Stock corner: ‘Reduce’ PNB, Q4 shows bank still in weak terrain

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Updated: June 4, 2019 12:52:12 AM

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 (CET 1 6.2%, net NNPL 6.6%) render PNB a structurally challenging investment proposition.

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Weak Q4FY19 numbers imply that Punjab National Bank (PNB) continues to remain in soft terrain—`47 bn loss. Key highlights: a) slippages, yet again, crossed 6% (`73 bn) largely IL&FS driven (>20% of slippage); b) dismal asset quality percolated to sustained NIM pressure (accentuated by higher interest income reversal), which along with higher opex (up 7% QoQ) restricted core operating profitability; and c) improved coverage (up 8ppt QoQ) leading to dip in NNPL & QoQ traction in domestic growth were the only silver lining.

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 (CET 1 6.2%, net NNPL 6.6%) render PNB a structurally challenging investment proposition. Moreover, operating performance has been much weaker compared to peers, further denting confidence. Also, merger proposition will continue to be an overhang. Our revised TP stands at `65 (earlier `62) as we roll valuations by a quarter.

Q4FY19 earnings: Weakness persists
Q4FY19 marked yet another soft quarter on the asset quality front. Slippages rose, yet again, (after some respite in Q3FY19) to `73 bn (6.7% even after >10% run-rate in FY18). That said, RBI divergence, portfolio seasoning and provisioning on a few telecom accounts led to higher credit cost of >800bps. This, however, helped improve coverage (by 8ppt) to 62%, which led to decline in NNPL.

Some improvement in business momentum; sustainability key
PNB’s business momentum improved a tad with 5% YoY rise in loan growth following >14% growth in domestic book even as overseas advances continued to decline (down 62% YoY). More importantly, deposit growth seems to be under pressure (up mere 5% YoY). We believe, operational issues that the bank is facing will continue to pose a challenge.

Outlook and valuation: Challenges outweigh valuation comfort
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’.

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