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Punjab National Bank's 3QFY11 results were in-line at the operational level; however, increase in pension liability, muted
fee income growth and deterioration in asset quality overshadowed overall performance. Key highlights:
Business growth remains strong, with loan growth of 30% YoY and 6% QoQ to Rs2.2t, and deposit growth of 23.5%
YoY and ~6% QoQ to Rs2.9t in 3QFY11.
Margin increased 7bp QoQ and 50bp YoY to 4.13%, led by timely hike in lending rates. NIM for 9MFY11 improved
56bp YoY to 3.99%. NII grew 45% YoY and 8% QoQ to Rs32b v/s our estimate of Rs31.8b. However, NII included
Rs1b of interest income on IT refund, adjusted for which NII grew 40% (in line).
Fee income (ex forex income) grew 20% YoY but declined ~6% QoQ. Lower processing charges from big-ticket
loans and waiver of processing charges on home loans are the reasons for the sequential drop in fee income.
Overall CASA growth stood at 22% YoY; however, SA grew 24% YoY (+3% QoQ). Sharp rise in interest rates led to
moderation in CA growth (+16% YoY and +2% QoQ). On the back of higher intake of bulk deposits, CASA ratio
declined to 39% from 40.6% a quarter ago.
Operating expenses grew 38% YoY. PNB provided Rs3.6b towards pension and gratuity (Rs1.1b more compared to
2QFY11). Management has guided for gratuity liability of ~Rs5b (to be fully provided in FY11) and Rs36b towards
second pension option (up from Rs25b guided earlier).
Asset quality continued to deteriorate. GNPA increased 13% QoQ to Rs45b. Gross slippages during the quarter
were ~Rs10b v/s Rs9b in 2QFY11. The bank added Rs8.2b to restructured accounts.
The stock trades at 1.5x FY12E and 1.2x FY13E BV. Maintain Buy with a target price of Rs1,360 (1.8x FY12E BV),
upside of 21%.
Margin up 7bp QoQ, stable post adjustment for exceptional interest income
Margin for 3QFY11 improved 7bp QoQ to 4.13%; however, adjusted for one-off interest
income of Rs1.07b on IT refund, it was largely stable QoQ at ~4%. While reported NII
was ~3% higher than expected, adjusted for one-offs, NII was largely in line with our
estimate. For 9MFY11, NIM remained stable at ~4%.
With 70% of the loans linked to PLR and base rate, 75bp PLR and 50bp base rate increase
during the quarter resulted in higher interest income. However, hike in deposit rates is yet
to fully impact cost of deposits. Reported yield on loans improved 8bp QoQ and 3bp YoY
to 10.48%; yield on investments improved 11bp QoQ and 56bp YoY to 6.58%. Cost of
deposits increased ~10bp QoQ and declined 47bp YoY to 5.1%.
Slippages remain high, asset quality disappoints
In absolute terms, GNPA increased 13% QoQ to Rs43b. Gross slippages during the quarter
were ~Rs10b v/s Rs9.1b in 2QFY11. The annualized slippage ratio for 3QFY11 remained
high at ~2.1%. For 9MFY11, annualized slippage ratio was 2.2%, higher than 1.83%
reported a year ago. Net increase in GNPA during the quarter was Rs5.2b
PCR (calculated) remained stable at ~65% and PCR including technical write-offs was at
77%. PNB restructured fresh loans worth Rs8.2b in 3QFY11 and accounts worth Rs660m
slipped into NPA. Outstanding restructured book stood at Rs143.6b (6.5% of loan book),
and cumulatively, restructured loans of Rs12.5b (8.7% of outstanding restructured book)
have slipped into NPA till December 2010.
Fees grew 20% YoY; high trading profits QoQ
Non-interest income remained flat YoY but was up 19% QoQ at Rs8.6b, boosted by
higher treasury gains and forex income. Trading profits for 3QFY11 were Rs870m v/s
Rs380m in 2QFY11. In 3QFY10, profit from sale of stake in PNB Housing (~Rs710m)
had boosted treasury gains to Rs1.6b. Growth in core fee income (ex-forex and income
from MF) grew 20% YoY and declined 6% QoQ to Rs5.05b.
Lower processing charges from big-ticket loans and waiver of processing charges on
home loans are the reasons for sequential drop in fee income. Forex income for the
quarter was Rs1.3b v/s Rs310m a quarter ago. Recoveries during the quarter were high
at Rs1.2b v/s Rs890m in 2QFY11 and Rs770m in 3QFY10.
Second pension liability deficit liability increased to Rs36b v/s Rs25b a
quarter ago
Operating expenses grew 38% YoY. Employee expenses increased 47% YoY and 10%
QoQ. During 3QFY11, PNB provided Rs3.6b towards pension and gratuity (Rs2.5b in
2QFY11). Management has guided for gratuity related liability of Rs5b (to be fully provided
in FY11) while it has revised its guidance for second pension option to Rs36b up from
Rs25b guided earlier. Pension related liability would be amortized over a period of five
years. Cost to core income ratio for 3QFY11 remained sequentially stable at ~43%.
Valuation and view: downgrading estimates by ~5%; maintain Buy
PNB has shown sustained traction in NII backed by high CASA ratio, efficient ALM and
strong growth. Despite sharp rise in cost of liabilities, margin performance remains
impressive. While we remain confident on core operating profit growth, continued
deterioration in asset quality is a key headwind for stock performance.
We are downgrading our earnings estimates by ~5% to factor in higher opex and credit
costs. We expect PNB to report earnings CAGR of 18% over FY10-13. We expect RoE
and RoA to remain superior at ~24% and ~1.3%, respectively over FY10-13. BV is expected
to be Rs757 in FY12 and Rs918 in FY13. The stock trades at 1.5x FY12E and 1.2x
FY13E BV. Maintain Buy with a target price of Rs1,360 (1.8x FY12E BV), upside of
21%.
Company background
Punjab National Bank (PNB) is the second largest stateowned
bank, with a strong presence in North and Central
India. Established in 1894, it has a balance sheet size of
over Rs2.7t and a network of over 5,000+ branches. It is
one of the most technologically advanced state-owned
banks. The government owns 57.8% of its equity.
Key investment arguments
Strongest liability franchise, ~40% CASA ratio, strong
control over cost of funds ensures superior margins of
3.8%+.
Increasing focus on international operations, third-party
distribution and strong loan growth will ensure strong
fee income growth.
Adequately capitalized (CAR of 13.3% and Tier-I ratio
of 9%) for the next phase of growth .
Mr K R Kamath, CMD, has a tenor of five years, which
should ensure continuity of strategy.
Key investment risks
PNB has higher proportion of restructured loans at 6.5%
of the loan book.
Relapse from restructured accounts and higher
slippages can put earnings under pressure.
Recent developments
Mr Rakesh Sethi has joined as Executive Director
effective from January 2010.
PNB has entered into factoring business through joint
venture (IFFSL) with FIMBank Plc and others. PNB
has a 30% stake in IFFSL.
Valuation and view
We expect PNB to report earnings CAGR of 18% over
FY10-13. We expect RoE and RoA to remain superior
at ~24% and ~1.3%, respectively over FY10-13. BV
is expected to be Rs757 in FY12 and Rs918 in FY13.
The stock trades at 1.5x FY12E BV and 1.2x FY13E
BV. Maintain Buy with a target price of Rs1,360.
Sector view
Loan growth remains strong. However, rising inflation
and increasing interest rates are the near-term
headwinds for the sector.
Our Economist expects current tightness in liquidity to
start easing in 4QFY11, allaying the pressure of
significant NIM compression.
We believe that margins would start compressing, but
gradually. With strong loan growth and high CD ratio,
there is strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank's 3QFY11 results were in-line at the operational level; however, increase in pension liability, muted
fee income growth and deterioration in asset quality overshadowed overall performance. Key highlights:
Business growth remains strong, with loan growth of 30% YoY and 6% QoQ to Rs2.2t, and deposit growth of 23.5%
YoY and ~6% QoQ to Rs2.9t in 3QFY11.
Margin increased 7bp QoQ and 50bp YoY to 4.13%, led by timely hike in lending rates. NIM for 9MFY11 improved
56bp YoY to 3.99%. NII grew 45% YoY and 8% QoQ to Rs32b v/s our estimate of Rs31.8b. However, NII included
Rs1b of interest income on IT refund, adjusted for which NII grew 40% (in line).
Fee income (ex forex income) grew 20% YoY but declined ~6% QoQ. Lower processing charges from big-ticket
loans and waiver of processing charges on home loans are the reasons for the sequential drop in fee income.
Overall CASA growth stood at 22% YoY; however, SA grew 24% YoY (+3% QoQ). Sharp rise in interest rates led to
moderation in CA growth (+16% YoY and +2% QoQ). On the back of higher intake of bulk deposits, CASA ratio
declined to 39% from 40.6% a quarter ago.
Operating expenses grew 38% YoY. PNB provided Rs3.6b towards pension and gratuity (Rs1.1b more compared to
2QFY11). Management has guided for gratuity liability of ~Rs5b (to be fully provided in FY11) and Rs36b towards
second pension option (up from Rs25b guided earlier).
Asset quality continued to deteriorate. GNPA increased 13% QoQ to Rs45b. Gross slippages during the quarter
were ~Rs10b v/s Rs9b in 2QFY11. The bank added Rs8.2b to restructured accounts.
The stock trades at 1.5x FY12E and 1.2x FY13E BV. Maintain Buy with a target price of Rs1,360 (1.8x FY12E BV),
upside of 21%.
Margin up 7bp QoQ, stable post adjustment for exceptional interest income
Margin for 3QFY11 improved 7bp QoQ to 4.13%; however, adjusted for one-off interest
income of Rs1.07b on IT refund, it was largely stable QoQ at ~4%. While reported NII
was ~3% higher than expected, adjusted for one-offs, NII was largely in line with our
estimate. For 9MFY11, NIM remained stable at ~4%.
With 70% of the loans linked to PLR and base rate, 75bp PLR and 50bp base rate increase
during the quarter resulted in higher interest income. However, hike in deposit rates is yet
to fully impact cost of deposits. Reported yield on loans improved 8bp QoQ and 3bp YoY
to 10.48%; yield on investments improved 11bp QoQ and 56bp YoY to 6.58%. Cost of
deposits increased ~10bp QoQ and declined 47bp YoY to 5.1%.
Slippages remain high, asset quality disappoints
In absolute terms, GNPA increased 13% QoQ to Rs43b. Gross slippages during the quarter
were ~Rs10b v/s Rs9.1b in 2QFY11. The annualized slippage ratio for 3QFY11 remained
high at ~2.1%. For 9MFY11, annualized slippage ratio was 2.2%, higher than 1.83%
reported a year ago. Net increase in GNPA during the quarter was Rs5.2b
PCR (calculated) remained stable at ~65% and PCR including technical write-offs was at
77%. PNB restructured fresh loans worth Rs8.2b in 3QFY11 and accounts worth Rs660m
slipped into NPA. Outstanding restructured book stood at Rs143.6b (6.5% of loan book),
and cumulatively, restructured loans of Rs12.5b (8.7% of outstanding restructured book)
have slipped into NPA till December 2010.
Fees grew 20% YoY; high trading profits QoQ
Non-interest income remained flat YoY but was up 19% QoQ at Rs8.6b, boosted by
higher treasury gains and forex income. Trading profits for 3QFY11 were Rs870m v/s
Rs380m in 2QFY11. In 3QFY10, profit from sale of stake in PNB Housing (~Rs710m)
had boosted treasury gains to Rs1.6b. Growth in core fee income (ex-forex and income
from MF) grew 20% YoY and declined 6% QoQ to Rs5.05b.
Lower processing charges from big-ticket loans and waiver of processing charges on
home loans are the reasons for sequential drop in fee income. Forex income for the
quarter was Rs1.3b v/s Rs310m a quarter ago. Recoveries during the quarter were high
at Rs1.2b v/s Rs890m in 2QFY11 and Rs770m in 3QFY10.
Second pension liability deficit liability increased to Rs36b v/s Rs25b a
quarter ago
Operating expenses grew 38% YoY. Employee expenses increased 47% YoY and 10%
QoQ. During 3QFY11, PNB provided Rs3.6b towards pension and gratuity (Rs2.5b in
2QFY11). Management has guided for gratuity related liability of Rs5b (to be fully provided
in FY11) while it has revised its guidance for second pension option to Rs36b up from
Rs25b guided earlier. Pension related liability would be amortized over a period of five
years. Cost to core income ratio for 3QFY11 remained sequentially stable at ~43%.
Valuation and view: downgrading estimates by ~5%; maintain Buy
PNB has shown sustained traction in NII backed by high CASA ratio, efficient ALM and
strong growth. Despite sharp rise in cost of liabilities, margin performance remains
impressive. While we remain confident on core operating profit growth, continued
deterioration in asset quality is a key headwind for stock performance.
We are downgrading our earnings estimates by ~5% to factor in higher opex and credit
costs. We expect PNB to report earnings CAGR of 18% over FY10-13. We expect RoE
and RoA to remain superior at ~24% and ~1.3%, respectively over FY10-13. BV is expected
to be Rs757 in FY12 and Rs918 in FY13. The stock trades at 1.5x FY12E and 1.2x
FY13E BV. Maintain Buy with a target price of Rs1,360 (1.8x FY12E BV), upside of
21%.
Company background
Punjab National Bank (PNB) is the second largest stateowned
bank, with a strong presence in North and Central
India. Established in 1894, it has a balance sheet size of
over Rs2.7t and a network of over 5,000+ branches. It is
one of the most technologically advanced state-owned
banks. The government owns 57.8% of its equity.
Key investment arguments
Strongest liability franchise, ~40% CASA ratio, strong
control over cost of funds ensures superior margins of
3.8%+.
Increasing focus on international operations, third-party
distribution and strong loan growth will ensure strong
fee income growth.
Adequately capitalized (CAR of 13.3% and Tier-I ratio
of 9%) for the next phase of growth .
Mr K R Kamath, CMD, has a tenor of five years, which
should ensure continuity of strategy.
Key investment risks
PNB has higher proportion of restructured loans at 6.5%
of the loan book.
Relapse from restructured accounts and higher
slippages can put earnings under pressure.
Recent developments
Mr Rakesh Sethi has joined as Executive Director
effective from January 2010.
PNB has entered into factoring business through joint
venture (IFFSL) with FIMBank Plc and others. PNB
has a 30% stake in IFFSL.
Valuation and view
We expect PNB to report earnings CAGR of 18% over
FY10-13. We expect RoE and RoA to remain superior
at ~24% and ~1.3%, respectively over FY10-13. BV
is expected to be Rs757 in FY12 and Rs918 in FY13.
The stock trades at 1.5x FY12E BV and 1.2x FY13E
BV. Maintain Buy with a target price of Rs1,360.
Sector view
Loan growth remains strong. However, rising inflation
and increasing interest rates are the near-term
headwinds for the sector.
Our Economist expects current tightness in liquidity to
start easing in 4QFY11, allaying the pressure of
significant NIM compression.
We believe that margins would start compressing, but
gradually. With strong loan growth and high CD ratio,
there is strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
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