1. Jefferies rates PNB as ‘Hold’ says pension accounting saved the day

Jefferies rates PNB as ‘Hold’ says pension accounting saved the day

PNB reported poor numbers — NIM declined 10 bp q-o-q; NPL formation was elevated with higher slippage from restructured book.

By: | Published: May 23, 2017 5:11 AM
PNB had likely seen significant NPLs from the restructured book (fell to 2.8% of loans vs 4.5% sequentially).

PNB reported poor numbers — NIM declined 10 bp q-o-q; NPL formation was elevated with higher slippage from restructured book. Had it not been for the pension gains of Rs 20 bn, PNB would be running 2 years of bottom line losses. Normalisation of RoA/RoE is significantly out in the future. Our price target increases to Rs 160 with a quarter rollover; maintain Hold.

Asset quality poor

We don’t have the full disclosure of the various stress buckets, but we believe there may not have been significant improvement. PNB had likely seen significant NPLs from the restructured book (fell to 2.8% of loans vs 4.5% sequentially). Gross NPL formation was Rs 75 bn implying a slippage ratio of 7.3% — much higher than in Q2 and Q3 FY17. Gross & Net NPL ratio improved sequentially to 12.5%/7.8% vs. 13.7%/ 9.1% driven by better recoveries, large write-offs and sale of NPLs to reconstruction companies. Provision coverage improved q-o-q to 41% from 37%.

Strong sequential growth in loans, CASA marginally down

Loan growth was muted at 1.7% y-o-y but saw strong 8.8% q-o-q growth. Domestic loans were up 10% q-o-q driven by 14.7% growth in large corporates. Retail loans were up 8.1% q-o-q and 14.2% y-o-y. Period end CASA ratio declined to 46% vs 47.1% sequentially.

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Pension accounting gains saves the day

Core fee grew 20.9% y-o-y driven by processing fees, exchange profits and ATM operations. NII also grew strongly owing to low base (AQR quarter). Pension gains of

Rs 20 bn were taken through the income statement similar to Q4FY16, resulting in strong PPOP which helped absorb the provision costs of Rs 57 bn, and thereby led to a small net profit at the bottom line.

Change in estimates

We revise our FY18-19 estimates by 0.8% and -0.8% respectively and introduced FY20e estimates. We have marginally increased NIM estimates by 10 bp assuming some bit of growth pick-up and tail risk from higher CASA numbers. We have kept credit cost estimates largely flat. This results in implied FY17-20 EPS CAGR of 57% helped by lower base, and FY17-20 adjusted book value CAGR of 46%.

Valuation/Risks

We roll forward earnings by a quarter. PNB trades at 2.4x book and 20.6x EPS versus 10-year average of 1.2x and 6.4x, respectively. We value PNB at 1.5x adj. book and 5.7x EPS. We also add Rs 34 to reflect the value accruing from PNB Housing. Risk: Downside: Impairments, weak recovery. Upside: Lower NPLs, higher recoveries.

Loans growth muted at 1.7% y-y Net advances growth was muted at 1.7% y-o-y. International book shrunk 5.5% y-o-y, while domestic book was up 3% y-o-y. The y-o-y improvement in CASA was driven by a 26.4% growth in savings and 27% growth in current accounts.

—jefferies

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