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PUNJAB NATIONAL BANK
Margin resilient; asset quality woes continue
Margin resilient, but pressure to build up
During Q3FY11, Punjab National Bank’s (PNB) profit came in at INR 10.9 bn (a
modest 8% growth Y-o-Y) as steady core NII performance was offset by higher
NPL provisions and retirement benefit provisions. Sequential margins reported a
7bps pick up to 4.13% (highest amongst PSU peers) led by stable spreads and
support from one-off interest on income tax refund (INR 1.07 bn). Advances
growth continued to surprise positively with a 6% Q-o-Q growth, however,
taking a toll on CASA (down 150bps Q-o-Q) due to relatively higher dependence
on bulk deposits. Once again, slippages came in higher at 2.3% (annualised one
year lag), but lower than 2.7% in H1FY11, in line with its higher–than-system
average run rate, necessitating higher NPL provisions. Management disclosed
that the second pension option liability is around INR 36 bn, higher than the
initial estimate of INR 25 bn, leading to annual provision of INR 7.2 bn.
Margins above 4%, best in industry; advances strong at 30% Y-o-Y
Margins continued to stay at healthy level of 4.13%, up 7bps Q-o-Q. However,
cost pressures are starting to build up with 15bps increase in cost of funds (first
increase in eight quarters). Given PNB’s strong advance growth necessitates
higher dependence on bulk deposits, which is taking a toll on CASA and
consequently impacting margins. Saving bank balances grew 3% Q-o-Q.
Advances grew 30% Y-o-Y—growth was largely dominated by industry (up 31%
Y-o-Y) and agriculture advances (25% Y-o-Y).
Outlook and valuations: Above average return ratios; maintain ‘BUY’
With its strong franchise and diversified loan book, PNB’s margins continue to
remain well above the industry average, driving the bank’s core profitability. A
high level of restructuring and recurring above higher slippages are key areas of
concerns straining earnings growth. We estimate 18% CAGR in earnings over
FY11/12 on back of 24% growth in loans and 3.6% NIMs (cal). The stock is
currently trading at 1.5x FY12E book (down from peak of 2x). Despite the nearterm
headwinds on margins and retirement cost, PNB will continue to deliver
strong return ratios (130bps RoA and 25% RoE). We maintain ‘BUY’
recommendation. On relative return basis we rate the stock ‘Sector
Outperformer’.
Headline asset quality deteriorates; slippages continue at high levels
Slippages during the quarter once again came in higher at 2.3% (compared to peers).
Relatively lower slippages/upgrades/write-offs led to 13% Q-o-Q jump in GNPL to INR
45.4bn (2.03%).Provisioning coverage for the quarter stood comfortable at 77.8% in
Q3FY11. Also, PNB restructured an additional INR 8.17 bn (adding ~6% to the
restructured pool) loans, taking total restructured assets to 6.4% (a key monitorable).
Loan loss provision during the quarter came in at 130bps, a function of higher slippages
during the quarter, necessitating higher cover post the change in RBI provisioning norms.
In Q3FY11, an additional INR 0.7 bn slipped from the restructured pool, taking
cumulative slippages to ~9%.
Impressive traction in other income despite absence of treasury gains
The bank’s core fee income grew 55% Y-o-Y; traction was strong in forex (up 67% Y-o-Y,
303% Q-o-Q). PNB booked investment profits of INR 870 mn against INR 1.57 bn
(included INR 714 mn from sale of housing finance unit) in Q3FY10.
Other highlights
Management disclosed that the second pension option liability at INR 36 bn is higher
than INR 25 bn reported earlier. This translates in to an annual provision of INR 7.2 bn,
leading to a hit of INR 1.8 bn per quarter. As the bank had provided INR 2.5 bn provision
in H1, the bank accelerated provisioning amounting to INR 2.35 bn in the current quarter.
It continued to provide INR 1.25 bn towards revised gratuity provisions (total estimated
hit of around INR 4.5-5.0 bn).
Company Description
PNB is northern India-based bank with 4689 branches including 213 extension counters,
most of which are in the states of Punjab, Haryana, Uttar Pradesh, Madhya Pradesh and
Bihar. More than 50% of its branches are in rural and semi- urban areas. The bank’s
balance sheet stands at around at around INR 3tn and has one of the highest CASA ratio
among nationalized banks. The government’s shareholding, at 57%, leaves little scope
for significant dilution/capital rising hereon. Foreign holding too is nearing maximum
permissible of 20%.
Investment Theme
PNB’s 1.4% plus return on assets, enabled by high margins, improving cost ratios, and
declining provisions, can potentially generate higher than presently reported ROEs (20%).
PNB’s Net Interest margins at 3.5% plus are one of the highest amongst Indian banks,
supported by its strong low cost deposit franchise (39% one of the highest). We believe
that the bank is best positioned to grow balance sheet even in a tight liquidity
environment given its excess SLR and high CASA ratio.
Key Risks
Any downturn in agricultural growth will hurt the banks asset quality
Given the pace of expansion delinquencies can rise faster than expected. Higher than
expected slippage from restructured assets can risk asset quality.
Management is a key factor for the bank to sustain premium valuations (among PSU
banks). The key risk to our recommendation is replacement of present management by a
weaker business manager.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
PUNJAB NATIONAL BANK
Margin resilient; asset quality woes continue
Margin resilient, but pressure to build up
During Q3FY11, Punjab National Bank’s (PNB) profit came in at INR 10.9 bn (a
modest 8% growth Y-o-Y) as steady core NII performance was offset by higher
NPL provisions and retirement benefit provisions. Sequential margins reported a
7bps pick up to 4.13% (highest amongst PSU peers) led by stable spreads and
support from one-off interest on income tax refund (INR 1.07 bn). Advances
growth continued to surprise positively with a 6% Q-o-Q growth, however,
taking a toll on CASA (down 150bps Q-o-Q) due to relatively higher dependence
on bulk deposits. Once again, slippages came in higher at 2.3% (annualised one
year lag), but lower than 2.7% in H1FY11, in line with its higher–than-system
average run rate, necessitating higher NPL provisions. Management disclosed
that the second pension option liability is around INR 36 bn, higher than the
initial estimate of INR 25 bn, leading to annual provision of INR 7.2 bn.
Margins above 4%, best in industry; advances strong at 30% Y-o-Y
Margins continued to stay at healthy level of 4.13%, up 7bps Q-o-Q. However,
cost pressures are starting to build up with 15bps increase in cost of funds (first
increase in eight quarters). Given PNB’s strong advance growth necessitates
higher dependence on bulk deposits, which is taking a toll on CASA and
consequently impacting margins. Saving bank balances grew 3% Q-o-Q.
Advances grew 30% Y-o-Y—growth was largely dominated by industry (up 31%
Y-o-Y) and agriculture advances (25% Y-o-Y).
Outlook and valuations: Above average return ratios; maintain ‘BUY’
With its strong franchise and diversified loan book, PNB’s margins continue to
remain well above the industry average, driving the bank’s core profitability. A
high level of restructuring and recurring above higher slippages are key areas of
concerns straining earnings growth. We estimate 18% CAGR in earnings over
FY11/12 on back of 24% growth in loans and 3.6% NIMs (cal). The stock is
currently trading at 1.5x FY12E book (down from peak of 2x). Despite the nearterm
headwinds on margins and retirement cost, PNB will continue to deliver
strong return ratios (130bps RoA and 25% RoE). We maintain ‘BUY’
recommendation. On relative return basis we rate the stock ‘Sector
Outperformer’.
Headline asset quality deteriorates; slippages continue at high levels
Slippages during the quarter once again came in higher at 2.3% (compared to peers).
Relatively lower slippages/upgrades/write-offs led to 13% Q-o-Q jump in GNPL to INR
45.4bn (2.03%).Provisioning coverage for the quarter stood comfortable at 77.8% in
Q3FY11. Also, PNB restructured an additional INR 8.17 bn (adding ~6% to the
restructured pool) loans, taking total restructured assets to 6.4% (a key monitorable).
Loan loss provision during the quarter came in at 130bps, a function of higher slippages
during the quarter, necessitating higher cover post the change in RBI provisioning norms.
In Q3FY11, an additional INR 0.7 bn slipped from the restructured pool, taking
cumulative slippages to ~9%.
Impressive traction in other income despite absence of treasury gains
The bank’s core fee income grew 55% Y-o-Y; traction was strong in forex (up 67% Y-o-Y,
303% Q-o-Q). PNB booked investment profits of INR 870 mn against INR 1.57 bn
(included INR 714 mn from sale of housing finance unit) in Q3FY10.
Other highlights
Management disclosed that the second pension option liability at INR 36 bn is higher
than INR 25 bn reported earlier. This translates in to an annual provision of INR 7.2 bn,
leading to a hit of INR 1.8 bn per quarter. As the bank had provided INR 2.5 bn provision
in H1, the bank accelerated provisioning amounting to INR 2.35 bn in the current quarter.
It continued to provide INR 1.25 bn towards revised gratuity provisions (total estimated
hit of around INR 4.5-5.0 bn).
Company Description
PNB is northern India-based bank with 4689 branches including 213 extension counters,
most of which are in the states of Punjab, Haryana, Uttar Pradesh, Madhya Pradesh and
Bihar. More than 50% of its branches are in rural and semi- urban areas. The bank’s
balance sheet stands at around at around INR 3tn and has one of the highest CASA ratio
among nationalized banks. The government’s shareholding, at 57%, leaves little scope
for significant dilution/capital rising hereon. Foreign holding too is nearing maximum
permissible of 20%.
Investment Theme
PNB’s 1.4% plus return on assets, enabled by high margins, improving cost ratios, and
declining provisions, can potentially generate higher than presently reported ROEs (20%).
PNB’s Net Interest margins at 3.5% plus are one of the highest amongst Indian banks,
supported by its strong low cost deposit franchise (39% one of the highest). We believe
that the bank is best positioned to grow balance sheet even in a tight liquidity
environment given its excess SLR and high CASA ratio.
Key Risks
Any downturn in agricultural growth will hurt the banks asset quality
Given the pace of expansion delinquencies can rise faster than expected. Higher than
expected slippage from restructured assets can risk asset quality.
Management is a key factor for the bank to sustain premium valuations (among PSU
banks). The key risk to our recommendation is replacement of present management by a
weaker business manager.
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