Punjab National Bank - Mounting Stressed Assets Rock The Boat; Result Update Q3FY15 :: Edelweiss

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Punjab National Bank’s (PNB) Q3FY15 PAT of INR7.7bn came in lower than our estimate on muted core profitability, elevated asset quality stress and higher tax rate. Slippages at ~INR55.5bn imply run rate of 6.2%, highest since H1FY13. Restructuring is also not showing any signs of abating with addition of INR26bn taking the outstanding book to 9.5% (impaired assets of >15%). Core operating profit also disappointed (down 5% YoY) on tepid revenue traction. Asset quality has been a major concern and has deteriorated further, with problem accruing from restructured book as well (~23% of slippages). Hence, we cut FY15/ FY16E earnings ~12%/4%. We introduce FY17E and roll forward valuations leading to target price of INR184 (0.9x FY17E P/ABV).

Tepid revenue traction dents core profitability

PNB’s core profitability (ex-treasury) has moderated further (down 5% YoY), lowest since past many quarters due to: (1) slower NII (flat YoY), a function of lower growth and below trend NIMs; and (2) elevated opex. However, higher treasury income (INR2.1bn versus INR1.4bn run rate over past quarters) aided profitability. The bank’s ability to propel core profitability and NIMs will be the key monitorable.

High asset quality stress; volatility a key concern

The bank’s slippages are showing no signs of abating with another large addition (6.2%) led by cement (INR8.5bn), iron & steel (INR2.5bn) and pharma (INR3bn) segments in Q3FY15. However, higher write offs (INR24bn versus INR11bn in Q2FY15) restricted GNPLs to 5.97%. Coverage ratio fell to 57.3% (59% in Q1FY15), pushing NNPLs up 19% QoQ to INR138bn (3.82%). Fresh restructuring was high at INR26bn, taking outstanding standard restructured book to INR343bn (9.5%; further pipeline of INR6.5bn), resulting in total stressed assets of >15%-highest among PSU peers.

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https://www.edelweiss.in/research/Punjab-National-Bank--Mounting-Stressed-Assets-Rock-The-Boat;-Result-Update-Q3FY15/28231.html