Asset quality improved in Q3; FY19e EPS up 13%; an unreliable investment story; ‘Reduce’ maintained.
Punjab National Bank (PNB), post three quarters of muted profitability (losses), reported PAT of `2.5 bn in Q3FY19. This was led by better-than-expected asset quality even as business momentum continued to remain soft. Key highlights:
(a) slippages were restricted at sub-Rs 40 bn (3.7%). This, with better recovery, led to dip in GNPL; (b) that said, business momentum continued to be soft (albeit improving), which with sustained NIM pressure restricted core operating profitability; and (c) improved coverage led to dip in NNPL & sequential traction in domestic growth was encouraging. Management continues to focus on recoveries, sale of non-core assets and conservation of capital.
We, however, believe a weak earnings profile, structural operational issues and a diluted franchise (CET1 6.9%, net NPLs 8.2%) render PNB a structurally challenging investment proposition. Factoring lower provisions, we raise FY19 EPS by 13%. That said, operating performance has been much weaker relative to peers, denting our confidence. Maintain Reduce with TP of Rs 62.
Business momentum continues to be weak: PNB’s business momentum continues to be soft with 4% y-o-y dip in loan growth following >60% y-o-y fall in overseas advances and below trend domestic growth (sub-10% level). More importantly, deposit growth seems to be under pressure (flat q-o-q). We believe, the road to recovery will be arduous.
Outlook: blurred prospects — We believe challenges and uncertainties far outweigh PNB’s undemanding valuation, subsidiary value and liability franchise. Limited visibility on structural drivers renders it an unpredictable investment story. Hence, we maintain ‘REDUCE/SU’.