PNB - All round weakness, asset quality a shocker - Centrum

PNB reported a very weak set of numbers with all round disappointment as core performance came in weaker than expected and asset quality worsened dramatically. Annualised slippages rate was high at +6% and restructured loans inched up to 9.4% of loans - which collectively kept the provisioning cost high at ~90bps. While the troubled SEB and aviation exposures have been restructured, we still see asset quality concerns persisting due to the challenging macro. The resulting stiff credit costs should contain RoE at ~16% which in turn would limit the fair valuation multiple at 1.0x FY14E. We turn Neutral on the stock given the limited upside to our revised target price.

- Asset quality a shocker: Asset quality matrices for PNB deteriorated dramatically during the quarter with 1) higher delinquency rate of 6.2% on annualised basis 2) %GNPA up by 135bps to 4.7% 3) further increase in restructured assets to 9.4% of advances and 4) PCR slipping by 700bps to 44%. Given the large outstanding restructured book and exposure to agri and SME, we have factored in stiff credit cost assumptions at 1.5% for FY13 & FY14 vs 1% for FY12.

- Weak core performance: In addition to the worsening of asset quality, the core performance too was weaker than expected. NII growth stood at a tepid 6% YoY led by 10bps QoQ contraction in NIM. The NIM contraction can be traced to a 43bps drop in lending yields due to reversal of interest income (Rs1600mn), which was partly offset by 25bps improvement in cost of funds.

- Loan growth healthy: Loan portfolio expanded by 18.4% YoY though domestic loan growth was even lower at 16.5% YoY. From segmental perspective, retail (20.3% YoY) and agriculture (15% YoY) grew faster than SME and large corporate segments. Given the pain on asset quality front, the bank intends to consolidate its balance sheet in the quarters to come and hence guided for industry average growth. In the past, we had highlighted our cautious view on asset quality emanating from risky strategy to aggressively building up the loan book in adverse economic scenario.

- Muted non-interest income performance: The non-interest income grew by a muted 2% YoY during the quarter with flattish core fee income and poor performance on recovery front. Notably, treasury gains during the quarter too were lackluster.

- Neutral: PNB continues to report a weakening asset quality matrix with pressures likely to continue for a few more quarters led by incremental restructuring and high slippage rate. Our stiff assumptions (credit cost and slippage rate) imply RoE of ~16% for FY13 and FY14 and hence a fair valuation multiple of 1.0x FY14E. Current valuation of 0.9x FY14E PABV leaves limited upside (8% only) to our revised price target of Rs800. We downgrade the stock to neutral.

Source : Equity Bulls

Keywords