Punjab National Bank’s (PNB) Q4FY15 PAT of R300 crore came in well below our estimate, owing to continued asset quality stress. Additionally, there was a tax gain of R940 crore, adjusting for which the bank would have reported loss. Slippages spiked to new highs of 8.2%. Restructuring also spurted to R788 crore aking the outstanding standard restructured book to R38,300 crore (9.7%). Core operating profit disappointed on tepid revenue traction. Asset quality has been a major concern, which further deteriorated. Hence, we cut FY16e/17e earnings by 9%/4%.
Amidst the noise around asset quality stress, the silver lining is the on-going positive structural changes undertaken by the government and curtailed opex, which will aid large PSU banks. This, when juxtaposed with the tailwind of gradual improvement in macros and current valuation of 0.7x FY17E P/ABV, suggests limited downside.
PNB’s performance has been marred by disappointing asset quality with management vacuum being another impediment. Government’s intention to usher in structural reforms aided by gradual improvement in macros and appointment of top management (likely in H1FY16) will lead to improved performance. This, along with valuation of 0.7x FY17E P/ABV, captures risks and implies limited downside. Further, relatively better capital (tier1 at 9.2%) lends comfort. Maintain buy with target price of R260.
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