Punjab National Bank - Mixed Bag on Asset Quality - Antique

Punjab National Bank (PNB) reported 4QFY13 earnings at INR11.3bn marginally above our estimates but below consensus on higher loan loss provisioning. The biggest surprise during the quarter has been absolute flat GNPA formation due to lower level of slippages. While the bank has embarked on b/s consolidation, however, restructuring continued to remain at elevated levels (Gross restructuring at INR64bn, net restructuring at INR18bn) suggesting that the bank is still getting impacted by the stress in the economy. We continue to maintain our Hold recommendation on the bank.

Absolute GNPA formation flat; Restructuring at elevated levels.

Headline asset quality for the bank positively surprised with absolute GNPA accretion declining 4% QoQ while Net NPA accretion declined 5% QoQ. However adjusting for write-offs (bank wrote-off INR9bn in 4Q), growth in absolute GNPA formation was at 3% QoQ. Net slippages in the current quarter came in at INR9.6bn Gross restructuring in the current quarter at INR64bn (which includes INR17bn linked to TNEB). Repayments in the current were at INR46bn resulting in net additions to restructuring at INR18 (restructuring at 10.2% of advances). Bulk of the restructuring in the current quarter came in power, iron and steel and chemicals. Management has not given any guidance on slippages and continues to maintain that asset quality pressures persist given the slowdown in economy.

Moderation in b/s growth continues; Margins guidance in FY14E at 3.25%

PNB consolidated its b/s growth in 4QFY13 - loan growth moderated to 5% YoY while deposits moderated to 3% YoY. Margins for the bank expanded marginally by 4bps QoQ to 3.51%.CASA ratio expanded 242bps QoQ to 41% as the bank continued to shed bulk deposits resulting in share of bulk deposits declining to 12% of deposits. Going forward, management is guiding sedate NIMs at 3.25% levels for full year FY14e and moderate b/s growth at 15-16%.

Valuation and outlook

We are increasing our estimates for FY15e by 7% but left our earnings estimates for FY14e unchanged to reflect slowing b/s growth. While PNB continues to remain one of the better deposit franchises in the banking system, return ratios are likely to be significantly impaired over the next two years (RoE at 14.8% and 14.5% in FY14e and FY15e respectively) due to weak earnings progression on asset quality stress. Hence we maintain our target price of INR800/share (0.7x FY15e P/BV) and our Hold recommendation on the bank.

Source : Equity Bulls

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