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Punjab National Bank
F1Q12: Better Quarter
Compared With Other SOEs
Quick Comment – PNB reported a profit of
Rs11.1 bn (+3% YoY; -8% QoQ). PBT was 10%
below our estimate – NII was in line; the miss was
driven by higher opex and MTM provisions on
investment book.
PNB’s numbers were better in comparison with what
other SOE banks have reported this quarter – especially
with regard to revenue growth. However, we expect
margins to remain under pressure for PNB. Term
deposit costs have repriced up to 7.9%; however, they
are at levels lower than peers’ and incremental funding
costs (8.75-9.5%). This implies further repricing
pressure ahead. Moreover, asset quality remains a
potential risk in coming quarters, given higher rates and
in the near term when PNB migrates to system-based
classification of NPLs for lower-value accounts (which
some of the others have already done). Hence, we
maintain UW.
The key highlights from the results include:
a) Margins were at 3.84% (-7 bps QoQ): Margin
compression was lower than what we have seen for
other SOE banks this quarter.
While PNB’s term deposits costs did move up from
~80 bps QoQ (on our computations) – the absolute level
at 7.9% is lower than what other SOE banks have
reported (see Exhibit 5), implying further pressure in the
coming few quarters.
The other factor that seems to have supported margin
progression is the expansion in investment yields, which
were up 55 bps QoQ at 7.65%. This is in contrast with
other SOE banks, which have reported broadly stable
investment yields (see Exhibit 6). PNB indicated that
the increase was driven by a shift in portfolio mix
towards longer maturity instruments. Given the rising
rate scenario, this change could result in potential MTM issues
in the future.
b) Loan book grew by 23% YoY but was flat QoQ: Deposits
grew by 27% YoY and were up 4% QoQ. LD ratio came off to
74.95% from 77.38% as of Mar-11.
Sequential loan growth was driven by infra, construction and
overseas advances: PNB’s loans to the infra segment grew by
4% QoQ and 36% YoY. Within the same, loans to the power
sector grew by 5% QoQ and 73% YoY. Infra segment currently
constitutes 15% of total loans at PNB within which power is 7%.
The other key segment that moved up sharply was the
construction segment, which was up 36% QoQ (this segment
currently constitutes 2.3% of total loans)
Overseas advances also saw very strong growth at 11% QoQ
and 78% YoY. This segment’s share in total credit has moved
up to 5.8% of total loans from 4% a year back.
PNB’s deposit mix deteriorated. Their reported CASA/deposits
ratio moved lower to 37.4% (-100 bps QoQ and -350 bps YoY).
Bulk deposits moved up to 24% of total deposits (+118 bps
QoQ and +527 bps YoY).
c) Core non-interest income growth was strong: Fee
income growth was strong at 29% YoY accelerating from
13% YoY delivered in the previous quarter. The growth in
the volatile FX segment also picked up to +15% YoY from
-20% YoY in the previous quarter. Contribution of net capital
gains was negative at Rs0.86 bn (-5% of PBT).
d) Operating expenses growth picked up: Employee
expense growth (outside of one-off amortization) grew by
32% QoQ and 40% YoY. The sharp growth was driven by
higher pension-related expenses recorded this quarter. Growth
in non-employee expenses was also strong at 29% YoY
(-5% QoQ).
e) GNPLs grew by 12% QoQ and 35% YoY: New NPL
creation moved lower to Rs11.8 bn (1.9% of loans) from
Rs12.3 bn (2.2% of loans) in QE Mar-11.
The bank has migrated to system-based recognition for loans
up to Rs10 mn. PNB will have to migrate all accounts by the
end of this quarter. Most other banks have seen significant
slippages as they migrated to smaller-value accounts – hence,
new NPL creation at PNB could see a pick-up.
PNB recorded provisions of Rs5.6 bn (93 bps of loans,
annualized) – stable vs. previous quarter’s level. Rs2.43 bn
(40 bps) was on account of the change in RBI provisioning
norms, implying that underlying credit costs came off QoQ
to 53 bps.
The coverage ratio (excluding tech writeoffs) improved to 57%
from 53% as of the previous quarter end. The coverage ratio
(including tech writeoffs) improved to 74.3% from 73.2% as of
previous quarter end. The sequential improvement in coverage
(despite low provisions) was enabled by:
i) Upgrades and recoveries, which picked up to 1.1% of
loans from 0.7% in QE Mar-11.
ii) The second factor that helped was the fact that PNB
did not write-off any accounts this quarter (vs. 1.8% of
loans in QE Mar-11).
f) Tier I ratio at 9%: Risk weighted assets were -1% QoQ and
24% YoY. RWAs were down 1% QoQ while (loans +
investments) were up 2% QoQ. Management indicated that
this was driven by shift in mix towards higher-rated borrowers
Price Target Discussion
We arrive at our price target of Rs1070 using a probability
weighted three-phase residual income model – a five-year high
growth period, a 10-year maturity period, followed by a
declining period.
Risks to Our Price Target
Key downside risks to our price target include
slower-than-expected loan growth, sharp compression in NIMs
and significant deterioration in asset quality (restructured loans
slippages).
Upside risks include: Better-than-expected margin
progressions and fee income growth, and lower-than-expected
credit costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Punjab National Bank
F1Q12: Better Quarter
Compared With Other SOEs
Quick Comment – PNB reported a profit of
Rs11.1 bn (+3% YoY; -8% QoQ). PBT was 10%
below our estimate – NII was in line; the miss was
driven by higher opex and MTM provisions on
investment book.
PNB’s numbers were better in comparison with what
other SOE banks have reported this quarter – especially
with regard to revenue growth. However, we expect
margins to remain under pressure for PNB. Term
deposit costs have repriced up to 7.9%; however, they
are at levels lower than peers’ and incremental funding
costs (8.75-9.5%). This implies further repricing
pressure ahead. Moreover, asset quality remains a
potential risk in coming quarters, given higher rates and
in the near term when PNB migrates to system-based
classification of NPLs for lower-value accounts (which
some of the others have already done). Hence, we
maintain UW.
The key highlights from the results include:
a) Margins were at 3.84% (-7 bps QoQ): Margin
compression was lower than what we have seen for
other SOE banks this quarter.
While PNB’s term deposits costs did move up from
~80 bps QoQ (on our computations) – the absolute level
at 7.9% is lower than what other SOE banks have
reported (see Exhibit 5), implying further pressure in the
coming few quarters.
The other factor that seems to have supported margin
progression is the expansion in investment yields, which
were up 55 bps QoQ at 7.65%. This is in contrast with
other SOE banks, which have reported broadly stable
investment yields (see Exhibit 6). PNB indicated that
the increase was driven by a shift in portfolio mix
towards longer maturity instruments. Given the rising
rate scenario, this change could result in potential MTM issues
in the future.
b) Loan book grew by 23% YoY but was flat QoQ: Deposits
grew by 27% YoY and were up 4% QoQ. LD ratio came off to
74.95% from 77.38% as of Mar-11.
Sequential loan growth was driven by infra, construction and
overseas advances: PNB’s loans to the infra segment grew by
4% QoQ and 36% YoY. Within the same, loans to the power
sector grew by 5% QoQ and 73% YoY. Infra segment currently
constitutes 15% of total loans at PNB within which power is 7%.
The other key segment that moved up sharply was the
construction segment, which was up 36% QoQ (this segment
currently constitutes 2.3% of total loans)
Overseas advances also saw very strong growth at 11% QoQ
and 78% YoY. This segment’s share in total credit has moved
up to 5.8% of total loans from 4% a year back.
PNB’s deposit mix deteriorated. Their reported CASA/deposits
ratio moved lower to 37.4% (-100 bps QoQ and -350 bps YoY).
Bulk deposits moved up to 24% of total deposits (+118 bps
QoQ and +527 bps YoY).
c) Core non-interest income growth was strong: Fee
income growth was strong at 29% YoY accelerating from
13% YoY delivered in the previous quarter. The growth in
the volatile FX segment also picked up to +15% YoY from
-20% YoY in the previous quarter. Contribution of net capital
gains was negative at Rs0.86 bn (-5% of PBT).
d) Operating expenses growth picked up: Employee
expense growth (outside of one-off amortization) grew by
32% QoQ and 40% YoY. The sharp growth was driven by
higher pension-related expenses recorded this quarter. Growth
in non-employee expenses was also strong at 29% YoY
(-5% QoQ).
e) GNPLs grew by 12% QoQ and 35% YoY: New NPL
creation moved lower to Rs11.8 bn (1.9% of loans) from
Rs12.3 bn (2.2% of loans) in QE Mar-11.
The bank has migrated to system-based recognition for loans
up to Rs10 mn. PNB will have to migrate all accounts by the
end of this quarter. Most other banks have seen significant
slippages as they migrated to smaller-value accounts – hence,
new NPL creation at PNB could see a pick-up.
PNB recorded provisions of Rs5.6 bn (93 bps of loans,
annualized) – stable vs. previous quarter’s level. Rs2.43 bn
(40 bps) was on account of the change in RBI provisioning
norms, implying that underlying credit costs came off QoQ
to 53 bps.
The coverage ratio (excluding tech writeoffs) improved to 57%
from 53% as of the previous quarter end. The coverage ratio
(including tech writeoffs) improved to 74.3% from 73.2% as of
previous quarter end. The sequential improvement in coverage
(despite low provisions) was enabled by:
i) Upgrades and recoveries, which picked up to 1.1% of
loans from 0.7% in QE Mar-11.
ii) The second factor that helped was the fact that PNB
did not write-off any accounts this quarter (vs. 1.8% of
loans in QE Mar-11).
f) Tier I ratio at 9%: Risk weighted assets were -1% QoQ and
24% YoY. RWAs were down 1% QoQ while (loans +
investments) were up 2% QoQ. Management indicated that
this was driven by shift in mix towards higher-rated borrowers
Price Target Discussion
We arrive at our price target of Rs1070 using a probability
weighted three-phase residual income model – a five-year high
growth period, a 10-year maturity period, followed by a
declining period.
Risks to Our Price Target
Key downside risks to our price target include
slower-than-expected loan growth, sharp compression in NIMs
and significant deterioration in asset quality (restructured loans
slippages).
Upside risks include: Better-than-expected margin
progressions and fee income growth, and lower-than-expected
credit costs.
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