.87 2.41 2.37 2.42 RoAE (%) 8.2 (10.3) 6.4 11.1 RoAA (%) 0.53 (0.63) 0.35 0.59 P / BV (x) 0.4 0.4 0.4 0.3 P / ABV (x) 0.5 1.4 1.0 0.6 PE (x) 4.4 (3.6) 5.8 3.1 Net dividend yield (%) 4.5 1.1 2.0 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
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 192.3 ABV per share adjusted for 70% Net NPLs, Rs - ABV 1 74.6 ABV per share adjusted for all other exposure (SDR, 5/25, ARC & restr) - ABV2 32.2 Damage to FY17E ABV due to others 42.0 May 18, 2016 2
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 108,240 116,505 (7.1) 122,206 (11.4) Interest Expense 80,563 78,589 2.5 81,010 (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 18,051 35.8 16,706 46.8 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 8,872 11.0 8,812 11.7 Operating profit 32,279 32,027 0.8 29,179 10.6 Core operating profit 31,139 26,647 16.9 26,849 16.0 Total provisions 104,852 38,342 173.5 37,755 177.7 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 5,013,786 10.3 5,485,316 0.8 Advances 4,123,258 3,805,344 8.4 3,929,367 4.9 Gross NPA (Rs m) 558,183 256,949 117.2 343,382 62.6 Net NPA (Rs m) 354,226 153,965 130.1 229,834 54.1 O/S Std. restr. assets (Rs m) 201,440 423,387 (52.4) 350,040 (42.5) Profitability ratios Yield on Advances 9.1 9.5 (41) 9.5 (37) Cost of Deposits 5.9 6.0 (19) 5.8 4 NIM 2.6 2.8 (19) 2.8 (15) RoaA (3.2) 0.2 (338) 0.0 (321) RoaE NA 3.3 0.5 Asset Quality Gross NPL ratio 12.9 6.6 635 8.5 443 Net NPL ratio 8.6 4.1 455 5.9 275 Coverage ratio 36.5 40.1 (354) 33.1 347 Std. rest. Assets/ Total 4.9 11.1 (624) 8.9 (402) advances Business & Other Ratios Low-cost deposit mix 41.6 40.6 106 40.4 125 Cost-income ratio 38.2 42.8 (461) 49.6 (1,144) Non int. inc / total income 47.0 32.3 1,472 28.9 1,813 Credit deposit ratio 74.6 75.9 (134) 71.6 292 CAR 11.3 12.2 (93) 11.3 3 Tier-I 8.4 9.3 (89) 8.5 (11) May 18, 2016 3
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 188,816 196,056 207,519 222,114 256,960 253,980 249,452 343,400 558,183 - Fresh Addition in Qtr 36,950 29,580 35,650 51,930 74,240 28,020 31,260 127,120 235,480 Annualized Slippages % 4.4% 3.4% 4.0% 5.7% 8.2% 2.9% 3.3% 12.9% 24.0% O/s std restructured 355,070 340,120 363,370 343,330 383,150 399,690 382,160 350,040 201,440 - Restructuring Addition 32,860 14,520 32,970 25,580 78,800 6,760 - - - - ARC sale - - 740 - - - - 13,720-5/25 refinancing stock 26,000 32,330 68,000 68,000 SDR assets stock - 70,000 70,000 Total stressed loans 543,886 536,176 570,889 565,444 640,110 679,670 663,942 831,440 897,623 % of loans 16.7% 15.4% 16.4% 15.8% 17.7% 17.9% 17.4% 21.8% 21.7% May 18, 2016 4
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 8.00 8.71 8.94 8.40 8.03 7.46 7.40 7.37 Interest expenses 4.50 5.50 5.77 5.26 5.16 5.05 5.03 4.95 Net interest income 3.50 3.21 3.17 3.14 2.87 2.41 2.37 2.42 Treasury income 0.09 0.08 0.10 0.11 0.18 0.11 0.08 0.07 Other Inc. from operations 0.98 0.92 0.80 0.78 0.84 0.97 1.03 1.05 Total income 4.57 4.21 4.07 4.03 3.89 3.49 3.48 3.54 Employee expenses 1.32 1.13 1.21 1.27 1.27 1.01 1.04 1.03 Other operating expenses 0.56 0.54 0.53 0.55 0.55 0.56 0.56 0.54 Operating profit 2.68 2.54 2.33 2.21 2.07 1.92 1.88 1.96 Tax 0.63 0.51 0.38 0.26 0.16 (0.28) 0.17 0.28 Loan loss provisions 0.74 0.86 0.94 1.30 1.39 2.83 1.36 1.10 Net profit 1.31 1.17 1.01 0.65 0.53 (0.63) 0.35 0.59 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 187,602 213,049 168,524 195,813 (10.2) (8.1) Operating profit 129,045 149,729 133,284 159,013 3.3 6.2 Net profit 31,929 41,907 25,079 47,367 (21.5) 13.0 EPS (Rs) 16.3 21.3 12.8 24.1 (21.5) 13.0 ABVPS (Rs) 108.9 143.0 74.6 114.8 (31.5) (19.8) Price target (Rs) 65 60 (7.9) Recommendation REDUCE REDUCE May 18, 2016 5
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 2.3 2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5 P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD May 18, 2016 6
Income Statement (Rs m) Int. Earned from Adv. 347,944 344,455 385,706 427,629 Int. Earned from Invt. 106,000 120,337 131,676 162,971 Others 9,210 9,452 8,399 5,810 Total Interest Income 463,154 474,244 525,781 596,409 Interest expense 297,598 321,126 357,257 400,596 NII 165,556 153,118 168,524 195,813 Growth (%) 2.5 (7.5) 10.1 16.2 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 522,061 543,014 604,248 686,803 Growth (%) 9.2 4.0 11.3 13.7 Operating Expense 104,916 99,725 113,706 127,194 Operating Profit 119,547 122,163 133,284 159,013 Growth (%) 5.0 2.2 9.1 19.3 NPA Provisions 79,792 184,690 92,043 84,531 Investment Provisions (5,670) 3,450 (863) 216 Total Provisions 79,975 179,540 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 (%) 22.6 30.7 32.0 32.0 PAT 30,615 (39,742) 25,079 47,367 Growth (%) (8.4) (229.8) (163.1) 88.9 Balance Sheet (Rs m) Par Value 2 2 2 2 No. of equity shares 1,855 1,964 1,964 1,964 Equity 3,709 3,927 3,927 3,927 Networth 390,795 383,101 406,295 450,128 Adj. Networth 236,830 28,871 75,945 169,927 Deposits 5,013,786 5,530,511 6,282,661 7,250,191 Growth (%) 11.1 10.3 13.6 15.4 Low Cost deposits 2,005,514 2,055,830 2,462,803 2,885,576 % of total deposits 40.0 37.2 39.2 39.8 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 (%) 9.0 8.4 12.6 14.2 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 120,347 123,450 122,206 108,240 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 37,755 104,852 Loan loss provisions 12,910 20,310 37,670 113,800 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 6,210 510 (53,671) Extraordinary item PAT 7,207 6,210 510 (53,671) Key Ratios CMP (Rs) 74 74 74 74 Equity Shrs. Os. (m) 1,855 1,964 1,964 1,964 Market Cap (Rs m) 137,330 145,405 145,405 145,405 M/Cap to AUM (%) 2.3 2.2 1.9 1.7 EPS (Rs) 16.7 (20.8) 12.8 24.1 Book Value (Rs) 203 181 192 215 Adj. BV (100%) (Rs) 145 54 75 115 P/E (x) 4.4 (3.6) 5.8 3.1 P/BV (x) 0.4 0.4 0.4 0.3 P/ABV (x) 0.5 1.4 1.0 0.6 DPS (Rs) 3.3 0.8 1.5 Dividend Yield (%) 4.5 1.1 2.0 Profitability (%) NIM 2.9 2.4 2.4 2.4 RoAA 0.5 (0.6) 0.4 0.6 RoAE 8.2 (10.3) 6.4 11.1 Efficiency Cost-Income Ratio (%) 46.7 44.9 46.0 44.4 C-D Ratio (%) 75.9 74.6 73.9 73.1 Business per Emp. (Rs m) 117 111 110 110 Profit per Emp. (Rs lacs) 4.1 (4.6) 2.5 4.1 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) 256,949 558,189 501,468 424,980 Net NPAs (Rs m) 153,965 354,230 330,351 280,201 Gr. NPAs to Gross Adv. (%) 6.8 13.5 10.8 8.0 Net NPAs to Net Adv. (%) 4.0 8.6 7.1 5.3 NPA Coverage (%) 40.1 36.5 34.1 34.1. May 18, 2016 7
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 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. 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