Taking the pain: Punjab National Bank (PNB) reported another quarter of weak performance with a loss at the PBT level, as the bank has made high provisions against specific loans identified by the regulator. NPLs (non performing loans) have touched 9% and overall impaired loans are at 17% but we might need a few more quarters to see where it peaks for the bank, as management has highlighted that the pain has not been fully addressed. Maintain REDUCE and revise TP (target price) to R100 (from R145 earlier) largely to reflect changes in earnings.
PBT (profit before tax) slips to negative territory largely led by high provisions for impaired loans
PNB reported an extremely weak performance with negligible earnings primarily benefitted by a tax write-back. The bank reported a loss at the PBT level. Operating profit grew 6% y-o-y on the back of 5% y-o-y revenue growth and negligible cost growth. NII (net interest income) declined 3% y-o-y largely on the back of high slippages and recent cuts in lending rates. Loan growth is still subdued at 8% y-o-y and revenue growth saw higher contribution from non-interest income, which was primarily led by income from written-off loans. Tier-1 ratio has declined 85 bps q-o-q though we are yet to get full clarity on the nature and cause of this decline.
Impaired loans increase 100 bps q-o-q to 17%; gross NPLs increase 210 bps q-o-q
After two consecutive quarters of improvement in headline in gross NPLs, performance for the quarter was quite weak with gross NPLs increasing 210 bps q-o-q to 8.5% of loans while restructured loans declined 110 bps q-o-q to 9% of loans (25% towards SEB exposure). NPLs sold during the quarter to ARCs were ~35 bps of loans with a similar quantum expected in the next quarter as well. Fresh impairments increased sharply to 13% of loans (annualised) largely led by recent initiatives from RBI to strengthen bank’s balance sheet (45% of the slippages) and slippages from restructured loans (15% of slippages). Management has indicated a similar quantum of slippages for Q4FY16 (RBI led exposures). 5:25 loans and SDR for loans were 1.7% each for the quarter.
It is still not the end of the tunnel; retain REDUCE
We maintain our REDUCE rating on the bank with a TP of R100 (from R145) incorporating our earnings forecast for FY2016-18. The nature of the book, which is largely dominated by corporate loans, makes it a challenge to understand the timing and quantum of slippages and its subsequent impact on credit costs for the bank. We have now moved to a reasonably conservative view on credit costs for the bank, which implies near-term RoEs to remain.
Domestic NIM declines ~25 bps q-o-q to 3.3%
Large NPL recognition along with base rate cuts had an impact on domestic NIM, resulting in a 25 bps q-o-q decline to 3.1%. Our broad outlook of the NIM profile of the bank remains unchanged. We see less scope for improvement given that the bank is actively looking to reduce the risk profile of the loan portfolio. While we don’t see a dramatic change in the business model of the bank, we think that we are reaching comfortable levels that suggest that NIM is closer to its medium term range. This would imply revenue growth has strong support levels from here.
Loan growth sluggish; overseas loan growth better
Loan growth remained anaemic at 8% y-o-y and below system level growth. However, retail growth was in line with industry retail growth of ~18% y-o-y. Within retail housing loans grew by 26% y-o-y and auto loans by 17% y-o-y. Share of retail grew marginally to 13% of total loans. Overseas loans grew by ~15% y-o-y, which could be a result of low margin, short tenure loans. We forecast 10-11% loan growth in FY2016-18e.
Deposit growth at 13% y-o-y; CASA ratio stable at 40%
While the overall growth was moderate at 13% y-o-y, CA balance growth was strong at 23% y-o-y and SA growth was 13% y-o-y. With loan growth being a challenge and domestic CD ratio at ~70%, deposit growth is perhaps not crucial at the moment. Bank’s effort to reduce the share of high cost bulk deposits has led to reduction in cost of deposits.
Other key operational highlights for the quarter
Cost income ratio increased 200 bps to 50% mainly on back of sluggish topline growth. Operating expenses grew by just 4% y-o-y, with staff cost declining by 2% y-o-y on account of completion of wage revision cycle.
Non-interest income growth was strong at 29% y-o-y, led by growth in recoveries (off low base). Fee income declined 7% y-o-y while trading profit increased 7% y-o-y. Capital adequacy ratio stood at 11.3% with tier-1 ratio of 8.5%.