PNB reported Q3FY13 PAT of R13.1 bn (+14% y-o-y, +23% q-o-q): This was higher than our expectation of R11.3bn driven by better asset quality progressionlower loan loss provisions. GNPLs (gross non-performing loans) were flat quarter-on-quarter as strong recoveries from high slippages during the previous two quarters helped. Core PPoP (pre-provision operating profit) growth (-1% y-o-y) was weak and the impaired loan formation rate remained high at R55bn (2.1% of trailing 12M (month) loans, non-annualised) vs. 2.9% last quarter.
Underlying asset quality stress remained elevated, but recoveries helped: Gross slippages were high at R30 bn (1.1% of loans vs. 1.8% last quarter). Restructuring was at R37 bnat 1.4% vs. 1.1% in Q2FY13. However, recoveries and upgradations from high slippages in past two quarters helped GNPL progressionflat q-o-q. We need to monitor whether the high recoveries can be sustained going forward.
Domestic loan growth slowed to 11% y-o-y vs. 16.5% last quarter: Even this was supported by additional loan disbursements to risky sectors like infra (led by power) and iron and steel sector.
NIMs (net interest margins) were down 3 bps q-o-q: This was mainly driven by lower loan yieldsdown 19 bps q-o-q, 50bps YTD (year-to-date). We expect loan spreads to remain under pressure, as the impact of a recent 25 bps cut in lending rate filters through. Management guided to stable margins of 3.5%, as it expects to deploy excess SLR (statutory liquidity ratio) into advances. Given the weak capex outlook and management targeting to shift to less risky loans, we think this will be tough.
Remain UW (Underweight): We expect continued challenges to revenue growth. At the same time, the high stock of impaired loans at 14% (10.4% excluding SEBstate electricity boards and Air India) will likely keep provisioning high as bad loans season. In addition, infra exposure at 17% of loans is much higher than peers. A combination of these factors will continue to weigh on multiples1.14x (times) adjusted P/BV (price-to-book value) (Dec-12).
We arrive at our price target of R630 using a probability weighted three-phase residual income modela five-year high-growth period, a 10-year maturity period, followed by a declining period. We assign a 60% weight to our base case, 35% to our bear case (reflecting the general conditions of balance sheets at the state-owned banks), and 5% to our bull case (reflecting the diminished likelihood of a V-shaped recovery).
Risks to price target: Key upside risks to our price target include: Better-than-expected margin progressions & fee income growth and lower-than-expected credit costs given: (i) better-than-expected economic environments, (ii) improvement in capital flows into the country, and (iii) improvement in execution of infrastructure projects.
Key downside risks include: Slower-than-expected loan growth, sharp compression in NIMs, and significant deterioration in asset quality (increase in restructuring+new NPL creation). Also, the Reserve Bank's final guidelines (when issued) on dynamic provisioning could potentially bring down long-term returns.