FY18/19 earnings estimates revised upwards; however, returning to satisfactory asset quality and loan growth will be a long journey
Q2FY17 performance signals some improvement in asset quality. However, returning to an overall satisfactory asset quality and loan book growth is a long journey. Normalisation of RoA/RoE is significantly out in the future. On estimates changes and one quarter rollover, our price target increases to R130, maintain Hold.
Management hopes to bring GNPA in Mar’17 to a level below Mar’16. GNPA in retail segment is 3.3%. 1H17 recoveries and upgrades have crossed R100 bn. The management is confident of hitting the top end of full year guidance for recoveries and upgrades at R200 billion. Apart from R17 bn in Q1 from discom bonds, the recoveries in 1H17 have been granular across the sectors. Q3 trends in recoveries and upgrades have been very encouraging, with October numbers in double digit billions.
No asset sale to ARCs during the quarter. Sale to ARC has to be approved by board. In Q3, the bank may sell some assets to ARCs. Standard SDR is R28.4 bn (total R90 bn, 28 accounts) and Standard 5:25 is R34 bn (total R90 bn).
In terms of loan growth, the bank is still not seeing many upcoming projects where large ticket lending opportunities are present. Road sector and Lease rental discounting are the two sectors where significant opportunities are present. The bank does not see a broader recovery and believes that a broader recovery could still be a few quarters away.
Strategy, employee expenses and capital management
The bank looks to monetise non-core assets, including real estate, but currently has plans to divest its stake in PNB Housing Finance (PNBHOUSI IN, R978, NC). The fall in yields has led to higher provisioning on account of employees’ future benefits in Q2. The bank expects to receive R7.72 bn of second tranche of capital in Jan 2017.
Change in estimates
We revise our FY17 ests. materially (+60%) on the back of improvement in provisioning as well as some sustainability in fee (driven by ATM interchange and FX income). We pencil in an improvement in impairment momentum—slippages in FY18 to fall to a third of FY17. However, we expect weakness at core PPOP to remain over the medium term. We forecast FY18/FY19 earnings ests. to increase by 8.2% and 2.8% respectively, implying FY17-19 CAGR of 78% helped by lower base and FY16-19 adjusted book value CAGR of 87%.
We roll fwd earnings by a quarter. On trailing basis, PNB trades at 1.9x book (Sep 16) and 22.2x EPS (12m to Sep 17e) versus 10 year avg. of 1.2x and 6.4x, respectively. We value PNB at 1.1x book (Sep 17e) and 7.5x EPS (12 m to Mar 18E). We also add R25 to the value per share of the bank to reflect the value accruing from PNB Housing.
Risk: Downside—Impairments, weak recovery
Upside: Lower NPLs, higher recoveries