PNB: Consistency is the key :: Centrum

Consistency is the key
PNB’s tepid core performance during Q3FY13 was in line though bottom-line
surprised positively on lower provisions as asset quality was largely stable.
Contained slippages (0.5% annualised), 5bps QoQ improvement in %GNPA
and 200bps expansion in PCR provided relief to heightened asset quality
concerns. While we welcome the stability in asset quality matrix, we remain a
tad cautious led by high GNPA at 4.6% and large outstanding standard
restructuring at ~9%. We remain Neutral on the stock given the limited upside
to our revised target price of Rs950.
Asset quality stable QoQ, improvement awaited: Asset quality matrices for
PNB stabilised during the quarter with delinquency contained at 0.5% duly
complimented by equivalent recoveries leading to stable GNPA in absolute
terms while implying a 5bps easing in relative terms. While provisions dipped
by 25% QoQ, PCR expanded by 200bps sequentially to 46% (w/o write offs).
Meanwhile, standard restructured assets inched up further to 9.4% as the
quarter saw inclusion of Suzlon and additional disbursement to DISCOMs
under agreed restructuring package. While we welcome the stability in asset
quality matrix, we remain a tad cautious led by high GNPA at 4.6% and large
outstanding standard restructuring at ~9%.
Tepid core performance: The core performance, though in line, was tepid with
flattish YoY. NII growth stood at a tepid 6% YoY led by stable NIM sequentially
and a moderate 14% credit growth. The quarter saw interest income reversal of
Rs800mn which suppressed loan yields, though this was offset by lower cost of
funds led by shedding of bulk deposits and easing in rates on the same. The
management continues to guide for better NIM going ahead.

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Loan growth moderates to 14%: Loan portfolio expanded by 14% YoY
though domestic loan growth was even lower at 11% YoY. From a segmental
perspective, retail (16.5% YoY) and agriculture (9% YoY) grew faster than SME
and large corporate segments. Given the pain on asset quality front, the bank
intends to consolidate its balance sheet in the quarters to come and hence
guided for industry average growth. In the past, we had highlighted our
cautious view on asset quality emanating from risky strategy to aggressively
building up the loan book in adverse economic scenario.
Muted non-interest income performance: The non-interest income grew by
a muted 2% YoY during the quarter with 10% de-growth in core fee income
though strong performance on recovery front provided some relief. Notably,
treasury gains during the quarter too were lackluster. Q4FY13 is likely to be a
better quarter from a treasury gains perspective.
Neutral: While we welcome the stability in asset quality matrix, we remain a
tad cautious led by high GNPA at 4.6% and large outstanding standard
restructuring at ~9%. We have revisited our earnings assumptions and are
factoring in additional information. Our revised assumptions indicate a RoEs
bottoming out at 17% in FY13 followed by 50bps expansion during FY14.
Current valuation of 1.1x FY14E PABV leaves limited upside (3% only) to our
revised price target of Rs950. We remain Neutral.