Asset quality worries intensifies May 08, 2015 Nitin Kumar nitinkumar@plindia.com +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 Rating Reduce Price Rs146 Target Price Rs155 Implied Upside 6.2% Sensex 27,105 Nifty 8,192 (Prices as on May 08, 2015) Trading data Market Cap. (Rs bn) 270.2 Shares o/s (m) 1,854.5 3M Avg. Daily value (Rs m) 1925.8 Major shareholders Promoters 59.86% Foreign 16.23% Domestic Inst. 18.43% Public & Other 5.48% Stock Performance (%) 1M 6M 12M Absolute (4.6) (22.5) (6.7) Relative 0.9 (19.8) (28.0) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 21.9 27.0 18.7 2017 25.7 34.2 24.9 Price Performance (RIC: PNBK.BO, BB: PNB IN) (Rs) 250 200 150 100 50 0 May 14 Jul 14 Sep 14 Source: Bloomberg Nov 14 Jan 15 Mar 15 May 15 PNB maintained its disappointing performance trend with annualized slippage run rate increasing to its highest level at ~8% annualized. The bank also restructured loans worth Rs78.8bn during the quarter taking the total standard restructured portfolio to 10.1%. NII growth was impacted by FITL provisioning and interest reversals while core other income grew at modest 5% YoY. Margins thus declined by 42bp QoQ to 2.79% though CASA mix improved to 40.6%. High slippage and bulky standard restructured portfolio (Rs383 bn) remains a key overhang on asset quality and earnings performance. We remain concerned as 35 40% of book will be moving out of moratorium in next 12 15 months. We cut FY16E/FY17E earnings by 16%/22% and revise our PT to Rs155 (from Rs175). Retain REDUCE. Operating metrics continues to worsen: PNB reported 5% YoY decline in NII affected by interest reversals, FITL provisioning and shift towards low yielding high quality corporate segment. Core other income also reported modest 5% YoY growth. Margins thus declined by 42bp QoQ to 2.79% though management guided it to improve to ~3.2% in FY16. Tax refund of Rs9.38bn, 26% QoQ decline in staff expenses and treasury gains of Rs5.38bn helped lift earnings but steep rise in provisions (credit cost of ~390bps) resulted in 62% YoY decline in PAT. Asset quality shock continues; slippages from restructured assets a big overhang: Fresh slippages of Rs74.2 bn (~8% annualized, ~33% on account of slippages from restructured assets) was highest ever while fresh restructuring also stood elevated at Rs78.8 bn. GNPA ratio increased to 6.55% while heavy provisioning resulted in slight improvement in coverage ratio. We remain concerned on the fallout from restructured book as at least 35 40% of book will be moving out of moratorium in next 12 15 months while recovery & upgrade rate for the bank has declined significantly over past few years. Capital adequacy is a silver lining; lowering PT as we cut earnings: PNB s capital adequacy improved to 12.2% (9.3% Tier I) post AT 1 issuance and capital infusion from the government which gives it an advantage over other PSU banks. However owing to weak performance we cut FY16E/FY17E earnings by 16%/22% respectively and lower our PT to Rs155 (from Rs175). Retain REDUCE. Key financials ( Y/e March) 2014 2015E 2016E 2017E Net interest income (Rs m) 161,460 165,554 184,022 207,542 Growth (%) 8.7 2.5 11.2 12.8 Operating profit (Rs m) 113,845 119,545 129,388 143,750 PAT (Rs m) 33,426 30,609 40,669 47,639 EPS (Rs) 18.7 16.7 21.9 25.7 Growth (%) (31.8) (10.6) 31.3 17.1 Net DPS (Rs) 2.0 2.0 3.0 3.5 Profitability & Valuation 2014 2015E 2016E 2017E NIM (%) 3.14 2.92 2.89 2.78 RoAE (%) 9.7 8.2 10.0 10.8 RoAA (%) 0.65 0.54 0.64 0.64 P / BV (x) 0.7 0.7 0.6 0.5 P / ABV (x) 1.0 0.8 0.7 0.6 PE (x) 7.8 8.7 6.6 5.7 Net dividend yield (%) 1.4 1.4 2.1 2.4 Source: Company Data; PL Research Q4FY15 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
NII growth was disappointing on slower growth in advances and high interest reversals from NPAs Other income was high on better treasury income and recovery from written off accounts, while core fees growth was flattish mainly supported from third party distribution income Exhibit 1: PNB Q4FY15 PAT aided by tax write backs; pain in asset quality continues P&L (Rs mn) Q4FY15 Q4FY14 YoY gr. (%) Q3FY15 QoQ gr. (%) Interest Income 116,505 111,013 4.9 116,141 0.3 Interest Expense 78,589 70,995 10.7 73,810 6.5 Net Interest Income (NII) 37,916 40,018 (5.3) 42,331 (10.4) Treasury income 5,380 1,890 184.7 2,110 155.0 Other income exc. Treasury 18,051 13,969 29.2 12,908 39.8 Total income 55,967 53,987 3.7 55,239 1.3 Operating expenses 23,940 22,253 7.6 27,732 (13.7) Staff expenses 15,069 14,778 2.0 20,286 (25.7) Other expenses 8,872 7,475 18.7 7,446 19.1 Operating profit 32,027 31,734 0.9 27,507 16.4 Core operating profit 26,647 29,844 (10.7) 25,397 4.9 Total provisions 38,342 21,387 79.3 14,678 161.2 Profit before tax (6,315) 10,347 (161.0) 12,830 (149.2) Tax (9,381) 2,284 (510.7) 5,084 (284.5) Profit after tax 3,066 8,064 (62.0) 7,746 (60.4) Balance sheet (Rs mn) Deposits 5,013,786 4,513,968 11.1 4,841,381 3.6 Advances 3,805,344 3,492,691 9.0 3,624,959 5.0 Gross NPA (Rs mn) 256,949 188,801 36.1 222,114 15.7 Net NPA (Rs mn) 153,965 99,170 55.3 137,878 11.7 O/S Std. restr. assets (Rs mn) 423,387 366,396 15.6 370,547 14.3 NIMs slide as interest reversals were high on substantial increase in asset quality impairment Profitability ratios RoaA 0.2 0.6 (38) 0.5 (33) RoaE 3.3 9.4 (610) 8.3 (507) NIM 2.8 3.2 (41) 3.2 (42) Yield on Advances 9.5 9.9 (43) 9.9 (35) Cost of Deposits 6.0 6.1 (10) 6.1 (7) Asset quality saw further deterioration on high slippages from sugar, iron & steel, infrastructure and other industries. Asset Quality Gross NPL ratio 6.6 5.3 130 6.0 58 Net NPL ratio 4.1 2.9 121 3.8 24 Coverage ratio 40.1 47.5 (739) 37.9 215 Std. rest. Assets/ Total 11.1 10.5 64 10.2 90 Business & Other Ratios Low cost deposit mix 40.6 41.3 (73) 39.4 113 Cost income ratio 42.8 41.2 156 50.2 (743) Non int. inc / total income 32.3 25.9 638 23.4 889 Credit deposit ratio 75.9 77.4 (148) 74.9 102 CAR 12.2 11.5 69 11.5 67 Tier I 9.3 8.9 43 8.5 80 May 08, 2015 2
Exhibit 2: Loan growth remained muted on weak corporate demand Exhibit 3: Core fees remains sluggish but supported by TPD income 35.0% Advances growth YoY(%) 40.0% Core fee growth (%) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 30.0% 20.0% 10.0% 0.0% 10.0% 0.0% 20.0% Exhibit 4: CASA profile remains decent in challenging environment Exhibit 5: NIMs slide on high interest reversals and FITL provisioning 42.0% 40.0% 38.0% 36.0% 34.0% 32.0% CASA (%) 4.10% 3.90% 3.70% 3.50% 3.30% 3.10% 2.90% 2.70% 2.50% NIM (%) Slippages rate of 8.2% annualized remains one of the highest recognized in any quarter.fresh stressed asset formation was Rs153bn in Q4FY15 with fresh restructuring of Rs78.8bn to seize forbearance benefit. Exhibit 6: Pain in asset quality highest among PSB, yet not over PNB Addition 30,500 15,050 36,950 29,580 35,650 51,930 74,240 Cash Recovery 10,640 7,200 13,100 7,490 10,710 10,820 13,540 Up gradation 4,780 3,310 990 2,640 2,487 5,870 14,210 Write off 730 3,840 14,090 12,210 10,990 24,160 11,660 GNPAs 165,256 165,956 188,816 196,056 207,519 222,114 256,960 Annualized Slippages % 3.9% 1.9% 4.4% 3.4% 4.0% 5.7% 8.2% Restructuring Addition 27,690 21,500 32,860 14,520 32,970 25,580 78,800 % of loans 3.53% 2.64% 3.76% 1.67% 3.69% 2.82% 8.70% May 08, 2015 3
Exhibit 7: Credit cost remains high at ~390 bps on elevated accretion in stressed assets Exhibit 8: Asset quality pain continues on high slippages, one third of which came from restructured portfolio 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Credit Cost 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Gross NPA (%) Net NPA (%) Exhibit 9: RoA decomposition tree RoA decomposition FY11 FY12 FY13 FY14 FY15E FY16E FY17E Interest income 8.00 8.71 8.94 8.40 8.03 7.99 8.01 Interest expenses 4.50 5.50 5.77 5.26 5.16 5.15 5.23 Net interest income 3.50 3.21 3.17 3.14 2.87 2.84 2.78 Treasury income 0.09 0.08 0.10 0.11 0.18 0.09 0.07 Other Inc. from operations 0.98 0.92 0.80 0.78 0.84 0.93 0.92 Total income 4.57 4.21 4.07 4.03 3.89 3.86 3.78 Employee expenses 1.32 1.13 1.21 1.27 1.27 1.22 1.23 Other operating expenses 0.56 0.54 0.53 0.55 0.55 0.63 0.62 Operating profit 2.68 2.54 2.33 2.21 2.07 2.00 1.92 Tax 0.63 0.51 0.38 0.26 0.16 0.27 0.27 Loan loss provisions 0.74 0.86 0.94 1.30 1.39 1.10 1.01 Net profit 1.31 1.17 1.01 0.65 0.53 0.63 0.64 Exhibit 10: We cut PT to Rs155 per share (from Rs175) PT calculation and upside Fair price EVA 150 Fair price P/ABV 159 Average of the two 155 Target P/ABV 0.8 Target P/ABV adj. for 20% slippages from restructured assets 0.9 Target P/E 6.0 Current price, Rs 146 Upside (%) 6% Dividend yield (%) 2% Total return (%) 8% May 08, 2015 4
Exhibit 11: We cut our earnings by 16% & 22% for FY16E & FY17E respectively on higher credit costs and lower NII as business growth remains subdued (Rs mn) Old Revised % Change FY15E FY16E FY15E FY16E FY15E FY16E Net interest income 190,522 222,331 184,022 207,542 (3.4) (6.7) Operating profit 129,091 150,686 129,388 143,750 0.2 (4.6) Net profit 48,576 61,154 40,669 47,639 (16.3) (22.1) EPS (Rs) 26.8 33.8 21.9 25.7 (18.3) (24.0) ABVPS (Rs) 186.0 223.0 176.6 212.7 (5.1) (4.6) Price target (Rs) 175 155 (11.9) Recommendation REDUCE REDUCE May 08, 2015 5
Income Statement (Rs m) Int. Earned from Adv. 323,931 347,944 381,773 443,689 Int. Earned from Invt. 102,658 106,000 125,050 148,257 Others 5,643 9,210 10,233 6,139 Total Interest Income 432,233 463,154 517,056 598,086 Interest expense 270,773 297,600 333,034 390,544 NII 161,460 165,554 184,022 207,542 Growth (%) 8.7 2.5 11.2 12.8 Treasury Income 5,494 10,230 5,530 5,530 NTNII 40,274 48,677 59,857 69,011 Non Interest Income 45,767 58,907 65,387 74,541 Total Income 478,000 522,061 582,443 672,627 Growth (%) 3.7 9.2 11.6 15.5 Operating Expense 93,382 104,916 120,021 138,333 Operating Profit 113,845 119,545 129,388 143,750 Growth (%) 4.4 5.0 8.2 11.1 NPA Provisions 45,171 79,780 63,289 66,792 Investment Provisions 7,828 (5,660) 1,415 (354) Total Provisions 66,939 79,980 71,290 75,694 PBT 46,905 39,565 58,098 68,056 Tax Provisions 13,479 8,957 17,429 20,417 Effective Tax Rate (%) 28.7 22.6 30.0 30.0 PAT 33,426 30,609 40,669 47,639 Growth (%) (29.6) (8.4) 32.9 17.1 Balance Sheet (Rs m) Par Value 2 2 2 2 No. of equity shares 1,810 1,855 1,855 1,855 Equity 3,621 3,709 3,709 3,709 Networth 358,951 390,795 419,471 459,477 Adj. Networth 259,781 289,526 341,499 408,525 Deposits 4,513,968 5,013,786 5,685,633 6,663,562 Growth (%) 15.3 11.1 13.4 17.2 Low Cost deposits 1,728,721 1,990,473 2,245,825 2,665,425 % of total deposits 38.3 39.7 39.5 40.0 Total Liabilities 5,504,197 6,033,336 6,904,063 8,033,101 Net Advances 3,492,691 3,805,344 4,360,924 5,180,778 Growth (%) 13.1 9.0 14.6 18.8 Investments 1,437,855 1,512,824 1,938,833 2,153,400 Total Assets 5,504,197 5,825,654 6,904,063 8,033,101. Quarterly Financials (Rs m) Y/e March Q1FY15 Q2FY15 Q3FY15 Q4FY15 Interest Income 115,887 114,621 116,141 116,505 Interest Expense 72,090 73,109 73,810 78,589 Net Interest Income 43,797 41,512 42,331 37,916 Non Interest Income 12,364 15,584 12,908 18,051 CEB Treasury 1,490 1,250 2,110 5,380 Net Total Income 56,161 57,096 55,239 55,967 Operating Expenses 24,908 28,335 27,732 23,940 Employee Expenses 17,674 20,341 20,286 15,069 Other Expenses 7,235 7,995 7,446 8,872 Operating Profit 31,253 28,760 27,507 32,027 Core Operating Profit 29,763 27,510 25,397 26,647 Provisions 9,276 17,679 14,678 38,342 Loan loss provisions 13,360 16,380 17,230 32,810 Investment Depreciation (3,810) (260) (4,450) 2,860 Profit before tax 21,977 11,081 12,830 (6,315) Tax 7,926 5,328 5,084 (9,381) PAT before EO 14,051 5,753 7,746 3,066 Extraordinary item PAT 14,051 5,753 7,746 3,066 Key Ratios CMP (Rs) 146 146 146 146 Equity Shrs. Os. (m) 1,810 1,855 1,855 1,855 Market Cap (Rs m) 263,768 270,201 270,201 270,201 M/Cap to AUM (%) 4.8 4.6 3.9 3.4 EPS (Rs) 18.7 16.7 21.9 25.7 Book Value (Rs) 203 219 240 266 Adj. BV (100%) (Rs) 149 177 213 233 P/E (x) 7.8 8.7 6.6 5.7 P/BV (x) 0.7 0.7 0.6 0.5 P/ABV (x) 1.0 0.8 0.7 0.6 DPS (Rs) 2.0 2.0 3.0 3.5 Dividend Yield (%) 1.4 1.4 2.1 2.4 Profitability (%) NIM 3.1 2.9 2.9 2.8 RoAA 0.6 0.5 0.6 0.6 RoAE 9.7 8.2 10.0 10.8 Efficiency Cost Income Ratio (%) 45.1 46.7 48.1 49.0 C D Ratio (%) 77.4 75.9 76.7 77.7 Business per Emp. (Rs m) 122 117 116 119 Profit per Emp. (Rs lacs) 5.1 4.1 4.7 4.8 Business per Branch (Rs m) 1,291 1,355 1,442 1,589 Profit per Branch (Rs m) 5 5 6 6 Asset Quality Gross NPAs (Rs m) 188,801 253,768 249,378 231,491 Net NPAs (Rs m) 99,170 101,269 77,972 50,952 Gr. NPAs to Gross Adv. (%) 5.4 6.7 5.7 4.5 Net NPAs to Net Adv. (%) 2.8 2.7 1.8 1.0 NPA Coverage (%) 47.5 60.1 68.7 78.0. May 08, 2015 6
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. 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 % of Total Coverage 50% 40% 30% 20% 10% 0% 44.6% 38.0% 17.4% 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), 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 commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com 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), 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 regarding, 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 Institutional 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 08, 2015 7