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Punjab National Bank (PNB)
Banks/Financial Institutions
Earning enough to provide for bad debts. PNB’s focus on margins is resulting in
reasonably strong revenues, giving adequate cushion for providing for NPLs witnessed
in recent quarters. Overall, the bank still delivers a 1.3% RoA despite making higher
NPL provisions and higher pension provisions. Our estimates on staff expenses have
been conservative factoring the pension liability of `36 bn (second pension option).
Overall growth remains strong and we expect return ratios of about 23-25% RoEs to
sustain over next few years. Valuations at 1.5X FY2012E PBR remain reasonable. BUY.
High margins provide comfort; expect operating leverage to play out in FY2012-13E
We like PNB’s focus on revenues to take care of somewhat disappointing trends on asset quality.
Margins further improved to 4.13% in 3Q and NII growth was 37% yoy. However, slippages at
`10 bn during the quarter remain high, resulting in higher provisions. Strong economic outlook
and an improving global economy should provide respite on NPLs over time and we expect
slippages to be on decline in FY2012E versus FY2011, resulting in lower provisions. Thus, even as
margins come off, we believe that the return ratios of 1.3% RoA and about 23% RoEs are likely to
be maintained for PNB. The bank also has cushion on operating expenses as growth is likely to be
very minimal at just 12%. Post 3Q, we maintain our earnings for FY2011-13E. We maintain our
BUY recommendation with a TP unchanged at `1,500.
Slippages remain at 2QFY11 levels; coverage levels stable at 77%
Pressure on asset quality continued with slippage ratio maintained at 2QFY11 levels of 1.9%.
However, we note that recognition of corporate NPLs is lumpy in nature and difficult to predict the
trend on a quarterly basis, but strong NII is giving adequate cushion for the bank to provide for the
current slippages. About 60% of the slippages were attributed to five corporate accounts – the
management expects some upgradations in future quarters. Overall, gross NPL increased by 13%
qoq and 44% yoy to `45 bn (2.0% of loans). Net NPLs increased 11% qoq to `15.8 bn (0.7% of
loans). Including technically written-off portfolio, the provision coverage stands healthy at 77%,
while reported coverage is at 65%. We model a delinquency ratio of 2.2% in FY2011E and 1.8%
in FY2012E. Total restructured assets are at `144 bn, about 6.5% of the loan book (increased by
6% qoq). Slippages out of the restructured loan portfolio have been lower at about 9% of loans
(12% on a one-year lagged basis).
Margins at 4.1% continue to impress despite one-offs during the quarter
PNB’s reported NIMs at 4.1% was 7 bps higher than the previous quarter. Adjusting for oneoffs
(interest on tax refund), NIMs showed a negligible decline during the quarter. While cost
of funds did show a marginal increase, lending rates have been flat during the quarter
indicating that the recent increase in lending rates is yet to reflect in earnings. We remain
conservative and build NIMs to decline by 22 bps in 4QFY11E and 30 bps in FY2012E over
FY2011E.
Loan growth remains impressive; CASA ratio at 39%
Loans at `2.2 tn grew ahead of the industry at 30% yoy and 6% qoq as of December 2010.
YTD growth is impressive at 19%, one of the highest amongst public sector banks driven by
SME, large corporate and services. SME grew by 30% yoy, large industries by 32% yoy and
retail by 22% yoy. On the back of higher credit growth in 9MFY11, we expect loans to grow
at 25% for FY2011E and 18% in FY2012E. Deposit growth was slower than credit growth
at 24% yoy but better than the industry growth. Tight liquidity and slow deposit growth
saw the bank increase the share of bulk deposits to 22% as compared to 20% in September
2010. CASA ratio declined 180 bps qoq to 39%.
Cost-income ratio maintained at about 42% despite higher retirement costs
Cost-income ratio was healthy at 42% for the quarter but employee costs increased by 49%
yoy and 10% qoq as the bank made retirement provisions and accounted for revised salaries.
The bank has provided `2.4 bn for pension and another `1.3 bn for gratuity benefit for the
quarter. The total impact of `5 bn for gratuity would be taken in FY2011E, while the bank is
likely to provide about `7.2 bn (`1.8 bn every quarter) for the next five years for pension
expenses including FY2011E. We expect similar pension provisions of `2.4 bn in 4QFY11E
and a gratuity provision of Rs1.3 bn, but subsequently this should fall to only about Rs1.8 bn
per quarter. We remain conservative on our assumptions and expect staff costs to grow by
11% in FY2012E.
Other key operational highlights for the quarter
�� Non-interest income increased by 17% yoy to `8.6 bn driven by higher income from
recoveries and foreign exchange. Income from processing fees has been under pressure,
declining by 5% yoy.
�� Treasury income was lower by 45% yoy to `0.9 bn.
�� Total provisions for loans (including standard assets) were higher at 1.3% (annualized) for
the quarter. Investment depreciation was at `440 mn for the quarter.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank (PNB)
Banks/Financial Institutions
Earning enough to provide for bad debts. PNB’s focus on margins is resulting in
reasonably strong revenues, giving adequate cushion for providing for NPLs witnessed
in recent quarters. Overall, the bank still delivers a 1.3% RoA despite making higher
NPL provisions and higher pension provisions. Our estimates on staff expenses have
been conservative factoring the pension liability of `36 bn (second pension option).
Overall growth remains strong and we expect return ratios of about 23-25% RoEs to
sustain over next few years. Valuations at 1.5X FY2012E PBR remain reasonable. BUY.
High margins provide comfort; expect operating leverage to play out in FY2012-13E
We like PNB’s focus on revenues to take care of somewhat disappointing trends on asset quality.
Margins further improved to 4.13% in 3Q and NII growth was 37% yoy. However, slippages at
`10 bn during the quarter remain high, resulting in higher provisions. Strong economic outlook
and an improving global economy should provide respite on NPLs over time and we expect
slippages to be on decline in FY2012E versus FY2011, resulting in lower provisions. Thus, even as
margins come off, we believe that the return ratios of 1.3% RoA and about 23% RoEs are likely to
be maintained for PNB. The bank also has cushion on operating expenses as growth is likely to be
very minimal at just 12%. Post 3Q, we maintain our earnings for FY2011-13E. We maintain our
BUY recommendation with a TP unchanged at `1,500.
Slippages remain at 2QFY11 levels; coverage levels stable at 77%
Pressure on asset quality continued with slippage ratio maintained at 2QFY11 levels of 1.9%.
However, we note that recognition of corporate NPLs is lumpy in nature and difficult to predict the
trend on a quarterly basis, but strong NII is giving adequate cushion for the bank to provide for the
current slippages. About 60% of the slippages were attributed to five corporate accounts – the
management expects some upgradations in future quarters. Overall, gross NPL increased by 13%
qoq and 44% yoy to `45 bn (2.0% of loans). Net NPLs increased 11% qoq to `15.8 bn (0.7% of
loans). Including technically written-off portfolio, the provision coverage stands healthy at 77%,
while reported coverage is at 65%. We model a delinquency ratio of 2.2% in FY2011E and 1.8%
in FY2012E. Total restructured assets are at `144 bn, about 6.5% of the loan book (increased by
6% qoq). Slippages out of the restructured loan portfolio have been lower at about 9% of loans
(12% on a one-year lagged basis).
Margins at 4.1% continue to impress despite one-offs during the quarter
PNB’s reported NIMs at 4.1% was 7 bps higher than the previous quarter. Adjusting for oneoffs
(interest on tax refund), NIMs showed a negligible decline during the quarter. While cost
of funds did show a marginal increase, lending rates have been flat during the quarter
indicating that the recent increase in lending rates is yet to reflect in earnings. We remain
conservative and build NIMs to decline by 22 bps in 4QFY11E and 30 bps in FY2012E over
FY2011E.
Loan growth remains impressive; CASA ratio at 39%
Loans at `2.2 tn grew ahead of the industry at 30% yoy and 6% qoq as of December 2010.
YTD growth is impressive at 19%, one of the highest amongst public sector banks driven by
SME, large corporate and services. SME grew by 30% yoy, large industries by 32% yoy and
retail by 22% yoy. On the back of higher credit growth in 9MFY11, we expect loans to grow
at 25% for FY2011E and 18% in FY2012E. Deposit growth was slower than credit growth
at 24% yoy but better than the industry growth. Tight liquidity and slow deposit growth
saw the bank increase the share of bulk deposits to 22% as compared to 20% in September
2010. CASA ratio declined 180 bps qoq to 39%.
Cost-income ratio maintained at about 42% despite higher retirement costs
Cost-income ratio was healthy at 42% for the quarter but employee costs increased by 49%
yoy and 10% qoq as the bank made retirement provisions and accounted for revised salaries.
The bank has provided `2.4 bn for pension and another `1.3 bn for gratuity benefit for the
quarter. The total impact of `5 bn for gratuity would be taken in FY2011E, while the bank is
likely to provide about `7.2 bn (`1.8 bn every quarter) for the next five years for pension
expenses including FY2011E. We expect similar pension provisions of `2.4 bn in 4QFY11E
and a gratuity provision of Rs1.3 bn, but subsequently this should fall to only about Rs1.8 bn
per quarter. We remain conservative on our assumptions and expect staff costs to grow by
11% in FY2012E.
Other key operational highlights for the quarter
�� Non-interest income increased by 17% yoy to `8.6 bn driven by higher income from
recoveries and foreign exchange. Income from processing fees has been under pressure,
declining by 5% yoy.
�� Treasury income was lower by 45% yoy to `0.9 bn.
�� Total provisions for loans (including standard assets) were higher at 1.3% (annualized) for
the quarter. Investment depreciation was at `440 mn for the quarter.
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