PUNJAB NATIONAL BANK Consolidation on cards; asset quality key monitorable :Edelweiss

We recently met the senior management of Punjab National Bank (PNB).
Management reiterated its focus on consolidating balance sheet growth
given the uncertain business environment, where focus on containing
asset quality will take precedence over growth. The bank believes
challenges on slippages persist(lumpy gems& jewellery account to
elevate Q1 slippages) however; focus on recoveries will offset pressure
from slippages. Deliberate efforts towards conservative growth will help
stabilise asset quality, though current level of stressed pool at 15%
remains a key monitorable (GNPLs of 4.3% + restructured pool of 9.9%).

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Maintain ‘HOLD’ with TP of INR875.
Pursuing consolidation strategy
Management stated that it continues to pursue the strategy of consolidating balance
sheet in uncertain times. It believes, in the interim, loan growth will come in below
industry growth. PNB will continue to focus on average advance growth during Q1FY14
against the peer set trend of period end growth. Building retail assets will be a key
focus area, but PNB believes the result will be slow and steady given the competitive
pressures and the bank's culture of focusing more on corporate; introduction of retail
asset branches will help in this direction. Reclassification of indirect agriculture has
resulted in PNB not meeting its priority sector requirements.
Anticipating robust treasury performance
Treasury performance will be better in Q1FY14 than Q4FY13. However, the reversal in
yields over the past couple of weeks has restricted some gains. In Q4FY13, bank
positioned its bond portfolio for yield rally ‐inching up duration of its AFS portfolio to
4.4years. 28% of investment in AFS should help post a strong treasury performance.
Outlook and valuations: Asset quality key; maintain ‘HOLD’
In FY13, the bank treaded the conservative growth path with focused efforts on
recoveries and managing asset quality. While it can reap the benefits of consolidation in
terms of moderation in high level of stress pool, asset quality performance will be a key.
Trading at 0.7x FY15E P/ABV, we maintain ‘HOLD/SP’.

Asset quality challenges remain
Management believes challenges on slippages persist. However, focus on recoveries will
offset pressure from slippages. The upgradation/recoveries of ~48% slippages during FY13 is
a vindication of the bank’s strong focus on recoveries. The bank believes that movement of
slippages and recoveries and upgrades will continue to be lumpy given that PNB gets no
leeway under system‐based NPL recognition. Specifically on the gem & jewellery account,
the bank has an exposure of INR20bn, which devolved on May 7. In all likelihood it will be
classified as an NPL by June 30. Management believes that outside of specific gems &
jewellery account the stress has been lower than the Q4FY13.The bank has INR 2 bn
exposure to the stressed NAFED account which has been fully provided for. Hence, any
recovery will be directly taken to income. On restructuring, PNB believes incremental
numbers should be lower given the stringent conditions put by RBI on personal guarantees,
and also promoter contribution increased to 20%. In Q4FY13, restructuring came in higher
at INR64bn—power at INR37bn.
SEB restructuring to be implemented by July; No NPV hit to be taken
PNB is the lead banker for UP SEB. The bank believes that the SEB’s restructuring will be
completed by July. As per the terms of the package, there will be no NPV on conversion as
per RBI clarification. Bonds will be subject to MTM; however, pricing ensures that chances of
hit are minimal. Post the issue of bonds, special securities of the state government will be
issued over three‐five years. Funding of losses—FY13: 100%, FY14: 75%, FY15: 50%. No
funding of losses from FY16.
Key highlights of annual report
• ALM profile‐ Widened mismatch within 1 yr maturity bucket
• NPLs rise more prominent in agriculture and Industrial segments
• Unable to meet PSL requirement due to reclassification by RBI
• Exposure to Infrastructure segment inched up as exposure to power segment increases