Buy Punjab National Bank Q3FY11; Higher provisions dent profits; Emkay

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Punjab National Bank

Higher provisions dent profits

BUY

CMP: Rs1,123                                       Target Price: Rs1,500

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n     PNB’s Q3FY11 NII at Rs32bn in line with estimates driven by 6% qoq growth in advances and 7bps expansion in NIMs. PAT at Rs10.9bn lower than expected due to higher provisions

n     NPAs inch up as the recoveries remain moderate during the quarter. Slippages remain in line with Q2FY11 at Rs9.7bn for the quarter. Provision cover strong at 77.8% (RBI norms)

n     Other positives in the result – (1) CASA at 39.1% despite strong growth in balance sheet (2) provisions at 71% of net new slippages and (3) accelerated provisions for pension

n     PAT growth lower this year on higher provisions. To bounce back as (1) staff provisions and (2) slippages come done in FY12E Valuations reasonable at 2.0x FY11E/1.6x FY12E ABV

Strong growth in NII…

PNB’s NII for Q3FY11 has grown by 37% yoy to Rs32.0bn. Even adjusted for one-off

items, the growth is strong at 32% yoy and 4% qoq. The strong growth in NII was driven

by 6% qoq growth in advances and 7bps expansion NIMs.

… As NIMs expands qoq/stable adjusted for one-off items

PNB’s NIMs have expanded by 7bps qoq during the quarter even as the cost of funds

has gone up by 15bps. However, adjusted for one-off items the NIMs would have

remained flat. However, PNB has revised its BPLR/Base rate by 75/100bps which will

help raise the yield on advances in coming quarters and help sustain margins. However,

we are already building in NIM compression of 20bps in FY12E

Profit growth moderates due to higher provisions

PNB’s PAT for Q3FY11 has grown by 13% yoy (28% in Q1FY11 and 16% in Q2FY11)

driven by higher provisions on pension and on NPAs. We believe the growth to bounce

back to 20% in FY12E as employee provisions moderate and slippages come down.

Large/SME corporate segment drives advances growth

PNB’s advances for the quarter have grown by 6.0% qoq as driven by the growth in large

and SME corporate segment which grew in almost double digits. Amongst the industries,

infrastructure (15.3% qoq), cement (8.7% qoq) and basic metals (5.7% qoq) witnessed

strong growth.

Savings deposits grow despite having raised rates

Driven by faster balance sheet growth the CASA has dipped to 39.1%. Notably, the savings

deposits have still grown by ~3% qoq despite PNB having raised its term deposit rates

twice during H2CY10.

Fee income growth moderates due to lower processing fees

The fee income for the quarter grew by a moderate 3.1% yoy and 16.9% driven by

lumpiness in the processing fees as they declined by almost 30% qoq. However, including

the other non-interest income (excluding trading and dividends), the growth would

have been 30% yoy.

Accelerates pension provisions; core operating profit grows 13.5% qoq

PNB has accelerated its pension provisions to Rs2.4bn/quarter while continuing gratuity

provisions at Rs1.25bn/quarter. As a result, the Opex has gown by 12% qoq. However,

adjusted for provisions and trading gains, the core operating profit has grown by 44.9% yoy

or 13.5% qoq.

The total pension liability has been estimated at Rs36bn which will be adjusted over period

of next five years. Hence, from Q1FY12 onwards the liabilities on pension per quarter will

be ~Rs1.8bn only. PNB is likely to provide gratuity liability in totality by this year only. Thus,

from Q1FY12, the provisions for pension/gratuity will be at Rs1.8/bn quarter compared with

Rs2.5-3.6bn/quarter for this year.

Provisions remain high as recoveries remain moderate

PNB has done provisions on the net incremental slippages at rate of 71%, up from ~45%

for H1FY11. This has resulted in steep rise in provisions for NPAs by ~70% over last year.

Slippages in line with previous quarter

The slippages during the quarter at Rs9.8bn were in line with previous quarter. However,

due to much lower recoveries, the gross NPAs have moved up by ~Rs5bn. The provision

cover including the technical write offs, was at 77%.

Capital adequacy remains comfortable

The capital adequacy remained comfortable during the quarter with tier I CAR at 8.99%

(including profit of M9FY11). The total CAR (including M9FY11 profit) stood at 13.3%.

Valuations and view

The need for higher provisions on all fronts like NPAs, gratuity and pension has resulted in

just 13.1% yoy growth in PNB’s profit for Q3FY11. The growth in profit after tax has

consistently come down from 28% in Q1FY11 to 16% in Q2FY11 and to 13.1% now in

Q3FY11.

We assuming the PAT growth in FY12 to bounce back to 20% driven by two things (1) the

provisions for pension/gratuity are likely to come down by a third from Rs12.2bn in FY11 to

Rs8.0bn in FY12 pension and (2) we have built in the slippages at 1.4% in FY12E

compared with 1.7% this year.

The stock is currently quoting at 2.0x FY11E ABV and 1.6x FY11E ABV with attractive

RoEs of 23.1%. We find the valuations reasonable looking at strong returns profile and on

expectations of bounce back in profit growth in FY12E. We maintain our BUY rating on the

stock with price target of Rs1500.