Company Update Punjab National Bank 19 September 2018 Reuters: PNB.BO; Bloomberg: PNB IN Concerns Remain; Assign Accumulate We take Punjab National Bank (PNB) out from Under Review and assign an Accumulate rating since (1) growth remains an issue for the bank even though (2) asset quality issues are largely behind the bank. Growth remains an issue with (a) Management having guided for domestic credit growth of ~10% for FY19, which is moderate (b) International book degrowth will continue (c) PNB does not sit on an adequate capital buffer with CAR standing at just 10.3% even after recent capital infusion of Rs28.16bn from the union government (d) PNB remains a candidate for RBI s Prompt Corrective Action regime given it still stands in breach of the relevant NPA threshold. Asset quality problems are largely behind the bank with (a) SMA exposure (which PNB considers its watchlist) standing at Rs80bn- Rs100bn (b) Exposure to various erstwhile restructuring dispensations (including 5/25) standing at Rs40bn (c) Slippage in 1QFY19 had stood at Rs73.6bn compared with a past 10-quarter average of Rs203bn with run rate set to decline further. We assign an Accumulate rating on PNB with a Target Price of Rs82, implying a valuation of 1.0x 1HFY21E P/ABV for the standalone bank. Growth remains an issue since domestic credit growth guidance remains moderate, international book will continue to restructure, capital levels are a constraint and PNB remains a candidate for PCA framework: Domestic credit growth guidance of ~10% is moderate and significantly lower than similar sized PSU peer, Bank of Baroda. There is no change to international book s growth outlook as such as restructuring plans continue with a view to make the business more profitable. Thirdly, despite (a) QIP of Rs 50bn in December 2017 (b) Capital infusion of Rs54.73bn in March 2018 and (c) again, of Rs28.16bn, by GOI, in July 2018, Capital Adequacy Ratio stands at 10.3% due to (a) high NPA provisions (b) fraud at Brady House branch. This is still lower than the minimum requirement of 10.875% for Total Capital if Capital Conservation Buffer (CCB) is included and whose breach precludes discretionary capital distribution to shareholders. Lastly, PNB remains a candidate for RBI s PCA framework given it still stands in breach of the relevant NPA threshold with an NNPA ratio of 10.58% as of 1QFY19 (see research note on considerations surrounding PCA for PNB). Asset quality problems are largely behind the bank with limited residual SMA and restructured book: SMA accounts are 1.8%-2.2% of loan book and restructured book (including 5/25) is 0.9% of loan book. NPA addition in 1QFY19 was 64% lower than the past 10-quarter average. NPA accretion run rate is set to move even lower since the 1QFY19 number included (a) A debit of Rs 21.13bn in existing NPA accounts primarily due to devolvement of non-fund exposure, of which residual exposure to NPA accounts is minimal (b) Rs 13bn of abnormally high Agri slippages, mainly due to seasonality (c) Rs11bn of SME slippages, which are also expected to move lower, as per management. Also, importantly, NPA reduction exceeded expectations at Rs84.45bn in 1QFY19. Consequently, the target of NPA reduction of Rs220bn for FY19 may be surpassed. Both funded and non-fund exposures to the specified Brady House account had earlier been declared fraud and provisions of Rs90.4bn (~63% of exposure) have been made as of 1QFY19, with the remaining to be made over the next two quarters. Certain operational metrics look good optically but have to be viewed in their underlying context: Cost of Deposits had declined 11bps QoQ in 1QFY19 to 4.99% but have to be viewed in conjunction with tepid domestic deposits growth of 4.9%. Yield on Advances moved up to 7.99%, up 147bps QoQ and 8bps YoY but were aided by Rs8bn interest income due to recovery on Bhushan steel account. PNB has adopted a strategy of focusing almost exclusively on higher rated corporates to shore up capital and management has decided to charge higher processing fees (lower discounts) on accounts of higher risk sectors but this may not fully offset the former s yield-dilutive impact. Operating expenses de-grew -17% YoY in 1QFY19 due to general cost control but also due to rationalization of both international and domestic businesses. Valuation and outlook: We assign a multiple of 1.0x 1HFY21E P/ABV for the standalone bank and add Rs30 for the value of subsidiaries, arriving at our Target Price of Rs82, at which PNB stock has an upside of 4%. Consequently, we assign an Accumulate Rating on PNB. ACCUMULATE Sector: Banking CMP: Rs79 Target Price: Rs82 Upside: 4% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Key Data Current Shares O/S (mn) 2,760.6 Mkt Cap (Rsbn/US$bn) 218.9/3.0 52 Wk H / L (Rs) 232/72 Daily Vol. (3M NSE Avg.) 34,267,690 Price Performance (%) 1 M 6 M 1 Yr Punjab National Bank (5.0) (17.9) (44.9) Nifty Index (1.7) 11.7 11.1 Source: Bloomberg
Sep-08 Jan-09 Jun-09 Oct-09 Mar-10 Jul-10 Dec-10 Apr-11 Sep-11 Jan-12 May-12 Oct-12 Feb-13 Jul-13 Nov-13 Apr-14 Aug-14 Dec-14 May-15 Sep-15 Feb-16 Jun-16 Nov-16 Mar-17 Aug-17 Dec-17 Apr-18 Sep-18 Exhibit 1: One-year forward P/BV (x) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 - Source: Company, Nirmal Bang Research P/BVPS Mean +1 SD -1 SD 2 Punjab National Bank
Financials Exhibit 2: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Interest income 4,72,760 4,79,958 4,98,317 5,37,918 5,92,326 Interest expenses 3,22,828 3,30,734 3,42,893 3,60,977 3,95,648 Net interest income 1,49,931 1,49,224 1,55,424 1,76,941 1,96,678 Fee income 62,917 56,217 62,848 73,095 86,582 Other income 26,597 32,592 16,269 23,280 25,215 Net revenues 2,39,445 2,38,033 2,34,541 2,73,317 3,08,475 Operating expenses 93,794 1,35,091 1,40,488 1,56,856 1,76,482 -Employee expenses 54,207 91,688 95,597 1,08,126 1,22,368 -Other expenses 39,587 43,403 44,892 48,730 54,114 Operating profit 1,45,651 1,02,942 94,052 1,16,461 1,31,993 Provisions 1,25,536 2,98,693 1,16,161 73,163 68,659 -Loan loss provision 1,31,453 2,29,458 1,08,420 67,062 64,426 -Investment depreciation 4,867 20,272 7,741 6,101 4,233 -Other provisions (10,784) 48,964 - - - PBT 20,115 (1,95,751) (22,109) 43,298 63,335 Tax 6,867 (72,923) (6,633) 12,989 19,000 PAT 13,248 (1,22,828) (15,476) 30,308 44,334 Source: Company, Nirmal Bang Research Exhibit 4: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Equity capital 4,256 5,521 6,147 6,147 6,147 Reserves & surplus 4,16,719 4,05,222 4,17,280 4,40,183 4,77,111 Shareholders funds 4,20,975 4,10,743 4,23,427 4,46,330 4,83,258 Deposits 62,17,040 64,22,262 67,86,599 73,43,514 80,78,643 -Current deposits 4,58,533 4,03,742 4,41,129 5,06,702 5,65,505 -Saving deposits 21,41,625 22,28,731 23,75,310 26,14,291 29,08,311 -Term deposit 36,16,882 37,89,789 39,70,160 42,22,521 46,04,826 Borrowings 4,07,633 6,08,507 5,27,038 5,45,217 7,69,470 Other liabilities 1,57,657 2,16,789 2,72,709 2,97,013 3,15,020 Total liabilities 72,03,305 76,58,301 80,09,774 86,32,074 96,46,391 Cash/equivalent 8,83,316 9,54,620 9,04,987 9,18,910 10,29,180 Advances 41,94,931 43,37,347 46,40,962 51,05,058 57,17,665 Investments 18,67,254 20,03,060 20,64,223 21,68,544 24,16,029 Fixed assets 62,732 63,493 69,843 76,827 84,510 Other assets 1,95,071 2,99,781 3,29,759 3,62,735 3,99,008 Total assets 72,03,305 76,58,301 80,09,774 86,32,074 96,46,391 Source: Company, Nirmal Bang Research Exhibit 3: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Growth (%) NII growth (2.1) (0.5) 4.2 13.8 11.2 Pre-provision profit growth 19.2 (29.3) (8.6) 23.8 13.3 PAT growth (133.3) (1,027.2) NA NA 46.3 Business (%) Deposit growth 12.4 3.3 5.7 8.2 10.0 Advance growth 1.7 3.4 7.0 10.0 12.0 Business growth 7.9 3.3 6.2 8.9 10.8 CD 67.5 67.5 68.4 69.5 70.8 CASA 41.8 41.0 41.5 42.5 43.0 Operating efficiency (%) Cost-to-income 39.2 56.8 59.9 57.4 57.2 Cost-to-assets 1.4 1.8 1.8 1.9 1.9 Productivity (Rsmn) Business per branch 1,500.9 1,540.8 1,613.4 1,709.3 1,841.2 Business per employee 140.9 143.7 153.7 162.8 175.4 Profit per branch 1.9 (17.6) (2.2) 4.2 5.9 Profit per employee 0.2 (1.6) (0.2) 0.4 0.6 Spread (%) Yield on advances 7.9 7.5 7.4 7.5 7.5 Yield on investments 7.3 7.2 7.2 7.2 7.2 Cost of deposits 5.1 4.8 4.7 4.7 4.7 Yield on assets 7.3 7.0 6.9 7.1 7.1 Cost of funds 4.9 4.7 4.6 4.6 4.6 NIMs 2.3 2.2 2.2 2.3 2.4 Capital adequacy (%) Tier I 8.9 7.1 7.8 7.5 7.3 Tier II 2.8 2.1 2.3 2.1 2.7 Total CAR 11.7 9.2 10.1 9.7 10.0 Asset quality (%) Gross NPAs 12.5 18.4 14.5 12.6 11.0 Net NPAs 7.8 11.2 7.8 6.3 5.0 Specific provision coverage 62.8 60.0 66.7 70.2 73.2 Slippage 5.4 10.4 4.0 3.5 2.5 Credit-cost 3.1 5.7 2.0 1.3 1.1 Return (%) RoE 3.3 (29.5) (3.7) 7.0 9.5 RoA 0.2 (1.7) (0.2) 0.4 0.5 RoRWA 0.3 (2.7) (0.3) 0.6 0.8 Per share EPS 6.5 (55.4) (5.0) 9.9 14.4 BV 197.8 148.8 137.8 145.2 157.2 ABV 44.2 (27.6) 19.7 40.4 64.1 Valuation (x) P/E 12.3 (1.4) (15.8) 8.0 5.5 P/BV 0.4 0.5 0.6 0.5 0.5 P/ABV 1.8 (2.9) 4.0 2.0 1.2 Source: Company, Nirmal Bang Research 3 Punjab National Bank
Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Mar-18 May-18 Jul-18 Sep-18 Rating track Date Rating Market price (Rs) Target price (Rs) 28 July 2014 Accumulate 924 975 8 October 2014 Accumulate 878 975 22 October 2014 Accumulate 928 1,030 8 January 2015* Accumulate 205 206 4 February 2015 Accumulate 177 200 11 May 2015 Accumulate 146 160 29 July 2015 Accumulate 143 160 10 February 2016 Sell 88 75 24 May 2016 Sell 72 55 1 August 2016 Sell 124 75 9 November 2016 Sell 141 92 9 February 2017 Sell 152 92 14 February 2017 Sell 142 100 22 May 2017 Sell 160 115 3 Aug 2017 Sell 158 110 8 November 2017 Under Review 191-7 February 2018 Under Review 161-16 May 2018 Under Review 84-9 August 2018 Under Review 80-19 September 2018 Accumulate 79 82 * Post stock split Rating track graph 250 230 210 190 170 150 130 110 90 70 50 Not Covered Covered 4 Punjab National Bank
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