Punjab National Bank - Core Profitability Muted; Stress Asset Formation Elevated; Result Update Q2FY15 :: Edelweiss, PDF link

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Punjab National Bank’s (PNB) Q2FY15 PAT of INR5.75bn (down >50% QoQ) came in much lower than our INR12.0bn estimate on muted core profitability and resumption of elevated asset quality stress. Slippages inched up yet again to INR39.7bn, implying run rate of 4.6% (3.4% in Q1FY15). This, coupled with surge in fresh restructuring (~INR33bn), triggered elevated incremental stress of INR72.7bn (8.0% versus 5.2% in Q1FY15). Consequently, the FITL of INR2.94bn led into NIM declining 24bps to 3.18% and credit cost touching 1.9%. Asset quality has been a major concern and the problem has resurfaced, and this time from restructured book as well and in sizeable manner (32% of slippages). We are pruning FY15E and FY16E PAT ~7% each and assigning revised target price of INR946 (earlier INR990) at 1.0x FY16E P/ABV.

Lower NII and higher opex feed into muted core profitability

PNB’s core profitability (ex-treasury) has moderated to lower single digits, lowest since past many quarters due to: (1) slower NII (up mere 3.4% YoY, down QoQ),a function of lower growth and NIMs contraction (due to FITL creation of INR2.94bn); and (2) higher opex-increased provisions for wage revision and AS-15 provision. This, along with higher asset quality stress, dented profitability.

High asset quality stress resurfaces; volatility a key concern

Slippages were elevated at INR39.7bn (4.6%) led by industrial and agriculture segments. This, coupled with modest recoveries/upgrades of INR13.5bn and write-offs of INR11.2mn, pushed gross NPLs to INR207bn to settle at 5.65%. Coverage ratio fell to 59.1% (60% in Q1FY15), pushing net NPLs up 11% QoQ to INR116bn (3.26%). Fresh restructuring surged to INR33bn, taking outstanding standard restructured book to INR364bn (10.2%), resulting in total stressed asset to ~16%-highest among PSU peers.

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https://www.edelweiss.in/research/Punjab-National-Bank--Core-Profitability-Muted;-Stress-Asset-Formation-Elevated;-Result-Update-Q2FY15/27326.html