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PNB 2QFY11: In-line; Margin and asset growth better than est; Fees disappoint; GNPA up 11% QoQ; Maintain Buy
Punjab National Bank's (PNB IN, Mkt Cap US$9.3b, CMP Rs1,310, Buy) 2QFY11 results were largely in-line with our estimate. Positive surprises were: 1) Strong loan growth of 6% QoQ, 2) 12bp QoQ improvement in NIMs, and 3) CASA growth of 25% YoY and 6% QoQ. While slippages remained high at Rs9.1b (1.85% annualized), they were partly offset by Rs3.7b upgradations and Rs1.3b write-offs. Nevertheless, GNPA increased 11% QoQ to Rs40.3b.
Key highlights
- Business growth remains strong with loan growth of 28% YoY and 6% QoQ to Rs2.1t; deposits growth of 18% YoY and 7% QoQ to Rs2.7t.
- Impressive performance on CASA continues; CASA grew ~25% YoY and 6%. CASA ratio at ~41% remained stable QoQ.
- NIM improved 56bp YoY and 12bp QoQ to 4.06% aided by improvement in yield on loans (up 31bp QoQ) and declining cost of deposits (down 6bp QoQ).
- Muted 6% YoY growth in fee income (ex-forex) remains a concern. Trading profits for 2QFY11 were Rs380m vs Rs1.2b in 1QFY11 and Rs1.5b in 2QFY10.
- Operating expense grew 38% YoY. PNB provided Rs2.5b towards pension and gratuity (same as in 1QFY11). Management has guided for gratuity related liability of Rs4.8b (to be fully provided in FY11) and Rs25b towards 2nd pension option (may be revised depending upon the final details).
- GNPAs increased 11% QoQ to Rs40b. Gross slippages during the quarter were Rs9.1b vs Rs12.2b in 1QFY11. During the quarter, bank has added Rs5.4b to restructured accounts.
Valuation and view
- PNB has shown sustained traction in NII backed by increasing CASA levels and healthy NIMs. The bank continues to grow in a calibrated manner reflected in stable CD ratio and rising margins. While Gross NPAs have increased, core operating profits are strong to absorb the higher credit cost.
- While we remain optimistic on bank’s growth prospects, higher than expected provisions towards pension liability could impact profitability.
- We expect PNB to report earnings CAGR of 20% over FY10-FY12. We expect RoE and RoA to remain superior at ~25% and ~1.4% over FY10-12.
- Stock trades at 1.7x FY12 BV and 7.3x FY12 EPS. Maintain Buy with target price of Rs1,550 (2x FY12 BV), upside of 18%.
Balance sheet growth strong; CD Ratio expands QoQ; CASA traction convincing
- Loans grew 28% YoY and 6% QoQ to Rs2.1t, deposits grew 18% YoY and 7% QoQ to Rs2.7t. CD ratio declined marginally to 76.4% vs 77.1% in 1QFY11.
- CASA ratio remained stable QoQ at 41%. Overall CASA deposits grew by 25% YoY (6.3% QoQ) whereas Savings deposits grew 25% YoY (6.7% QoQ).
- Proportion of bulk deposits increased from 18.7% in 1QFY11 to 20.3% at the end of 2QFY11. The increase was largely from issuance of CDs which increased to Rs361b vs Rs258b in 1QFY11. Retail and SME loans were up 16% QoQ and 17% QoQ respectively.
Margin improvement of 12bp QoQ to 4.06% is impressive
- Margins for 2QFY11 improved 12bp QoQ to 4.06% (up 56bp YoY). Yield on loans improved 31bp QoQ to 10.55% whereas cost of deposits declined 6bp QoQ to 4.96%. W.e.f. Aug-10, PNB increased its BPLR 75bp which is reflected in improved yields. However, hike in deposit rates is yet to fully impact on cost of deposits.
- Robust loan growth and higher margins aided NII growth of 49% YoY (10% higher than our expectation).
Fee income disappoints, while CI ratio inched up
- Non-interest income declined 7% YoY and 19% QoQ to Rs7.2b. Trading profits for 2QFY11 were Rs380m vs Rs1.2b in 1QFY11 and Rs1.5b in 2QFY10.
- Growth in core fee income (ex-forex) remained muted at 6% YoY to Rs5.6b– a disappointment. Including forex, fee income growth was flat YoY at Rs5.9b
- Recoveries during the quarter were high at Rs890m vs Rs350m in 2QFY10 and Rs760m in 1QFY11.
- Operating expense grew 38% YoY. Employee expenses increased 53% YoY and 12% QoQ. During 2QFY11, PNB provided Rs2.5b towards pension and gratuity (equivalent amount in 1QFY11).
- Management has guided for gratuity related liability of Rs4.8b (to be fully provided in FY11) and Rs25b towards 2nd pension option (the final disclosure related to liability towards 2nd pension option would be made in 3QFY11).
- Cost to core Income ratio for 2QFY11 inched up to 45% vs 42% in 1QFY11 (stable YoY), on account of lower treasury gains and higher employee expenses.
Asset quality deteriorates; restructured loans up 7% QoQ
- Gross NPAs increased 11% QoQ to Rs40b. Gross slippages during the quarter stood at Rs9.1b vs Rs12.2b in 1QFY11. The annualized slippage ratio for 2QFY11 was 1.85% vs 2.61% in 1QFY11. Net increase in GNPAs during the quarter was Rs4b.
- PCR (cal) remained stable at ~64.6% and PCR including technical write-offs was at 77.1%.
- PNB restructured fresh loans worth Rs5.4b during 2QFY11 and accounts worth Rs1.6b slipped into NPAs. O/s restructured book stood at Rs135b (6.5% of loan book) and cumulatively restructured loans of Rs12b (8.8% of outstanding restructured book) have slipped into NPAs till Sept 2010.
- Of the restructured loans, Rs20.6b is CDR cases (~15% of restructured assets) and Rs10.3b is from SME (~7.6% of restructured assets). Real estate, textile, infrastructure and metals each accounts for more than 10% of the total restructured book.
Valuation and view
- PNB has shown sustained traction in NII backed by increasing CASA levels and healthy NIMs. The bank continues to grow in a calibrated manner reflected in stable CD ratio and rising margins. While Gross NPAs have increased, core operating profits are strong to absorb the higher credit cost.
- While we remain optimistic on bank’s growth prospects, higher than expected provisions towards pension liability could impact profitability.
- We expect PNB to report earnings CAGR of 20% over FY10-FY12. We expect RoE and RoA to remain superior at ~25% and ~1.4% over FY10-12.
- Stock trades at 1.7x FY12 BV and 7.3x FY12 EPS. Maintain Buy with target price of Rs1,550 (2x FY12 BV), upside of 18%.
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