Rating: Neutral (V)
Q2FY15 earnings came in at R5.8 bn, up 14% year-on-year but 43% below our estimate on higher than expected provisions and decline in margins. The y-o-y increase despite the spike in provisions was on the back of a lower base in Q2FY14.
Operating highlights: Q2FY15 NII (net interest income) was up only 3% y-o-y despite 14% y-o-y loan growth leading to NIM (net interest margin) declining 24 basis points to 3.18%. This was due to the increased share of lower yielding overseas loans (57% y-o-y) in the loan mix, and interest income reversals of R2.9 bn from higher loan restructuring and
R1 bn from fresh slippages. However, the management sees it stabilising at 3.4-3.5% levels by end-FY15e.
Total deposits were up 17% y-o-y although domestic deposits grew by only 4% y-o-y versus system deposit growth of 13% y-o-y. Employee expenses were up 23% y-o-y driven by higher wage hike provisions (R2.4 bn versus a run-rate of R1.8 bn), and pension expenses (R2.7 bn) related to change in actuarial assumptions. Asset quality worsened as GNPL (gross non-performing loans) ratio increased by 17 bps quarter-on-quarter to 5.7% as slippages climbed 70 bps to 4% leading to 33 bps increase in credit cost to 1.9%.
Of R16.4 bn provisioned for loan losses, R6.8 bn of specific provisions were made by the bank in excess of prudential requirements in order to maintain coverage at 59%, versus 60% in Q1. Fresh restructuring was at R33 bn and restructured book is now at 10%. Tax rate was higher at 48% mainly due to higher taxes related to depreciation write-back. Tier-1 ratio stood at 8.7%.
Outlook: While economic recovery could pick up gradually, PNB could see stress continuing for the next couple of quarters. We lower our FY16e and FY17e earnings estimates by 7.1% and 6.2% on lower loan growth, margins and higher tax rate. That said, we continue to believe that its better positioned vs most PSU peers to take advantage of a turnaround in FY16e.
Valuation: PNB is trading at 1.0x 12-month rolled forward ABV (adjusted book value). We continue to value PNB at 1.1x P/AB (price to adjusted book), resulting in a revised TP (target price) of R1,063 (R1,088) based on a single-stage Gordon growth model (Oct 2016 base from Jul 2016 base), implying a potential return of 15.6%. Maintain Neutral (V). Upside risks: Bottoming of growth and asset quality cycle; potential resolution of power sector issues. Downside risks: Continuing asset quality and margin stress.