Q1FY17 RESULT UPDATE Aug-15 Sep-15 Oct-15 GEOJIT BNP PARIBAS Research Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 RETAIL EQUITY RESEARCH Punjab National Bank Banking BSE CODE: 532461 NSE CODE: PNB Bloomberg CODE: PNB:IN SENSEX: 28,085 Reduce Rating as per Large cap 12months investment period CMP Rs124 TARGET Rs80 RETURN -35% 10 th August 2016 Not out of the woods Punjab National Bank (PNB) is one of the largest Public Sector Banks (PSBs) of India with physical network of 6,809 branches and over 9,669 ATMs across the country. Net Interest Income (NII) declined 10% YoY, Pre Provisioning Profit (PPP) increased 5% YoY supported by higher other income. Net profit continued to remain under pressure ( 57% YoY) due to higher credit cost. Credit growth remained sluggish at 3% YoY due to weak corporate credit demand. We expect PNB s loan book to grow at 5% CAGR over FY16-18E. While fresh slippages moderated, it still remained elevated at Rs7,533cr. We expect NII to decline at a CAGR of 2% over FY16-18E on the back of higher interest reversal. Considering the bank s higher exposure towards stressed sectors, we assign REDUCE rating on the stock with target price of Rs80 (P/ABV of 1.0x for FY18E). Sluggish credit growth PNB s loan book increased at a moderate pace of 3% YoY mainly due to muted credit demand from large corporates. The management wants to focus more on retail segment for its future growth where the competition is already intense in the absence of muted credit demand from the corporates. We have factored in sluggish credit growth at 5% CAGR over FY16-18E owing to slower pace of corporate credit demand. NIM on a declining trend Global NIM of the bank declined 15 bps QoQ and 45 bps YoY to 2.5% on the back of large NPA recognition. Yield on advances declined at a faster pace of 40 bps QoQ to 6.9% as compared to 25 bps QoQ decline in cost of funds to 4.7%. We expect NIM to remain around current level for the rest of FY17. Asset quality concerns persist PNB reported fresh slippages of Rs7,533cr (as compared to Rs41,060cr in Q4FY16 and Rs2,802cr in Q1FY15). However, higher cash recoveries of Rs4,825cr (led by one-off benefit of Rs1,600cr on SEB bonds) helped the bank in containing Gross Non-Performing Assets (NPA) (+1% QoQ to Rs56,654cr) and Net NPA (+1% QoQ to Rs35,729cr) in absolute terms sequentially. In terms of ratios, Gross NPA and Net NPA increased significantly to 13.8% (+85 bps QoQ) and 9.2% (+55 bps QoQ) due to de-growth in advances (-5% QoQ). Though the management intends to focus on recoveries in FY17, we don t expect any significant improvement in asset quality considering the bank s higher exposure towards stressed sectors. Infrastructure and Metal sectors comprised 21% of total outstanding loan book of the bank. Outlook & Valuation PNB has significantly higher level of stressed assets as compared to its peers. As a result, the bank s return ratios (RoA 0.1% and RoE 2.1% by FY18E) to remain under pressure over FY16-18 on the back of elevated credit cost on stressed assets. We remain negative on the bank and assign REDUCE rating on the stock with price target of Rs80 (P/ABV of 1.0x for FY18E). At CMP of Rs 124, the stock is trading at P/ABV of 3.5x and 1.5x for FY17E and FY18E respectively. Company Data Market Cap (Rs cr) 24,368 Outstanding Shares (cr) 196 Free Float 38% Dividend Yield - 52 week high Rs181 52 week low Rs69 6m average volume (cr) 1.4 Beta 1.1 Face value Rs2 Shareholding % Q3 FY16 Q4 FY16 Q1 FY17 Promoters 62.1 62.1 62.1 FII s 1.9 10.4 10.4 MFs/Insti 30.4 20.8 21.9 Public& Others 5.6 6.7 5.6 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 50% 41% -22% Absolute Sensex 9% 17% -1% Relative Return* 41% 24% -22% *over or under performance to benchmark index 170 140 110 80 50 20 PNB Sensex (rebased) Y.E Mar (Rscr) FY16 FY17E FY18E Interest Income 47,424 45,782 48,517 Interest Expense 32,113 32,049 33,924 Net Interest Income 15,312 13,733 14,593 Growth (%) -8% -10% 6% Pre Pro Profit 12,216 11,735 12,216 Growth (%) 2% (4%) 4% Net Profit (3,974) 568 749 Growth (%) - - 32% EPS (20.2) 2.9 3.8 Growth (%) NA - 32% P/E - 42.8 32.7 P/BV 0.6 0.6 0.6 P/ABV 8.3 3.5 1.5 RoE (%) (10.9) 1.6 2.1 RoA (%) (0.6) 0.1 0.1
Quarterly Financials (Standalone) Profit & Loss Account (Rs cr) Q1FY17 Q1FY16 YoY Growth % Q4FY16 QoQ Growth % Interest Income 11,575 12,035 (3.8) 10,824 6.9 Interest on advances 8,510 8,908 (4.5) 7,592 12.1 Income on Investments 2,785 2,906 (4.1) 2,980 (6.5) Others 280 221 26.7 251 11.3 Interest Expense 7,876 7,932 (0.7) 8,056 (2.2) Net Interest Income 3,699 4,102 (9.8) 2,768 33.6 Non-Interest Income 2,355 1,397 68.5 2,452 (4.0) Total Net Income 6,054 5,500 10.1 5,220 16.0 Operating Expenses 2,779 2,368 17.4 1,992 39.5 Employee Cost 1,900 1,550 22.6 1,008 88.6 Other Operating Exp. 880 818 7.5 984 (10.6) Total Income 13,930 13,432 3.7 13,276 4.9 Total Expenditure 10,655 10,300 3.5 10,048 6.0 Pre-Provisioning profit 3,275 3,132 4.6 3,228 1.4 Provisions 2,738 1,811 51.2 10,485 (73.9) Profit Before Tax 536 1,321 (59.4) (7,257) -- Tax 230 600 (61.7) (1,890) -- Net Profit 306 721 (57.5) (5,367) -- EPS - Diluted (Rs) 1.6 3.9 (59.9) (27.3) -- (Rs cr) Q1FY17 Q1FY16 YoY Growth % Q4FY16 QoQ Growth % Advances 391,574 380,880 2.8 412,326 (5.0) Deposits 553,952 517,733 7.0 553,051 0.2 Total Business 945,526 898,613 5.2 965,377 (2.1) Gross NPA 56,654 25,397 123.1 55,818 1.5 Net NPA 35,729 15,394 132.1 35,423 0.9 Key Ratios (%) Q1FY17 Q1FY16 YoY bps Q4FY16 QoQ bps NIM 2.5 2.9 (45) 2.6 (15) Cost of Fund 4.7 5.1 (39) 4.9 (25) Yield on Advances 8.5 9.6 (102) 9.1 (56) Yield on Investment* 7.9 7.9 (1) 7.9 (1) Yield on Fund 6.9 7.7 (81) 7.3 (40) Cost to Income* 45.9 43.1 286 38.2 775 Credit to Deposit* 70.7 73.6 (288) 74.6 (387) CASA 41.4 38.9 245 41.6 (24) CAR 11.6 12.1 (50) 11.3 30 Tier I Capital 8.6 9.2 (56) 8.4 21 GNPA 13.8 6.5 728 12.9 85 NNPA 9.2 4.1 511 8.6 55 Provision Coverage 52.5 59.3 (682) 51.1 144 Credit Cost* 2.8 1.9 89 10.2 (737) ROE (Ann.) 3.4 7.5 (407) (56.0) 5947 ROA (Ann.) 0.2 0.5 (28) (3.2) 336 * Calculated Source: Company, Geojit BNP Paribas Research
Standalone Financials Profit & Loss Account Y.E March (Rscr) FY14 FY15 FY16 FY17E FY18E Interest Income Interest Expense Net Interest Income Non-Interest Income Net Income Operating Expenses Total Income Total Expenditure Pre-Provisioning Profit Provisions Profit Before Tax Tax Tax Rate (%) Net Profit No. of Shares (cr) EPS (Rs) 43,223 46,315 47,424 45,782 48,517 27,077 29,760 32,113 32,049 33,924 16,146 16,556 15,312 13,733 14,593 8.7 2.5 (7.5) (10.3) 6.3 4,577 5,891 6,877 9,295 10,028 20,723 22,446 22,189 23,028 24,621 9,338 10,492 9,972 11,293 12,405 47,800 52,206 54,301 55,077 58,545 36,416 40,251 42,085 43,342 46,329 11,384 11,955 12,216 11,735 12,216 4.4 5.0 2.2 (3.9) 4.1 6,694 7,998 17,954 10,915 11,135 4,691 3,957 (5,738) 820 1,081 1,348 896 (1,763) 252 332 29 23 NA 31 31 3,343 3,062 (3,974) 568 749 (29.6) (8.4) NA NA 31.9 181 185 196 196 196 18 17 (20) 3 4 (31.3) (10.6) NA NA 31.9 Balance Sheet Y.E March (Rscr) FY14 FY15 FY16 FY17E FY18E Liabilities Capital 362 371 393 393 393 Reserves & Surplus 35,533 38,709 37,917 38,406 39,050 Deposits 451,397 501,379 553,051 596,818 653,626 Borrowings 48,034 45,671 59,755 51,777 56,043 Other Liabilities & Provisions 15,422 17,615 16,677 12,947 9,288 Total Liabilities 550,748 603,743 667,793 700,341 758,401 Assets Cash & Balances 45,218 55,934 73,623 82,437 87,669 Investments 143,786 149,877 157,846 172,643 182,540 Advances 349,269 380,534 412,326 414,477 455,924 Fixed Assets 3,420 3,551 5,223 6,232 7,137 Other Assets 9,055 13,846 18,776 24,552 25,130 Total Assets 550,748 603,743 667,793 700,341 758,401 Ratios Y.E March (Rs) FY14 FY15 FY16 FY17E FY18E EPS 18.5 16.5 (20.2) 2.9 3.8 DPS 10.0 16.5 0.0 7.5 10.0 BV 198.3 210.7 195.1 197.6 200.9 ABV 143.5 127.7 14.7 34.6 81.3 Valuation (%) P/E 6.7 7.5-42.8 32.7 P/BV 0.6 0.6 0.6 0.6 0.6 P/ABV 0.9 1.0 8.3 3.5 1.5 Div. Yield 8.2 13.5 0.0 6.1 8.2 Spreads (%) Yield on Advances 9.8 9.5 8.7 8.0 8.0 Yield on Investments 7.5 7.2 7.8 6.9 6.9 Yield on Funds 9.8 9.5 8.7 8.0 8.0 Cost of Funds 5.8 5.7 5.5 5.1 5.0 Capital (%) CAR 12.3 12.2 11.3 10.4 9.8 Tier I 9.3 9.3 8.4 7.6 7.2 Tier II 3.0 2.9 2.9 2.8 2.6 Asset (%) GNPA 5.3 6.6 12.9 15.4 14.9 NNPA 2.9 4.1 8.6 7.7 5.2 PCR 59.1 58.2 51.1 49.7 65.4 Management (%) Credit/ Deposit 77.4 75.9 74.6 69.4 69.8 Cost/ Income 45.1 46.7 44.9 49.0 50.4 CASA 38.3 36.7 37.2 37.2 36.8 Earnings (%) NIM 3.5 3.2 2.8 2.4 2.4 ROE 10.2 8.5 (10.9) 1.6 2.1 ROA 0.6 0.5 (0.6) 0.1 0.1
Recommendation Summary (last 3 years) Dates Rating Target 250 200 150 100 50 0 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Source: Bloomberg, Geojit BNP Paribas Research 02 August 2013 BUY 173 31 January 2014 REDUCE 104 16 April 2014 REDUCE 124 20 May 2014 REDUCE 144 12 August 2014 REDUCE 159 25 November 2014 REDUCE 162 04 February 2015 REDUCE 150 09 May 2015 REDUCE 126 03 July 2015 REDUCE 113 19 August 2015 REDUCE 130 18 January 2016 REDUCE 91 09 August 2016 REDUCE 80 Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Geojit BNP Paribas Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit BNP Paribas's research desk have reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit BNP Paribas Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
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