Low B/S growth is leading to CASA improvement, which should aid margins once slippages abate.
We had recently upgraded Punjab National Bank (PNB) given conservative recognition and expecting net slippages to moderate significantly. Q1FY17 performance has been stronger than expected on NII/PPOP, but marginally weaker on net slippages. The NII beat of R37 bn looks more sustainable than the R92 bn of gross slippage miss because of the conservative recognition PNB has done in the past. With the recent outperformance, PNB’s valuation now at .75x Mar-18 book is not undemanding any more. Incrementally, we wait for details on granularity of the Q1FY17 slippage to see if the Q1FY17 trend will continue or is likely to improve. Relatively, PNB has closed its valuation gap with SBI substantially, and with just a 15% valuation gap we would have a strong preference for SBI.
Key Q1FY17 highlights
NII of R37 bn is the key positive: PNB’s NII improved to R37 bn from R27.7 bn in Q4FY16, up 33% q-o-q. While non-performing assets (NPAs) have moved up substantially from Q2FY16 levels, in the last two quarters NII has had a high impact from interest reversals, which should have normalised in Q1FY17 and hence the current NII looks more sustainable. From a liability perspective, the low B/S growth is leading to CASA improvement, which should aid margins when slippages abate.
Gross slippage a miss, net slippage marginally higher: Slippages of R92 bn included R75 bn of fresh slippages and R17 bn of non-fund exposures of past NPAs which are unlikely to recur in similar quantum. The net slippage at R32 bn was a smaller miss given the R60 bn of recoveries and upgrades, but this is unsustainable in our view. Our expectation for PNB and most large PSU banks has been that the recognition of stress has been conservative in the past and hence gross slippages should come off meaningfully. Like recoveries and upgrades, we believe even such high gross slippages look unsustainable. Our expectation for FY17 is R120 bn of net slippages vs R32 bn in Q1FY17.
Break-up of Gross slippages: Of the R75 bn of fresh slippages, we reckon that R12 bn was from the restructured book and hence the other R63 bn was unrecognised stress. On a net basis, the R32 bn slippages compared with R12 bn of slippages from the restructured book seems fine from an incremental delinquency perspective, but as we have highlighted above the key is for gross slippages to come down.