Punjab National Bank - 3QFY17 Result Update - Asset Quality Pressure Recedes; Reiterate HOLD - Reliance Securities

Punjab National Bank (PNB) has delivered improved performance on asset quality front in 3QFY17 with fresh slippages declining to Rs56.6bn from Rs62.1bn and Rs92.1bn in 2QFY17 and 1QFY17, respectively. Further, its PCR improved to 55% in 3QFY17 from 51% in 4QFY16. However, its PAT dipped by 62.3% QoQ to Rs2.1bn owing to 15.9% QoQ surge in provisioning expenses (due to elevated stressed assets and ageing of old NPAs) and 4.8% QoQ decline in operating profit. Other income grew owing to higher treasury profit of Rs17.7bn in 9MFY17 vs. Rs6.1bn in 9MFY16, while lower G-sec yield and higher SLR holding aided PNB to monetize part of its excess SLR in 9MFY17. Loan book de-grew by 1.8% YoY and 2% QoQ due to higher repayment of loan in demonetized currencies and unwinding of FCNR deposit related loan book. Expecting credit cost to remain elevated in next 4-5 quarters, we maintain our HOLD recommendation on the stock with an unrevised Target Price of Rs147.

Key Management Commentary

- CASA deposit grew by 21.5% QoQ owing to 23.2% QoQ and 13.0% QoQ growth in saving deposits and current deposits, respectively. As a result, CASA ratio improved to 47.1% in 3QFY17 42.1% in 2QFY17. Management expects ~40% of incremental CASA deposits to remain with the Bank.

- Management expects decline in fresh slippages and credit cost on the back of improvement in operating environment along with higher upgrades and recovery in next few quarters. In absolute term, the PNB's gross NPA is likely to decline due to relatively higher upgrades and increased recovery vis-à-vis fresh slippages.

- Post achieving upgrade and recovery to the tune of Rs148bn in 9MFY17, PNB expects upgrade and recovery of Rs200bn in entire FY17E.

Outlook and Valuation

Though we continue to admire PNB's core operating performance and business franchise, the current headwinds suggest further pressure on profitability in the near-term. We believe that the Bank will continue to witness higher credit cost, which will keep its earning profile and return ratio subdued over next 3-6 quarters. Further, we have introduced SOTP-based valuation for PNB after listing of its housing finance arm along with better market based valuation of its insurance arm. We reiterate our HOLD recommendation on the stock with an unrevised SOTP-based Target Price of Rs147 (valuing parent at 1x FY18 Adj. BV implying standalone value at of Rs110and valuing subsidiaries at Rs37 after 15% holding company discount).

Shares of PUNJAB NATIONAL BANK was last trading in BSE at Rs.145.2 as compared to the previous close of Rs. 144.75. The total number of shares traded during the day was 859476 in over 4919 trades.

The stock hit an intraday high of Rs. 147.35 and intraday low of 144.5. The net turnover during the day was Rs. 125381579.

Source : Equity Bulls

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