PNB - Consistency is the key - Centrum

PNB's tepid core performance during Q3FY13 was in line though bottom-line surprised positively on lower provisions as asset quality was largely stable. Contained slippages (0.5% annualised), 5bps QoQ improvement in %GNPA and 200bps expansion in PCR provided relief to heightened asset quality concerns. While we welcome the stability in asset quality matrix, we remain a tad cautious led by high GNPA at 4.6% and large outstanding standard restructuring at ~9%. We remain Neutral on the stock given the limited upside to our revised target price of Rs950.

Asset quality stable QoQ, improvement awaited: Asset quality matrices for PNB stabilised during the quarter with delinquency contained at 0.5% duly complimented by equivalent recoveries leading to stable GNPA in absolute terms while implying a 5bps easing in relative terms. While provisions dipped by 25% QoQ, PCR expanded by 200bps sequentially to 46% (w/o write offs). Meanwhile, standard restructured assets inched up further to 9.4% as the quarter saw inclusion of Suzlon and additional disbursement to DISCOMs under agreed restructuring package. While we welcome the stability in asset quality matrix, we remain a tad cautious led by high GNPA at 4.6% and large outstanding standard restructuring at ~9%.

Tepid core performance: The core performance, though in line, was tepid with flattish YoY. NII growth stood at a tepid 6% YoY led by stable NIM sequentially and a moderate 14% credit growth. The quarter saw interest income reversal of Rs800mn which suppressed loan yields, though this was offset by lower cost of funds led by shedding of bulk deposits and easing in rates on the same. The management continues to guide for better NIM going ahead.

Loan growth moderates to 14%: Loan portfolio expanded by 14% YoY though domestic loan growth was even lower at 11% YoY. From a segmental perspective, retail (16.5% YoY) and agriculture (9% 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 10% de-growth in core fee income though strong performance on recovery front provided some relief. Notably, treasury gains during the quarter too were lackluster. Q4FY13 is likely to be a better quarter from a treasury gains perspective.

Neutral: While we welcome the stability in asset quality matrix, we remain a tad cautious led by high GNPA at 4.6% and large outstanding standard restructuring at ~9%. We have revisited our earnings assumptions and are factoring in additional information. Our revised assumptions indicate a RoEs bottoming out at 17% in FY13 followed by 50bps expansion during FY14. Current valuation of 1.1x FY14E PABV leaves limited upside (3% only) to our revised price target of Rs950. We remain Neutral.

Source : Equity Bulls

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