Punjab National Bank (PNB) Q3 profit after tax (+3% year-on-year) missed estimates by 13%, despite a high contribution of net trading gains (R6.6 bn –50% of profit before tax). A sharp rise in slippages to R55.5 bn (R39.7 bn in Q2), as much as 6.8% of annualised loans, impacted NIM—net interest margin— (+3bp quarter-on-quarter vs expectation of +15bp q-o-q) and led to NII—net interest income—(flat y-o-y) miss of 5%
Fresh restructuring declined q-o-q to R24.6 bn (3% of loans) vs R33 bn (4.2%). Led by relapse from RL/repayments, OSRL (outstanding standard restructured loans) declined R343 bn (9.5% of loans) vs R368 bn (10.3%). Net stress addition (net slippages + change in OSRL) came in at R14.2 bn (1.8%) vs R50.5 bn (6.4%) in Q2. The management guided for continued pressure on asset quality for at least next two quarters.
Other highlights: (i) Fees grew 6% y-o-y (flat q-o-q) (ii) Loans growth remained moderate (+2% q-o-q and 11% y-o-y) while deposits grew 2% q-o-q and 15% y-o-y (iii) CASA (current account savings account) ratio stable q-o-q at 40% (iv) PCR (provision coverage ratio) including technical write offs declined 185 basis point q-o-q to 57.3% (v) High tax rate of 40% (est. of 32%) – a drag on profitability (PBT miss of just 2%) and (vi) CET 1 (common equity tier-I) of ~8.7% including 9MFY15 PAT.
Valuation and view: Balance sheet consolidation helped PNB to improve the liability profile and keep NIM at 3%+, despite high asset quality strain and volatility in interest rate. NSL—net stressed loan– (ex-SEB and AI—state electricity boards and Air India) at 11% remains significantly higher than industry, however, 55% of RL (restructured loan) belong to Infrastructure and Iron & Steel and a kick-start in these segments could allay concerns.
While net trading gains compensated for weak core performance (PBT raise of 2%), we cut PAT estimates by 5% for FY15 to factor in high tax rate. ROA/ROE (return on assets/equity) expected to be better than peers at 0.8%/14%. Buy Slippages increase sharply QoQ , but net stress addition declines:
* Gross slippages increased to R55.5 bn (annualised slippage ratio of 6.8%) from R39.7 bn (5.1%) in Q2. Of this, R12 bn came in from loans which were already restructured. During 9M(month) FY15, out of total slippages of R110 bn, R40 bn came from accounts already restructured.
* Net slippages for the quarter came in at R38.8 bn (4.8%) vs R22.6 bn (2.9%) in Q2.
* During the quarter, bank wrote-off R24.2 bn (R11.2 bn in Q2) and resultantly, GNPA (gross non-performing asset) in absolute terms increased 7% q-o-q. In percentage terms GNPA and NNPA (net NPA) was at 6.0% (5.7% in Q1) and 3.8% (3.3% in Q2). PCR declined q-o-q to 38% from 44% in Q2.
* Fresh restructuring stood at R24.5 bn (R32.9 bn in Q2). Hence net stress addition declined q-o-q to R14.2 bn. Net stress loans declined to 13.3% compared to 13.6% in Q2, led by a reduction in OSRL.
* NIM for the quarter came in at 3.2% (stable q-o-q). Yield on loans declined 4 bp q-o-q to 9.86%. Cost of funds was largely stable at 5.1%.
* Opex (operating expenses) grew 13% y-o-y led by a 15% growth in employee related expenses. Cost to core income ratio declined 210 bp to 56% in Q3FY15.
* Loan and deposits growth was moderate at 11% y-o-y (+2% q-o-q) and 15% y-o-y (+2% q-o-q). Domestic loans grew just 8% y-o-y and +2% q-o-q. PNB capitalised on one -ff opportunity to grow its international loans (+40% y-o-y)
n CASA growth remains moderate at 8% y-o-y (+5% q-o-q) led by moderate growth in CA deposits (+9% y-o-y and +1% q-o-q) and SA deposits (+7% y-o-y and 1% q-o-q). Domestic CASA ratio stood at 39.4%.
* Retail advances grew 28% y-o-y, led by a strong growth in the car/vehicle segment (+21% y-o-y) and housing (+23% y-o-y). The MSME segment grew 19% y-o-y (+8% q-o-q) and now forms 16% of overall loans. While, agriculture loans grew 5% q-o-q and +20% year-on-year.
* Credit costs during came in at R 17.2 bn (1.9% of loans).