Steady on all fronts February 07, 2018 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating Accumulate Price Rs160 Target Price Rs172 Implied Upside 7.5% Sensex 34,196 Nifty 10,498 (Prices as on February 07, 2018) Trading data Market Cap. (Rs bn) 389.2 Shares o/s (m) 2,425.6 3M Avg. Daily value (Rs m) 3480.4 Major shareholders Promoters 57.04% Foreign 12.56% Domestic Inst. 25.29% Public & Other 5.11% Stock Performance (%) 1M 6M 12M Absolute (8.9) 6.3 7.2 Relative (9.0) 0.5 (13.0) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 15.0 15.0 0.3 2020 24.4 23.1 5.4 Price Performance (RIC: PNBK.BO, BB: PNB IN) (Rs) 250 200 150 100 50 0 Feb 17 Apr 17 Jun 17 Source: Bloomberg Aug 17 Oct 17 Dec 17 Feb 18 PNB s operational performance remained weak with slower NII despite strong loan growth of 17% YoY implying pressure on margins. Earnings were supported by onetime stake sale in PNB Housing of Rs15.0bn and tax write back, while the bank continues to suffer from higher provisioning and incrementally by high investment depreciation. Overall asset quality was much stable (improved on percentage basis) helped by better recoveries and write offs but slippages continue to remain elevated sequentially too. Stressed assets continue to be coming off gradually but balance provisions on NCLT based referrals remain high (Rs100.0bn) which will keep earnings under pressure. We maintain Accumulate with revised TP of Rs172 (from Rs186) based on 1.4x Sep 19 ABV. Muted core performance: NII growth was slow at 7% YoY and flattish sequentially despite strong loan growth. Fee income was also muted leading to core PPOP growth of only 2.6% YoY, mainly helped by opex de growth. PPOP was supported by one off gains in stake sale of PNB Housing of Rs15.0bn while treasury remained muted. Margins were under pressure down by 10bps QoQ (calculated) as pressure on yields had a higher bearing. Asset quality stable: Asset quality trends were stable on absolute basis but improved on percentage basis on favourable denominator of loans (increase of 17% yoy). Overall asset quality was helped by better recovery and slightly higher write offs but slippages increased sequentially to Rs46.0bn (fresh Rs39.0bn v/s Rs35.2bn in Q2FY18) and mainly were from the existing pool of stressed assets. Going ahead, bank remains underprovided on the NCLT referred a/c with Rs10.0bn of additional provision in Q4FY18 and ageing of NPAs along with fresh slippages which will keep credit cost at much higher levels. Loan growth very strong: Post capital infusion of Rs50.0bn through preferential basis & stake sale in PNB housing helping Tier I improve by 30bps QoQ, helped strong loan growth of 17% YoY and 1 QoQ mainly from corporate and retail and looks slightly aggressive in our view and result in margin pressure as yields remain much more competitive. Key positive is CASA mix remained stable at 45% (average basis 43%) and one of the best amongst PSBs will help manage cost of funds in much better manner with liquidity getting tighter. Key financials ( Y/e March) 2017 2018 2019E 2020E Net interest income 149,932 160,367 178,958 202,399 Growth (%) (2.1) 7.0 11.6 13.1 Operating profit 145,652 141,585 149,219 164,169 PAT 13,248 14,018 36,270 59,143 EPS (Rs) 6.5 6.2 15.0 24.4 Growth (%) (131.1) (4.9) 142.9 63.1 Net DPS (Rs) 1.0 2.4 4.0 Profitability & Valuation 2017 2018 2019E 2020E NIM (%) 2.16 2.13 2.17 2.22 RoAE (%) 3.3 3.1 7.3 11.1 RoAA (%) 0.19 0.19 0.44 0.65 P / BV (x) 0.9 0.9 0.8 0.8 P / ABV (x) 2.2 1.9 1.5 1.2 PE (x) 24.8 26.1 10.7 6.6 Net dividend yield (%) 0.6 1.5 2.5 Source: Company Data; PL Research Q3FY18 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
Exhibit 1: Core performance continues to be weak; asset quality stable P&L (Rs m) Q3FY18 Q3FY17 YoY gr. (%) Q2FY18 QoQ gr. (%) Interest Income 121,755 119,842 1.6 122,993 (1.0) Interest Expense 81,868 82,534 (0.8) 82,841 (1.2) Net Interest Income (NII) 39,887 37,308 6.9 40,152 (0.7) Treasury income 15,370 5,160 197.9 7,010 119.3 Other income 30,820 25,135 22.6 19,060 61.7 Total income 70,707 62,443 13.2 59,212 19.4 Operating expenses 28,255 30,897 (8.5) 26,421 6.9 Staff expenses 17,416 21,021 (17.2) 15,900 9.5 Other expenses 10,840 9,876 9.8 10,521 3.0 Operating profit 42,452 31,546 34.6 32,791 29.5 Core operating profit 27,082 26,386 2.6 25,781 5.0 Total provisions 44,667 29,359 52.1 24,408 83.0 Profit before tax (2,215) 2,187 NA 8,383 NA Tax (4,516) 116 NA 2,777 NA Profit after tax 2,301 2,072 11.1 5,606 NA Balance sheet (Rs m) Deposits 6,479,977 6,121,803 5.9 6,362,084 1.9 Advances 4,521,102 3,857,269 17.2 4,102,656 10.2 Profitability ratios NIM 2.3 2.3 (5) 2.4 (7) RoaA 0.1 0.1 0.3 (18) RoaE 1.9 2.1 (26) 5.6 (372) Asset Quality Gross NPA (Rs m) 575,194 556,275 3.4 576,301 (0.2) Net NPA (Rs m) 340,757 349,935 (2.6) 345,702 (1.4) O/S Std. restr. assets (Rs m) 95,940 172,190 (44.3) 104,560 (8.2) Gross NPL ratio 12.1 13.7 (159) 13.3 (120) Net NPL ratio 7.6 9.1 (154) 8.4 (89) Coverage ratio 40.8 37.1 366 40.0 74 Std. rest. Assets/Loans 2.1 4.5 (234) 2.5 (43) Business & Other Ratios Low cost deposit mix 45.5 47.1 (159) 44.4 112 Cost income ratio 40.0 49.5 (952) 44.6 (466) Non int. inc / total income 43.6 40.3 334 32.2 1,140 Credit deposit ratio 69.8 63.0 676 64.5 528 CAR 11.6 11.6 (4) 11.6 2 Tier I 9.2 8.8 32 8.9 28 February 07, 2018 2
Exhibit 2: Strong loan book growth mainly in domestic corporate & retail 2 18% 16% 14% 12% 1 8% 6% 4% 2% 2% 4% Advances growth YoY(%) Exhibit 3: 4 3 2 1 1 Fee growth remained muted but better Fx fees Core fee growth (%) Exhibit 4: CASA ratio remained stable Exhibit 5: Margins continue to see pressure, lowest in many quarters 48% 46% 44% 42% 4 38% 36% CASA (%) 4. 3.8% 3.6% 3.4% 3.2% 3. 2.8% 2.6% 2.4% 2.2% 2. NIM (%) Exhibit 6: Credit cost remained elevated including investment depreciation Exhibit 7: but asset quality improved on favourable denominator but on absolute also remained stable 12% 1 8% 6% 4% 2% Credit Cost 16% 14% 12% 1 8% 6% 4% 2% Gross NPA (%) Net NPA (%) February 07, 2018 3
Exhibit 8: Stressed assets coming down gradually PNB GNPAs 222,114 256,960 253,980 249,452 343,400 558,183 566,541 564,656 556,275 553,705 577,207 576,301 575,194 Fresh Addition in Qtr 43,500 53,650 28,020 23,880 124,650 234,050 75,330 50,890 48,000 68,960 60,180 35,170 39,000 Annualized Slippages % 5.7% 5.9% 2.9% 2.5% 13.1% 23.8% 7.3% 5.2% 4.9% 7.2% 5.7% 3.5% 3.8% O/s std restructured 343,330 383,150 399,690 382,160 350,040 201,440 189,090 180,940 172,190 119,320 110,510 104,560 95,940 O/s Restructred as % of adv 11. 10.2% 11.1% 11.5% 11. 8.9% 4.9% 4.8% 4.6% 2.8% 2.8% 2.5% 2.2% 5/25 refinancing stock 26,000 32,330 68,000 76,000 81,710 90,000 101,510 NA 108,530 108,530 SDR assets stock 60,000 54,580 58,790 91,740 102,730 110,000 69,710 69,710 S4A assets stock 33,030 25,000 54,680 54,680 Total 237,270 232,920 210,000 Overlap with Restructured 45,000 Overlap with NPA 46,000 Exhibit 9: RoAE decomposition tree RoAE decomposition FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E Interest income 8.94 8.40 8.03 7.46 6.81 6.52 6.67 6.74 Interest expenses 5.77 5.26 5.16 5.05 4.65 4.39 4.51 4.52 Net interest income 3.17 3.14 2.87 2.41 2.16 2.13 2.16 2.21 Treasury income 0.10 0.11 0.18 0.11 0.38 0.37 0.15 0.11 Other Inc. from operations 0.80 0.78 0.84 0.97 0.91 0.88 1.05 1.03 Total income 4.07 4.03 3.89 3.49 3.45 3.37 3.36 3.35 Employee expenses 1.21 1.27 1.27 1.01 0.78 0.92 0.94 0.94 Other operating expenses 0.53 0.55 0.55 0.56 0.57 0.58 0.61 0.62 Operating profit 2.33 2.21 2.07 1.92 2.10 1.88 1.80 1.79 Tax 0.38 0.26 0.16 (0.28) 0.10 0.02 0.21 0.30 Loan loss provisions 0.94 1.30 1.39 2.83 1.81 1.67 1.16 0.85 RoAA 1.01 0.65 0.53 (0.63) 0.19 0.18 0.44 0.64 RoE 16.48 10.17 8.48 (10.87) 3.60 3.40 7.97 12.05 Exhibit 10: Change in earnings estimates We have slightly tweak our estimates on business growth, other income, credit cost and slippages (Rs mn) Old Revised % Change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Net interest income 162,225 188,215 205,862 160,367 178,958 202,399 (1.1) (4.9) (1.7) Operating profit 137,908 155,734 169,518 141,585 149,219 164,169 2.7 (4.2) (3.2) Net profit 25,032 46,009 67,296 14,018 36,271 59,144 (44.0) (21.2) (12.1) EPS (Rs) 11.8 21.6 31.6 6.2 15.0 24.4 (47.7) (30.8) (22.9) ABVPS (Rs) 81.5 109.2 140.9 83.8 108.6 138.0 2.8 (0.6) (2.0) Price target (Rs) 186 172 (7.7) Recommendation ACCUMULATE ACCUMULATE February 07, 2018 4
Exhibit 11: We reduce our PT to Rs172 (from Rs186) based on 1.4x Sep 19 ABV PT calculation and upside Fair price EVA 173 Fair price P/ABV 171 Average of the two 172 Target P/ABV 1.4 Target P/E 13.1 Current price, Rs 157 Upside (%) 9% Dividend yield (%) 2% Total return (%) 11% Exhibit 12: PNB one year forward P/ABV trends 3.2 2.9 2.6 2.3 2.0 1.7 1.4 1.1 0.8 0.5 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD 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 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 February 07, 2018 5
Income Statement (Rs m) Int. Earned from Adv. 329,588 331,924 373,348 419,120 Int. Earned from Invt. 125,772 141,677 159,080 176,250 Others 17,400 17,849 18,568 19,785 Total Interest Income 472,760 491,449 550,996 615,154 Interest expense 322,828 331,082 372,038 412,755 NII 149,932 160,367 178,958 202,399 Growth (%) (2.1) 7.0 11.6 13.1 Treasury Income 26,543 28,000 12,000 10,000 NTNII 62,970 65,989 86,689 93,623 Non Interest Income 89,514 93,989 98,689 103,623 Total Income 562,274 585,439 649,685 718,778 Growth (%) 3.5 4.1 11.0 10.6 Operating Expense 93,794 112,772 128,427 141,853 Operating Profit 145,652 141,585 149,219 164,169 Growth (%) 19.2 (2.8) 5.4 10.0 NPA Provisions 127,037 110,641 88,425 71,223 Investment Provisions 4,867 15,573 3,893 1,947 Total Provisions 125,536 126,009 95,879 77,193 PBT 20,115 15,576 53,340 86,976 Tax Provisions 6,867 1,558 17,070 27,833 Effective Tax Rate (%) 34.1 10.0 32.0 32.0 PAT 13,248 14,018 36,270 59,143 Growth (%) (133.3) 5.8 158.7 63.1 Balance Sheet (Rs m) Par Value 2 2 2 2 No. of equity shares 2,128 2,426 2,426 2,426 Equity 4,256 4,851 4,851 4,851 Networth 418,470 479,425 508,711 556,213 Adj. Networth 91,449 138,501 211,777 293,558 Deposits 6,217,040 6,714,403 7,385,844 8,272,145 Growth (%) 12.4 8.0 10.0 12.0 Low Cost deposits 2,600,159 2,769,691 3,028,196 3,391,579 % of total deposits 41.8 41.3 41.0 41.0 Total Liabilities 7,203,305 7,878,602 8,634,373 9,629,629 Net Advances 4,194,931 4,656,374 5,168,575 5,788,804 Growth (%) 1.7 11.0 11.0 12.0 Investments 1,867,254 2,125,707 2,297,953 2,538,676 Total Assets 7,203,305 7,878,602 8,634,373 9,629,629. Quarterly Financials (Rs m) Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18 Interest Income 118,865 121,364 122,993 121,755 Interest Expense 82,030 82,812 82,841 81,868 Net Interest Income 36,835 38,551 40,152 39,887 Non Interest Income 31,028 23,318 19,060 30,820 CEB 9,660 10,720 8,510 8,620 Treasury 9,210 8,020 7,010 15,370 Net Total Income 67,863 61,869 59,212 70,707 Operating Expenses 5,545 29,696 26,421 28,255 Employee Expenses (5,484) 19,373 15,900 17,416 Other Expenses 11,029 10,323 10,521 10,840 Operating Profit 62,318 32,173 32,791 42,452 Core Operating Profit 53,108 24,153 25,781 27,082 Provisions 57,535 26,087 24,408 44,667 Loan loss provisions 49,104 25,597 26,938 29,964 Investment Depreciation 2,080 2,410 840 10,750 Profit before tax 4,783 6,086 8,383 (2,215) Tax 2,164 2,652 2,777 (4,516) PAT before EO 2,619 3,434 5,606 2,301 Extraordinary item PAT 2,619 3,434 5,606 2,301 Key Ratios CMP (Rs) 160 160 160 160 Equity Shrs. Os. (m) 2,128 2,426 2,426 2,426 Market Cap (Rs m) 341,433 389,186 389,186 389,186 M/Cap to AUM (%) 4.7 4.9 4.5 4.0 EPS (Rs) 6.5 6.2 15.0 24.4 Book Value (Rs) 179 182 194 214 Adj. BV (10) (Rs) 71 84 109 138 P/E (x) 24.8 26.1 10.7 6.6 P/BV (x) 0.9 0.9 0.8 0.8 P/ABV (x) 2.2 1.9 1.5 1.2 DPS (Rs) 1.0 2.4 4.0 Dividend Yield (%) 0.6 1.5 2.5 Profitability (%) NIM 2.2 2.1 2.2 2.2 RoAA 0.2 0.2 0.4 0.6 RoAE 3.3 3.1 7.3 11.1 Efficiency Cost Income Ratio (%) 39.2 44.3 46.3 46.4 C D Ratio (%) 67.5 69.3 70.0 70.0 Business per Emp. (Rs m) 104 99 95 93 Profit per Emp. (Rs lacs) 1.3 1.2 2.8 3.9 Business per Branch (Rs m) 1,397 1,426 1,471 1,540 Profit per Branch (Rs m) 2 2 4 6 Asset Quality Gross NPAs (Rs m) 553,710 583,447 545,660 505,122 Net NPAs (Rs m) 327,021 340,923 296,934 262,655 Gr. NPAs to Gross Adv. (%) 13.2 12.5 10.6 8.7 Net NPAs to Net Adv. (%) 7.8 7.3 5.7 4.5 NPA Coverage (%) 40.9 41.6 45.6 48.0. February 07, 2018 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 5 4 3 2 1 41.9% 45.7% 12.4% 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 1 absolute upside in 1 month Trading Sell : Over 1 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. R Sreesankar (B.Sc ), 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. 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. 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