Hope against hope PNB ::HDFC Sec, report

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Hope against hope PNB results disappointed with no respite seen on asset quality (slippages at 6.2% ann.). This has significantly impacted the bank’s core revenue performance (NII was flat YoY vs. 11% loan growth). Further driven by continued high provisioning cost (both loan loss and staff), bank’s profits remained under pressure. PAT grew merely 2.5% YoY on an extremely low base. However, marginal positives were (1) incremental growth was driven by retail & MSME segments & (2) benefits percolating from downward revision of deposit rates during 3Q along with strong CASA. Asset quality performance was unsatisfactory and is likely to remain under pressure for the next couple of quarters. But hope of some improvement continues to linger on the back of the much anticipated macro recovery, to which PNB is a direct beneficiary. We lower our PAT estimate by 11/4% FY16/17E to factor subdued 3Q and weak management commentary. Our positive stance on the stock is driven by (a) relatively lower dilution risk in the near term (b) adequate staff related provisions and (c) the recent correction leading to a comfortable valuation of 0.9x FY17E ABV. Maintain BUY with revised TP of Rs 221/sh (1.1x FY17E ABV).  Gross stressed formation was high at Rs to Rs 77bn (+7% QoQ), with a sharp jump in slippages (Rs 55bn +40% QoQ). Slippages from the restructured pool remain elevated at Rs 13bn (3Q) and Rs 42bn (FYTD) i.e. 36% of 9M slippages and 11% of FY14 O/s restructured pool. High W/Os restricted GNPA (6%) rise to +7% QoQ, though the 180bps fall in PCR led NNPA (3.8%) to jump 18%. Restructured assets of Rs 22bn in 3Q; o/s standard restructured pool now stands at Rs 343bn, 9.5% of loans.  Impact of higher stressed additions led to a sharp YoY NIM compression of 36bps to 3.2%. Thus, NII came in flat YoY despite 11% loan growth. However, benefits of lowering term deposit rates across maturities during 3Q and stable CASA ratio provided some relief to NIM. We expect NIM to improve to avg. 3.2% over FY16-17E vs. 3.15% FY15E as we expect the bank to benefit from further decline in cost of funds and some respite on yields as slippages moderates.

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