Some sanity in asset quality November 08, 2016 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 Rs141 Target Price Rs140 Implied Upside.7% Sensex 27,591 Nifty 8,544 (Prices as on November 08, 2016) Trading data Market Cap. (Rs bn) 299.2 Shares o/s (m) 2,128.0 3M Avg. Daily value (Rs m) 1796.4 Major shareholders Promoters 65.01% Foreign 11.07% Domestic Inst. 18.24% Public & Other 5.68% Stock Performance (%) 1M 6M 12M Absolute (1.8) 73.9 5.9 Relative (0.2) 64.5 0.8 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 8.1 9.2 11.8 2018 15.2 15.9 4.1 Price Performance (RIC: PNBK.BO, BB: PNB IN) (Rs) 160 140 120 100 80 60 40 20 0 Nov 15 Jan 16 Mar 16 Source: Bloomberg May 16 Jul 16 Sep 16 Nov 16 PNB s Q2FY17 performance was better than expectations with PAT of Rs5.5bn. The bog positive came in from slippages rate trending downward coupled with strong efforts on recovery/upgrades beginning to pay off while keeping the asset quality stable. Provisions continued to remain high but were offset by higher treasury gains during the quarter. Recoveries continued to be from small/medium accounts with management guiding for recovery of another Rs100bn in H2FY17 v/s Rs107bn in H1FY17. We have slightly fine tuned our estimates on equity infusion by GOI of Rs21.0bn, while also adjusted movement of NPA. Strong recovery/upgrades especially from large a/c can provide delta on asset quality, while operational improvement seems to be on track. We are Upgrading to Accumulate with revised PT of Rs140 (from Rs80). Operating performance still soft but likely to get on track: Bank s PPOP was led by high treasury gains, while core operations still remains soft with tepid loan growth of 5 6% which kept NII growth under pressure. Although, we see signs of operational performance improvement going ahead mainly on (i) Stabilizing margins after 5 6 quarters of decline (ii) improvement in loan growth led by retail, SME & small ticket loans and (iii) strong CASA profile at 42% of deposits lowering CoF further. But we expect credit cost to remain high on fallout from restructured book and any failure from SDR assets post completing 18 months. Management efforts on recoveries/upgrades help stabilize asset quality: Bank has recovered/upgraded Rs107.8bn of loans in H1FY17 with slippages trending downwards has helped maintain overall asset quality at stable levels. Mostly recovery has been from smaller & medium sized accounts from different sectors. Bank has guided for another Rs100bn of recovery target in H2FY17 but refrained from providing any run rate on slippages going ahead. Better recovery/upgrade & lowering slippages compels us to upgrade to Accumulate: Bank has showcased strong recovery/upgrades mainly in the small & medium a/c and much better among its peers, while also has much smaller watchlist of Rs30bn. Though we have not seen resolutions on large accounts, strong delta remains for PNB to improve its asset quality. Risk in near term is any large fallout from restructured book which is 4% of loans and has already seen slippage of almost of 5 already. Key financials ( Y/e March) 2015 2016 2017E 2018E Net interest income 165,556 153,118 154,657 175,437 Growth (%) 2.5 (7.5) 1.0 13.4 Operating profit 119,547 122,163 132,170 154,595 PAT 30,615 (39,742) 16,639 32,350 EPS (Rs) 16.7 (20.8) 8.1 15.2 Growth (%) (10.6) (224.6) (139.1) 86.9 Net DPS (Rs) 3.3 0.8 1.5 Profitability & Valuation 2015 2016 2017E 2018E NIM (%) 2.87 2.41 2.24 2.30 RoAE (%) 8.2 (10.3) 4.1 7.5 RoAA (%) 0.53 (0.63) 0.24 0.42 P / BV (x) 0.7 0.8 0.8 0.7 P / ABV (x) 1.0 2.6 2.0 1.5 PE (x) 8.4 (6.8) 17.3 9.2 Net dividend yield (%) 2.3 0.5 1.1 Source: Company Data; PL Research Q2FY17 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
NII growth was weak due to sluggish credit growth however margins remain consistent due to reduced CoF Other Income was led by strong treasury gains, while Fx fees were tad better but core fees remained weak Opex was under control despite adjusting to lower discount rate on pension liabilties Exhibit 1: PNB Q2FY17 Continued upgrades/recoveries remain highlight for a treasury led operating performance P&L (Rs m) Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 QoQ gr. (%) Interest Income 1,18,304 1,23,450 (4.2) 1,15,749 2.2 Interest Expense 79,505 80,231 (0.9) 78,759 0.9 Net Interest Income (NII) 38,799 43,220 (10.2) 36,990 4.9 Treasury income 6,540 2,170 201.4 6,010 8.8 Other income 23,879 13,569 76.0 23,551 1.4 Total income 62,678 56,789 10.4 60,541 3.5 Operating expenses 29,557 27,404 7.9 27,794 6.3 Staff expenses 19,672 18,776 4.8 18,998 3.5 Other expenses 9,886 8,628 14.6 8,797 12.4 Operating profit 33,120 29,385 12.7 32,746 1.1 Core operating profit 26,580 27,215 (2.3) 26,736 (0.6) Total provisions 25,338 18,821 34.6 27,384 (7.5) Profit before tax 7,783 10,564 (26.3) 5,362 45.1 Tax 2,289 4,354 (47.4) 2,299 (0.4) Profit after tax 5,494 6,210 (11.5) 3,064 79.3 Loan growth was seen mainly from retail front but at lower base Balance sheet (Rs m) Deposits 57,48,841 53,99,240 6.5 55,39,522 3.8 Advances 39,37,309 38,09,577 3.4 39,15,743 0.6 Margins improved sequentially as yields remained stable on lower interest reversals, while largely benefit was from lowering cost of funds Profitability ratios Yield on Advances 8.5 9.8 (122) 8.5 Cost of Deposits 5.4 6.0 (59) 5.5 (10) NIM 2.5 3.0 (46) 2.5 6 RoaA 0.3 0.4 (7) 0.2 14 RoaE 5.7 6.1 (37) 3.4 229 Asset quality was largely stable on lower trending slippages with strong recovery/upgrades. But overall stress asset ratio still remains high at 13% Asset Quality Gross NPA (Rs m) 5,64,656 2,49,452 126.4 5,66,541 (0.3) Net NPA (Rs m) 3,57,223 1,51,860 135.2 3,57,285 (0.0) O/S Std. restr. assets (Rs m) 1,80,940 4,18,280 (56.7) 1,89,090 (4.3) Gross NPL ratio 13.6 6.4 727 13.8 (12) Net NPL ratio 9.1 4.0 511 9.2 (6) Coverage ratio 36.7 39.1 (239) 36.9 (20) Std. rest. Assets/ Total 4.6 11.0 (638) 4.8 (23) Business & Other Ratios Low cost deposit mix 42.1 40.2 187 41.4 71 Cost income ratio 47.2 48.3 (110) 45.9 125 Non int. inc / total income 38.1 23.9 1,420 38.9 (80) Credit deposit ratio 68.5 70.6 (207) 70.7 (220) CAR 11.7 12.2 (55) 11.6 7 Tier I 8.8 9.4 (58) 9.6 (84) November 08, 2016 2
Q2FY17 Analyst Meet Highlights Business outlook & growth: Loan growth of 5 6% is not that anaemic as it looks, as Rs72.0bn SEB loans moved out to investment book, while ~Rs59.0bn were to technical written off NPA and hence does not reflect in net loan growth. Under retail segment, services sector is seeing +2 growth. Outlook Small ticket loan to continue especially in the agricultural side with better monsoons as harvest/processing commences. Bank continues to make concerted efforts to improve CASA deposits which stands at 41.4% and was led by 15% growth in SA deposits. Opex Bank has adjusted discount rate on pension assets to 7.9% from 8.5% and mentioned that it has adequately provided for pension as of H2FY17. Rs7.85bn provisions were done on AS15 in Q2FY17. Margins: Margins saw improvement sequentially on stable yields, while improvement were seen on in cost of funds. Margin improvement going ahead will be led by cost reduction. Asset Quality: Bank saw slippages of ~Rs60.0bn with 1 2 a/c slipping from shipping, while others were from other sectors. Outlook Slippages should taper going ahead but bank did not mention any run rate, while bank guided on recovery/upgrade of Rs150bn 200bn staying on track with Rs100bn already done in recovery and upgrades. Recoveries are pan india with circles reporting +Rs30mn per day. Rs11.0bn recovery came in from SEBs in Q1FY17 and Rs5.5bn recovered from small accounts Bank s watch list is small at Rs30.0bn, while SMA 2 a/c at Rs160bn was slightly down sequentially from Rs170bn. Identified accounts to sale to ARC going ahead. Approval already taken from the board. SDR/5:25 & S4A assets The bank did not do any meaningful SDR or 5:25 refinancing during the quarter. O/s SDR assets stood at 28 accounts totalling Rs91.7bn of which Rs28.4bn remains standard, while SDR for 8 a/c has not worked. O/s 5:25 refinancing remained at Rs90.0bn of which Rs34.1bn were under standard category. On S4A, the bank has till now successfully concluded one small a/c in real estate but no concrete resolutions yet. November 08, 2016 3
Others: Capital infusion Bank has seen an infusion of capital by Govt. of Rs21.12bn in September, while expected to see another Rs7.7bn infusion in Jan 2017 by Govt. Monetization of non core assets Bank does not intend to stake sale in any subsidiaries, but has identified certain real estate which can be put on sale. Valuation: Though the stock may look expensive at 1.5X P/ABV, the SOTP valuation is what makes the stock trade at 1.0X P/ABV as PNBS stake in the housing finance subsidiary alone adds up to a third of the current valuation of the bank. As we believe the worse is over, slippages coming from the restructured book as expected and with relatively lesser surprise, we upgrade the stock to an Accumulate. Exhibit 2: Loan growth continued to be driven by Retail & SME Exhibit 3: Core fees was better from Fx, TPD & loan processing 25% Advances growth YoY(%) 3 Core fee growth (%) 2 2 15% 1 1 5% 1 2 Exhibit 4: CASA profile continued to be better led by SA growth Exhibit 5: Margins stabilize post long trend of decline 44% 42% 4 38% 36% 34% 32% CASA (%) 3.9% 3.7% 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% 2.3% NIM (%) November 08, 2016 4
Exhibit 6: Stressed assets show slight improvement but asset quality still remains very weak PNB GNPAs 188,816 196,056 207,519 222,114 256,960 253,980 249,452 343,400 558,183 566,541 564,656 Fresh Addition in Qtr 36,100 26,550 33,220 43,500 53,650 28,020 23,880 124,650 2,34,050 75,330 50,890 Annualized Slippages % 4.4% 3. 3.8% 4.8% 5.9% 2.9% 2.5% 12.7% 23.8% 7.3% 5.2% O/s std restructured 355,070 340,120 363,370 343,330 383,150 399,690 382,160 350,040 201,440 189,090 180,940 Restructuring Addition 32,860 14,520 32,970 25,580 78,800 6,760 ARC sale 740 13,720 5/25 refinancing stock 26,000 32,330 68,000 76,000 81,710 90,000 SDR assets stock 60,000 54,580 58,790 91,740 Exhibit 7: Credit cost has come off comparatively as slippages has been trending lower Exhibit 8: Asset quality remains largely stable as bank has been showcasing better recovery/upgrades and lower trending slippages 12% 1 8% 6% 4% 2% Credit Cost 16% 14% 12% 1 8% 6% 4% 2% Gross NPA (%) Net NPA (%) Exhibit 9: RoAE decomposition tree RoAE decomposition FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Interest income 8.00 8.71 8.94 8.40 8.03 7.46 7.17 7.05 Interest expenses 4.50 5.50 5.77 5.26 5.16 5.05 4.93 4.75 Net interest income 3.50 3.21 3.17 3.14 2.87 2.41 2.24 2.30 Treasury income 0.09 0.08 0.10 0.11 0.18 0.11 0.20 0.11 Other Inc. from operations 0.98 0.92 0.80 0.78 0.84 0.97 1.12 1.28 Total income 4.57 4.21 4.07 4.03 3.89 3.49 3.56 3.69 Employee expenses 1.32 1.13 1.21 1.27 1.27 1.01 1.07 1.09 Other operating expenses 0.56 0.54 0.53 0.55 0.55 0.56 0.57 0.57 Operating profit 2.68 2.54 2.33 2.21 2.07 1.92 1.92 2.02 Tax 0.63 0.51 0.38 0.26 0.16 (0.28) 0.10 0.20 Loan loss provisions 0.74 0.86 0.94 1.30 1.39 2.83 1.57 1.40 RoAA 1.31 1.17 1.01 0.65 0.53 (0.63) 0.24 0.42 November 08, 2016 5
Exhibit 10: Earnings change table We have slightly tweaked our earnings to factor in the capital infusion into the bank, while increase our slippages & recovery/upgrades numbers (Rs mn) Old Revised % Change FY17E FY18E FY17E FY18E FY17E FY18E Net interest income 1,54,107 1,73,941 1,54,657 1,75,437 0.4 0.9 Operating profit 1,31,620 1,53,099 1,32,170 1,54,595 0.4 1.0 Net profit 15,922 30,665 16,639 32,350 4.5 5.5 EPS (Rs) 8.1 15.6 8.1 15.2 0.3 (2.7) ABVPS (Rs) 74.1 109.1 70.8 91.9 (4.4) (15.7) Price target (Rs) 80 140 75.3 Recommendation REDUCE ACCUMULATE Exhibit 11: We raise our PT to Rs140 (from Rs80) based on 1.5x Mar 18 ABV PT calculation and upside Fair price EVA 143 Fair price P/ABV 138 Average of the two 140 Target P/ABV 1.5 Target P/E 9.2 Current price, Rs 139 Upside (%) 1% Dividend yield (%) Total return (%) 1% Exhibit 12: PNB historical 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 Nov 11 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 November 08, 2016 6
Income Statement (Rs m) Int. Earned from Adv. 347,944 344,455 358,486 385,273 Int. Earned from Invt. 106,000 120,337 124,982 140,799 Others 9,210 9,452 10,966 12,525 Total Interest Income 463,154 474,244 494,434 538,597 Interest expense 297,598 321,126 339,778 363,160 NII 165,556 153,118 154,657 175,437 Growth (%) 2.5 (7.5) 1.0 13.4 Treasury Income 10,227 7,260 13,500 8,500 NTNII 48,680 61,510 77,277 97,709 Non Interest Income 58,907 68,770 90,777 106,209 Total Income 522,061 543,014 585,211 644,806 Growth (%) 9.2 4.0 7.8 10.2 Operating Expense 104,916 99,725 113,264 127,050 Operating Profit 119,547 122,163 132,170 154,595 Growth (%) 5.0 2.2 8.2 17.0 NPA Provisions 79,792 184,690 106,947 103,366 Investment Provisions (5,670) 3,450 (863) 216 Total Provisions 79,975 179,540 108,400 107,022 PBT 39,572 (57,377) 23,769 47,574 Tax Provisions 8,957 (17,635) 7,131 15,224 Effective Tax Rate (%) 22.6 30.7 30.0 32.0 PAT 30,615 (39,742) 16,639 32,350 Growth (%) (8.4) (229.8) (141.9) 94.4 Balance Sheet (Rs m) Par Value 2 2 2 2 No. of equity shares 1,855 1,964 2,128 2,128 Equity 3,709 3,927 4,256 4,256 Networth 390,795 383,101 418,896 447,416 Adj. Networth 236,830 28,871 76,592 128,673 Deposits 5,013,786 5,530,511 6,055,910 6,988,520 Growth (%) 11.1 10.3 9.5 15.4 Low Cost deposits 2,005,514 2,055,830 2,373,917 2,781,431 % of total deposits 40.0 37.2 39.2 39.8 Total Liabilities 6,033,336 6,673,905 7,120,039 8,155,932 Net Advances 3,805,344 4,123,258 4,432,502 4,964,403 Growth (%) 9.0 8.4 7.5 12.0 Investments 1,512,823 1,578,459 1,737,260 2,096,376 Total Assets 6,033,335 6,673,905 7,120,039 8,155,932. Quarterly Financials (Rs m) Y/e March Q3FY16 Q4FY16 Q1FY17 Q2FY17 Interest Income 122,206 108,240 115,749 118,304 Interest Expense 81,010 80,563 78,759 79,505 Net Interest Income 41,196 27,677 36,990 38,799 Non Interest Income 16,706 24,522 23,551 23,879 CEB 8,230 8,110 8,960 7,350 Treasury 2,330 2,050 6,010 6,920 Net Total Income 57,902 52,199 60,541 62,678 Operating Expenses 28,724 19,920 27,794 29,557 Employee Expenses 19,912 10,076 18,998 19,672 Other Expenses 8,812 9,845 8,797 9,886 Operating Profit 29,179 32,279 32,746 33,120 Core Operating Profit 26,849 30,229 26,736 26,200 Provisions 37,755 104,852 27,384 25,338 Loan loss provisions 37,670 113,800 36,200 22,178 Investment Depreciation 1,230 (800) (2,200) 3,680 Profit before tax (8,577) (72,574) 5,362 7,783 Tax (9,087) (18,902) 2,299 2,289 PAT before EO 510 (53,671) 3,064 5,494 Extraordinary item PAT 510 (53,671) 3,064 5,494 Key Ratios CMP (Rs) 141 141 141 141 Equity Shrs. Os. (m) 1,855 1,964 2,128 2,128 Market Cap (Rs m) 260,751 276,082 299,193 299,193 M/Cap to AUM (%) 4.3 4.1 4.2 3.7 EPS (Rs) 16.7 (20.8) 8.1 15.2 Book Value (Rs) 203 181 183 197 Adj. BV (10) (Rs) 145 54 71 92 P/E (x) 8.4 (6.8) 17.3 9.2 P/BV (x) 0.7 0.8 0.8 0.7 P/ABV (x) 1.0 2.6 2.0 1.5 DPS (Rs) 3.3 0.8 1.5 Dividend Yield (%) 2.3 0.5 1.1 Profitability (%) NIM 2.9 2.4 2.2 2.3 RoAA 0.5 (0.6) 0.2 0.4 RoAE 8.2 (10.3) 4.1 7.5 Efficiency Cost Income Ratio (%) 46.7 44.9 46.1 45.1 C D Ratio (%) 75.9 74.6 73.2 71.0 Business per Emp. (Rs m) 117 111 105 104 Profit per Emp. (Rs lacs) 4.1 (4.6) 1.7 2.8 Business per Branch (Rs m) 1,355 1,386 1,407 1,499 Profit per Branch (Rs m) 5 (6) 2 4 Asset Quality Gross NPAs (Rs m) 256,949 558,189 569,831 556,930 Net NPAs (Rs m) 153,965 354,230 342,304 318,743 Gr. NPAs to Gross Adv. (%) 6.8 13.5 12.9 11.2 Net NPAs to Net Adv. (%) 4.0 8.6 7.7 6.4 NPA Coverage (%) 40.1 36.5 39.9 42.8. November 08, 2016 7
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 7 6 5 4 3 2 1 59.8% 25.6% 14.5% 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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