4QFY18 Result Update Institutional Equities Punjab National Bank 16 May 2018 Reuters: PNB.BO; Bloomberg: PNB IN Prompt Corrective Action Looms Punjab National Bank (PNB) reported its 4QFY18 results with the key strategic pointers being: (1) RBI s Prompt Corrective Action regime may be applied to PNB in the near term. (2) PNB has (i) taken significant cognisance of the RBI s February 2018 circular overhauling resolution of stressed loans (ii) made half the provision pertaining to the fraud at its Brady House branch. (3) Operating expenses have jumped significantly on account of higher establishment expenses. Per se, on the results front, PNB posted NII decline of 17% YoY to Rs30,634mn, pre-provisioning loss of Rs4,474mn and net loss of Rs134,169mn. RBI s Prompt Corrective Action regime may be applied to PNB in the near term: As of FY18-end, PNB s NNPA ratio stands at 11.24%, Capital Adequacy Ratio stands at 9.2% and Common Equity Tier 1 (CET1) ratio stands at 5.95%. PNB was already in breach of NNPA Risk Threshold 1 (>=6% but <9%) as of 3QFY18 with a then NNPA ratio of 7.55%, but now it is in breach of NNPA Risk Threshold 2 (>=9% but <12%). Moreover, a bank is generally placed under the PCA regime based on audited financial results although the RBI reserves the right to impose PCA during the course of the year. Furthermore, PNB also stands in breach of Capital Risk Threshold 1 for the first time. Capital Risk Threshold 1 is CAR <10.25% but >=7.75% and / or CET1 < 6.75% but >=5.125%. This is based on minimum CAR and CET1 requirements of 9% and 5.5%, respectively, plus a Capital Conservation Buffer (CCB) of 1.25% as of FY17. The CCB stands revised to 1.875% as of FY18 although PNB is in breach without this revision. Capital infusion by the government of India of Rs54.68bn was completed in 4QFY18. Provisions skyrocket on the back of PNB taking cognisance of the RBI s revised guidelines as well as fraud at its Brady House branch: Non-tax provision of PNB jumped 254% YoY to Rs204 bn in 4QFY18. Of the Rs310bn slippage during 4QFY18, Rs102.37bn was on account of taking cognisance of the RBI s 12th February 2018 circular overhauling modus operandi for stressed asset resolution. Provision pertaining specifically to 28 accounts reclassified from SDR, change in ownership outside SDR and S4A to NPA amounted to Rs31.2bn. Divergence in FY17 GNPAs had amounted to 0.53% of FY17 loan book. Rs75.79bn slippage was on account of fraud at its Brady House branch. PNB s total liability arising out of this fraud amounts to Rs143.57bn, of which it has absorbed 50% quantum in 4QFY18 by way of provision. The remaining quantum of provision will be taken over the next three quarters. Depreciation on investment in 4QFY18 was Rs6.26bn with PNB availing the RBI dispensation to spread losses. PNB has taken provision write-backs on restructured book amounting to Rs18.2bn (part of non-tax provision) and Rs73.84bn on income tax. PNB managed to eke out 9.8% domestic advances growth YoY, but operating expenses jumped significantly: PNB s retail loan book grew 16% to Rs762bn, with housing, vehicle, and education loans growing 17%, 9% and 13% YoY, respectively. The agri book grew 4% YoY, and MSME book grew 7% YoY. Domestic NIM for the quarter compressed 61bps YoY and 68bps QoQ. Operating expenses for the quarter grew 815% YoY and 80% QoQ on the back of rising employee costs. PNB has charged Rs 0.63bn because of enhancement in gratuity limit and deferred Rs1.9bn to the next three quarters. In 4QFY17, the employee costs were -Rs5,484mn. Valuation and outlook: The stock is currently under review. UNDER REVIEW Sector: Banking CMP: Rs84 Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Shreesh Chandra Research Associate shreesh.chandra@nirmalbang.com +91-22-6273 8028 Key Data Current Shares O/S (mn) 2,760.6 Mkt Cap (Rsbn/US$bn) 237.3/3.5 52 Wk H / L (Rs) 232/84 Daily Vol. (3M NSE Avg.) 48,666,040 Price Performance (%) 1 M 6 M 1 Yr Punjab National Bank (13.3) (54.7) (50.6) Nifty Index 2.6 5.7 13.6 Source: Bloomberg Y/E March (Rsmn) 4QFY18 4QFY17 3QFY18 YoY (%) QoQ (%) Interest income 113,846 118,864 121,755 (4.2) (6.5) Interest expenses 83,212 82,030 81,868 1.4 1.6 Net interest income 30,634 36,834 39,887 (16.8) (23.2) Calculated NIM (%) 2.0 2.2 2.7 (19bps) (67bps) Non-interest income 15,611 31,028 30,820 (49.7) (49.3) Operating income 46,244 67,862 70,707 (31.9) (34.6) Staff costs 39,000 (5,484) 17,416 NA 123.9 Other operating expenses 11,719 11,029 10,840 6.3 8.1 Total operating expenses 50,718 5,545 28,255 814.7 79.5 Cost- to-income (%) 109.7 8.2 40.0 10,150bps 6,971bps Operating profit (4,474) 62,317 42,452 NA NA Provision 203,531 57,535 44,667 253.8 355.7 PBT -208,005 4,782 (2,215) NA NA Tax (73,836) 2,164 (4,516) (3,512.0) 1,535.0 -Effective tax rate NA 45.2 203.9 NA NA Net profit (134,169) 2,618 2,301 NA NA EPS (Rs) (48.6) 1.2 0.9 NA NA BV (Rs) 148.8 196.7 202.0 (24.3) (26.3) Deposits 6,422,262 6,217,040 6,479,977 3.3 (0.9) Advances 4,337,347 4,194,931 4,521,102 3.4 (4.1)
Exhibit 1: Financial summary Y/E March (Rsmn) FY14 FY15 FY16 FY17 FY18 Net interest income 161,460 165,556 153,118 149,932 149,216 Pre-provision profit 113,844 119,548 122,163 145,651 102,936 PAT 33,425 30,616 (39,744) 13,249 28,502 EPS (Rs) 18.5 16.5 (20.2) 6.2 (44.5) BV (Rs) 198.3 210.7 195.1 196.7 148.8 P/E (x) 8.7 9.8 (8.0) 25.9 (3.6) P/BV (x) 0.8 0.8 0.8 0.8 1.1 Gross NPAs (%) 5.3 6.6 12.9 12.5 18.4 Net NPAs (%) 2.8 4.0 8.6 7.8 11.2 RoA (%) 0.6 0.5 (0.6) 0.2 (1.7) RoE (%) 9.7 8.2 (10.3) 3.3 (29.6) 2 Punjab National Bank
Financials Exhibit 2: Income statement Y/E March (Rsmn) FY14 FY15 FY16 FY17 FY18 Interest income 432,233 463,154 474,244 472,760 479,957 Interest expenses 270,773 297,598 321,126 322,828 330,741 Net interest income 161,460 165,556 153,118 149,932 149,216 Fee income 40,273 48,654 61,484 62,917 56,240 Other income 5,493 10,253 7,286 26,596 32,570 Net revenues 207,226 224,463 221,888 239,444 238,026 Operating expenses 93,382 104,915 99,725 93,794 135,090 -Employee expenses 65,104 73,369 64,259 54,207 91,688 -Other expenses 28,278 31,546 35,466 39,587 43,402 Operating profit 113,844 119,548 122,163 145,651 102,936 Provisions 66,939 79,975 179,541 125,536 298,690 -Loan loss provision 50,224 83,841 185,896 131,453 245,680 -Investment depreciation 7,828 (5,670) 3,454 4,867 20,270 -Other provisions 8,888 1,804 (9,809) (10,784) 56,120 PBT 46,905 39,573 (57,378) 20,114 (195,754) Tax 13,479 8,957 (17,634) 6,867 (72,920) PAT 33,425 30,616 (39,744) 13,247 (122,834) Exhibit 4: Balance sheet Y/E March (Rsmn) FY14 FY15 FY16 FY17 FY18 Equity capital 3,621 3,709 3,927 4,256 5,521 Reserves & surplus 355,332 387,086 379,174 414,216 405,222 Shareholders funds 358,953 390,795 383,101 418,472 410,743 Deposits 4,513,967 5,013,787 5,530,511 6,217,040 6,422,262 -Current deposits 314,992 335,808 361,570 458,533 403,740 -Saving deposits 1,413,729 1,501,997 1,694,263 2,141,625 2,228,730 -Term deposit 2,785,246 3,175,982 3,474,678 3,616,882 3,789,792 Borrowings 480,344 456,705 597,552 407,633 608,508 Other liabilities 150,934 172,049 162,739 160,162 216,789 Total liabilities 5,504,199 6,033,336 6,673,903 7,203,307 7,658,301 Cash/equivalent 452,184 559,342 736,230 883,316 954,620 Advances 3,492,691 3,805,344 4,123,258 4,194,931 4,337,347 Investments 1,437,855 1,512,823 1,578,459 1,867,254 2,003,060 Fixed assets 34,197 35,515 52,227 62,732 63,493 Other assets 87,271 120,312 183,729 195,071 299,781 Total assets 5,504,199 6,033,336 6,673,903 7,203,305 7,658,301 Exhibit 3: Key ratios Y/E March FY14 FY15 FY16 FY17 FY18 Growth (%) NII growth 8.7 2.5 (7.5) (2.1) (0.5) Pre-provision profit growth 4.4 5.0 2.2 19.2 (29.3) PAT growth (29.6) (8.4) (229.8) (133.3) (1,027.3) Business (%) Deposit growth 15.3 11.1 10.3 12.4 3.3 Advance growth 13.1 9.0 8.4 1.7 3.4 Business growth 14.3 10.1 9.5 7.9 3.3 CD 77.4 75.9 74.6 67.5 67.5 CASA 38.3 36.7 37.2 41.8 41.0 Operating efficiency (%) Cost-to-income 45.1 46.7 44.9 39.2 56.8 Cost-to-assets 1.8 1.8 1.6 1.4 1.8 Productivity (Rsmn) Business per branch 1,291.4 1,344.4 1,428.3 1,500.9 1,540.8 Business per employee 122.2 129.1 136.4 140.9 1975.0 Profit per branch 5.4 4.7 (5.9) 1.9 (17.6) Profit per employee 0.5 0.4 (0.6) 0.2 (22.5) Spread (%) Yield on advances 9.8 9.5 8.7 7.9 7.5 Yield on investments 7.5 7.2 7.8 7.3 7.2 Cost of deposits 6.0 5.8 5.7 5.1 4.8 Yield on assets 9.0 8.6 8.0 7.3 7.0 Cost of funds 5.6 5.5 5.4 4.9 4.7 NIMs 3.3 3.1 2.6 2.3 2.2 Capital adequacy (%) Tier I 8.9 9.3 8.4 8.9 7.1 Tier II 2.7 2.9 2.9 2.8 2.1 Total CAR 11.5 12.2 11.3 11.7 9.2 Asset Quality (%) Gross NPA 5.3 6.6 12.9 12.5 18.4 Net NPA 2.8 4.0 8.6 7.8 11.2 Provision coverage 47.5 40.1 36.5 40.9 43.8 Slippage 3.3 4.6 10.7 5.4 10.4 Credit-cost 1.4 2.2 4.7 3.1 5.7 Return (%) RoE 9.7 8.2 (10.3) 3.3 (29.6) RoA 0.6 0.5 (0.6) 0.2 (1.7) RoRWA 1.0 0.8 (0.9) 0.3 (4.9) Per share EPS 18.5 16.5 (20.2) 6.2 (44.5) BV 198.3 210.7 195.1 196.7 148.8 ABV 143.5 127.7 14.7 43.0 (27.6) Valuation (x) P/E 4.5 5.1 (4.1) 13.5 (1.9) P/BV 0.4 0.4 0.4 0.4 0.6 P/ABV 0.6 0.7 5.7 2.0 (3.0) 3 Punjab National Bank
Apr-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Institutional Equities 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 - * 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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