Neutral rating on Punjab National Bank; Result a clear disappointment

By: | Published: May 23, 2016 7:35 AM

Though the bank did front-end recognition, there’s more pain in store

Punjab National Bank Q4 LOSSPNB reported gross slippage of ~5.7% of its loans in Q4FY16 and this was clearly a shock. (Photo: Reuters)

PNB’s Q4FY16 result was a clear disappointment, with Rs 72.6 bn of pre-tax loss. Rs 235 bn of gross slippages included ~Rs 80-90 bn of slippage from its restructured book and points to front-ended recognition, but Rs 110 bn of SMA-2 book and Rs 180 bn of standard restructured loans (ex SEBs—state electricity boards) indicate that there is some more pain to come. The PSU banks’ results clearly highlight the asset quality and related P&L risk for all corporate banks, including ICICI/Axis. We remain cautious on PNB and cut our below-consensus earnings by 15-30% and target price to Rs 80. Value in PNB Housing (a 51% holding) and other subs provide some downside support.

Asset quality—How large was the clean-up? PNB reported gross slippage of ~5.7% of its loans in Q4FY16 and this was clearly a shock. The R235 bn of slippages included Rs 80-90 bn slippages from the restructured book split across all sectors. The only positive in the results was the ~2x increase in cash recovery in FY16 vs FY15 (should be largely technical in nature).

Asset quality—some more pain to come: While PNB did front-end recognition, it still has Rs 110 bn of its SMA-2 book and Rs 180 bn of its standard restructured book (ex-SEBs) which will likely slip into NPA over the next two years. Cumulatively, this is Rs 290 bn of exposure (6.5% of FY17F loans), and hence near-term pain is likely to continue.

Big impact of NIMs: With such high reversals, NIMs dropped ~100bps q-o-q. While the quantum of interest reversals is unlikely to be repeated, we expect a 30-35bps NIM drop in FY17F vs FY16, due to higher net NPAs. The majority of our 15-30% earnings cut is driven by lower NIMs.

No near-term respite; stay cautious

We cut our below-consensus earnings by 15-30%, mainly due to lower NII, and revise our target price down by 20% to R80/share. ROEs will be 4-8% in the next two years, and hence adjusted valuations at 0.6x Mar-18 book are not cheap. PNB’s stake in PNB Housing provides some downside comfort to valuations.

Key changes in FY17/18F estimates
* With significantly lower NIMs reported in FY16 due to higher slippages, we cut our NIM expectations for FY17/18F by 40-50bps, resulting in a cut in our NII estimates of 13-20%.
* With weakness in fees, we also lower our fee growth expectations by 2-4% for FY17/18F.
* Opex in FY16 was lower due to write-back of R4.4 bn, in turn due to an increase in fair value of pension assets which will not recur in FY17F. Hence, we have not materially lowered our estimates for opex.
* With higher provisioning done in FY16, we now expect lower slippages and credit costs in FY17F, and hence a 15-30% cut in our FY17/18F PAT estimates is largely a result of lower NIM expectations.

No near-term respite; stay cautious

We cut our below-consensus earnings forecasts by 15-30%, mainly due to lower NII, and revise our target price down by 20% to R80/share. Return on Equity will be 4-8% in next two years, and hence adjusted valuations at
0.6x Mar-18 book are not cheap.

PNB’s stake in PNB Housing provides some downside comfort to valuations.

Risks: A better-than-expected economic recovery will be a key upside risk. A downside risk will be further compression in net interest margins.

Graph 5

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition