4QFY15 Result Update Institutional Equities Punjab National Bank 11 May 2015 Reuters: PNB.BO; Bloomberg: PNB IN Asset Quality Disappointment Continues Punjab National Bank (PNB) posted dismal 4QFY15 performance, mainly on the asset quality front. Loan slippage inched up to 5.8% as against our estimate of 4.3%. PNB restructured Rs79bn of loans during the quarter, taking the total stressed asset addition to Rs134bn. PNB posted a 62% drop in profit on very high loan slippage and compression in net interest margin or NIM, which was partly offset by income-tax refund. NIM compressed 41bps sequentially, mainly because of reversal of interest income on loan slippage and restructuring and a 13bps increase in the cost of funds. Non-interest income grew 29% YoY, driven by treasury income of Rs5.4bn. The bank made a healthy NPL provision of Rs32.8bn which helped its provision coverage ratio to improve sequentially by 94bps to 58.2%. Credit disbursal grew 9% YoY, with higher growth witnessed in overseas and retail segments. Despite a poor performance, we have retained Accumulate rating on PNB as we expect its asset quality to turn around in FY17. We have cut our FY17 ABV estimate by 10%, our valuation multiple to 1.0x (from 1.1x earlier) and also reduced our target price to Rs160 (from Rs200 earlier). Asset quality disappoints: Loan slippage inched up to 5.8% from 5.0% in the previous quarter and 4.2% in the corresponding quarter a year ago. Loan slippage stood at Rs55.1bn, while upgradation/recovery was at Rs8.6bn and write-off at Rs11.7bn. Loan slippage during the quarter was fairly broad-based. PNB restructured Rs78.9bn of loans during the quarter, taking the total stressed asset addition to Rs134bn. Outstanding restructured loans increased 60bps QoQ to 10.1%. The management indicated that the loan restructuring pipeline for 1QFY16 is miniscule. Gross non-performing assets (GNPAs) inched up 58bps sequentially to 6.6%. Similarly, net non-performing assets (NNPAs) rose 24bps sequentially to 4.1%. Backed by heavy provisioning, the provision coverage ratio improved 94bps sequentially to 58.2%. We have increased our loan slippage estimate for FY16 to 3.7% from 3.0 earlier. Valuation and outlook: The management gave guidance that the asset quality problem will ease gradually. We derive comfort from PNB s relatively better capital cushion, efforts to improve the provision coverage ratio, strong retail franchise, one of the best expected RoAs among public sector banks and a not-so-aggressive business growth strategy. We have valued PNB at 1.0x P/ABV FY17E earnings, setting a target price of Rs160 and retaining Accumulate rating on it. ACCUMULATE Sector: Banking CMP: Rs146 Target Price: Rs160 Upside: 9% Hatim Broachwala, CFA hatim.broachwala@nirmalbang.com +91-22-3926 8068 Key Data Current Shares O/S (mn) 1,854.6 Mkt Cap (Rsbn/US$bn) 270.2/4.2 52 Wk H / L (Rs) 232/142 Daily Vol. (3M NSE Avg.) 5,943,489 Price Performance (%) 1 M 6 M 1 Yr Punjab National Bank (4.6) (22.5) (6.7) Nifty Index (6.0) (1.7) 23.0 Source: Bloomberg Y/E March (Rsmn) 4QFY15 4QFY14 3QFY15 YoY (%) QoQ (%) Interest income 116,505 111,013 116,140 4.9 0.3 Interest expenses 78,589 70,995 73,810 10.7 6.5 Net interest income 37,916 40,018 42,330 (5.3) (10.4) NIM (%) 2.8 3.2 3.2 (41)bps (42)bps Non-interest income 18,051 13,969 12,908 29.2 39.8 Operating income 55,967 53,987 55,238 3.7 1.3 Staff costs 15,069 14,778 20,286 2.0 (25.7) Other operating expenses 8,872 7,475 7,446 18.7 19.2 Total operating expenses 23,941 22,253 27,732 7.6 (13.7) Cost- to-income (%) 42.8 41.2 50.2 156bps (743)bps Operating profit 32,026 31,734 27,506 0.9 16.4 Provision 38,342 21,387 14,677 79.3 161.2 PBT (6,316) 10,347 12,829 (161.0) (149.2) Tax (9,381) 2,283 5,084 (510.9) (284.5) -Effective tax rate - 22.1 39.6 - - Net profit 3,065 8,064 7,745 (62.0) (60.4) EPS (Rs) 8.3 22.3 21.4 (62.9) (61.4) BV (Rs) 210.7 198.3 213.4 6.3 (1.3) Deposits 5,013,786 4,513,968 4,841,381 11.1 3.6 Advances 3,805,344 3,492,691 3,624,959 9.0 5.0 Please refer to the disclaimer towards the end of the document.
Exhibit 1: Financial summary Net interest income 148,490 161,460 165,555 185,859 206,358 Pre-provision profit 109,073 113,844 119,545 138,929 149,894 PAT 47,476 33,425 30,614 48,922 69,940 EPS (Rs) 26.9 18.5 16.5 26.4 37.7 ABV (Rs) 141.9 139.7 122.1 120.8 162.2 P/E 5.4 7.9 8.8 5.5 3.9 P/ABV 1.0 1.0 1.2 1.2 0.9 Gross NPAs (%) 4.3 5.3 6.6 7.7 6.8 Net NPAs (%) 2.3 2.8 4.0 4.6 3.7 RoA (%) 1.0 0.6 0.5 0.8 1.0 RoE (%) 15.7 9.7 8.2 11.9 15.2 Margins dip 41bps sequentially PNB reported margin compression of 41bps sequentially to 2.8%, largely on account of compression in the yield on advances after factoring in reversal of interest income on loan slippage and restructuring. Yield on advances fell 35bps sequentially to 9.5%. Also, the cost of funds increased 13bps sequentially to 5.2%. Moderate growth in balance sheet Deposits grew 11%, while advances increased 9%. Advances were mainly driven by a 30% growth in the overseas segment and a 25% growth in the retail segment. Agriculture and MSME (micro, small and medium enterprise) segments grew 13% and 12%, respectively. However, the large corporate segment posted a muted growth of 8% YoY. Within the retail segment, housing loans grew 27% and automobile loans posted a 14% growth. CASA (current account savings account) deposit ratio improved 145bps sequentially to 36.7%, whereas the differential rate deposit was down 160bps to 2.4% of total deposits. Overseas deposits accounted for 9.6% of overall deposits. Healthy growth in non-interest income Non-interest income grew 29% YoY, 20% above our estimate, mainly on account of a healthy treasury profit of Rs5.4bn as against Rs1.9bn in the corresponding quarter a year ago. Fee income growth was flattish on YoY basis, whereas growth in recovery from written-off accounts was decent at 22%. Forex income was weak, down 14% YoY. Operating expenses Operating expenses grew 8%, significantly below our estimate. Staff expenses increased by only 2% YoY and dipped 26% QoQ as there were reversals in wage hike provisioning. Other expenses grew 19%. PNB added 153 branches during the quarter and 359 branches during the year, taking the total number of its branches to 6,559. Cost-to-income ratio stood at 42.8% for the quarter as against 50.2% in the previous quarter and 41.2% in the corresponding quarter a year ago. Exhibit 2: Actual performance versus our estimates (Rsmn) 4QFY15 4QFY14 3QFY15 YoY (%) QoQ (%) 4QFY15E Devi. (%) Net interest income 37,916 40,018 42,330 (5.3) (10.4) 43,187 (12.2) Pre-provision profit 32,026 31,734 27,506 0.9 16.4 29,304 9.3 PAT 3,065 8,064 7,745 (62.0) (60.4) 8,869 (65.4) NII was down 12%, mainly on account of reversal of interest income on loan slippage and restructuring. However, pre-provision profit was 9% above our estimate on account of higher treasury gains and lower operating expenses. PAT was significantly lower than estimate on account of very high NPL provisioning, which was partly offset by tax refund. 2 Punjab National Bank
Financials Exhibit 3: Income statement Interest income 418,858 432,233 463,153 505,101 553,474 Interest expenses 270,368 270,773 297,598 319,241 347,116 Net interest income 148,490 161,460 165,555 185,859 206,358 Fee income 23,448 25,794 28,907 32,376 36,261 Other income 13,920 14,479 19,770 22,447 24,252 Net revenue 185,858 201,733 214,232 240,682 266,871 Operating expenses 81,651 93,382 104,917 108,065 123,844 -Employee expenses 56,747 65,104 73,370 71,785 82,122 -Other expenses 24,904 28,278 31,548 36,280 41,722 Operating profit 104,207 108,351 109,315 132,617 143,027 Investment profit 4,866 5,493 10,230 6,312 6,867 Pre-provision profit 109,073 113,844 119,545 138,929 149,894 Provisions 43,856 66,939 79,974 69,041 49,980 -Loan loss provision 33,364 45,171 79,780 60,746 41,133 -Investment depreciation 1,036 7,828 (5,660) - - -Other provisions 9,456 13,941 5,854 8,294 8,847 PBT 65,217 46,905 39,571 69,889 99,914 Tax 17,741 13,479 8,957 20,967 29,974 PAT 47,476 33,425 30,614 48,922 69,940 Exhibit 5: Balance sheet Equity capital 3,535 3,621 3,709 3,709 3,709 Reserves & surplus 323,234 355,332 387,086 426,870 485,501 Shareholders funds 326,769 358,953 390,795 430,579 489,210 Deposits 3,915,601 4,513,967 5,013,786 5,665,578 6,402,103 -Current deposits 298,743 314,992 335,810 433,579 544,058 -Saving deposits 1,234,701 1,413,729 1,502,000 1,697,538 1,918,495 -Term deposit 2,382,157 2,785,246 3,175,976 3,534,462 3,939,551 Borrowings 396,210 480,344 456,706 528,076 608,724 -Subordinate debt 108,953 116,303 114,177 149,861 190,185 Other liabilities 150,190 150,934 172,049 200,685 220,370 Total liabilities 4,788,770 5,504,199 6,033,336 6,824,918 7,720,407 Cash/equivalent 271,353 452,184 559,341 702,408 864,073 Advances 3,087,252 3,492,691 3,805,344 4,294,188 4,846,582 Investments 1,298,962 1,437,855 1,512,824 1,643,182 1,790,487 Fixed assets 33,577 34,197 35,515 40,765 46,015 Other assets 97,626 87,271 120,312 144,374 173,249 Total assets 4,788,770 5,504,199 6,033,336 6,824,918 7,720,407 Exhibit 4: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E Growth (%) NII growth 10.7 8.7 2.5 12.3 11.0 Pre-provision profit growth 2.8 4.4 5.0 16.2 7.9 PAT growth (2.8) (29.6) (8.4) 59.8 43.0 Business (%) Deposit growth 3.2 15.3 11.1 13.0 13.0 Advances growth 5.1 13.1 9.0 12.8 12.9 Business growth 4.0 14.3 10.1 12.9 12.9 CD 78.8 77.4 75.9 75.8 75.7 CASA deposit 39.2 38.3 36.7 37.6 38.5 Operating efficiency (%) Cost-to-income 43.9 46.3 49.0 44.9 46.4 Cost-to-assets 1.9 1.9 1.9 1.8 1.8 Productivity (Rsmn) Business per branch 1,192.2 1,291.4 1,344.6 1,441.6 1,549.6 Business per employee 110.6 122.2 124.6 134.0 145.5 Profit per branch 8.1 5.4 4.7 7.1 9.6 Profit per employee 0.8 0.5 0.4 0.7 0.9 Spread (%) Yield on advances 10.6 9.8 9.5 9.2 8.9 Yield on investments 7.5 7.5 7.2 7.5 7.5 Cost of deposits 6.6 6.0 5.8 5.6 5.4 Yield on assets 9.5 8.9 8.5 8.4 8.1 Cost of funds 6.2 5.6 5.5 5.3 5.1 NIM 3.4 3.3 3.1 3.1 3.0 Capital adequacy (%) Tier I 9.8 8.9 9.3 9.1 9.1 Tier II 3.0 2.7 2.9 3.4 3.8 Total CAR 12.7 11.5 12.2 12.4 12.9 Asset quality (%) Gross NPAs 4.3 5.3 6.6 7.7 6.8 Net NPAs 2.3 2.8 4.0 4.6 3.7 Provision coverage 46.3 47.5 40.1 42.5 47.8 Provision coverage (incl. write-off) 58.8 59.1 58.2 57.4 61.9 Slippage 2.9 3.3 4.6 3.7 2.5 Credit costs 1.1 1.4 2.2 1.5 0.9 Return (%) RoE 15.7 9.7 8.2 11.9 15.2 RoA 1.0 0.6 0.5 0.8 1.0 RoRWA 1.5 1.0 0.8 1.2 1.5 Per share EPS 26.9 18.5 16.5 26.4 37.7 BV 176.8 190.5 203.1 224.6 256.2 ABV 141.9 139.7 122.1 120.8 162.2 Valuation P/E 5.4 7.9 8.8 5.5 3.9 P/BV 0.8 0.8 0.7 0.7 0.6 P/ABV 1.0 1.0 1.2 1.2 0.9 3 Punjab National Bank
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 * Post stock split 4 Punjab National Bank
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