Weak quarter; better play on economic revival • PNB :ICICI Securities, report

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Weak quarter; better play on economic revival • PNB’s asset quality woes continued while PAT was in line largely supported by higher treasury gains & write back in MTM provisions • PAT rose 2.5% YoY (35% QoQ) to | 775 crore vs. estimate of | 764 crore supported by strong rise in other income of 37.5% YoY to | 1291 crore. Treasury gains were robust at 69% QoQ to | 211 crore • Provisions dipped to | 1468 crore vs. | 1768 crore in Q2 owing to | 445 crore write-back in investment book MTM provision. The asset quality deterioration was higher than estimated. Absolute GNPA increased from | 20752 crore to | 22211 crore QoQ. There was a sharp increase in the NNPA ratio QoQ from 3.26% in Q2FY15 to 3.82% as on Q3FY15 • Slippages were higher at | 4575 crore vs. | 3616 crore in Q2FY15 while fresh RA was at | 2558 crore vs. | 3297 crore in Q2FY15 • Credit and deposits grew at 11% and 15% YoY, respectively. NIM rose to 3.21% from 3.18% QoQ despite NPA pressures Third largest PSU bank, grappling with surge in NPA, RA PNB is the third largest bank in terms of advances among PSU banks (| 362496 crore) with 4.85% market share, declining from 5.45% in September 2010. It lost the No.2 position to BoB. PNB has an extensive branch network of >6200 branches, with 50% in rural areas giving it unparalleled advantage of domestic CASA of ~40% since FY07 and consequent lower CoF. This has kept NIM high at ~3.5-4%. The bank grew credit at 23-29% in FY06-11 and at 16.3% CAGR in FY10-13. Loss of market share in deposit & loans happened due to a change in focus to manage rising NPAs (5.2% of credit from 1.9% in September 2010). This impacted profit significantly over time. Margins improving, profit ratios to remain muted PNB has been in a consolidation stage in FY14, when credit grew 13.1% YoY to | 349269 crore. The loan book is dominated by the large corporate (26%) & MSME (13.4%) segment and has 10% in international. We have revised our FY15E credit estimate lower to 13% YoY from 15% earlier. On the deposit front, we saw 18.2% CAGR to | 346510 crore in FY10-13 while FY14 growth was 15.3%. Over FY14-16E, we expect 14% CAGR in deposits. Going ahead, the management guided for NIM to be maintained at ~3.2-3.3%. We expect NII to grow at a marginal 9% CAGR to | 19347 crore after growth of 21% in FY10-13. PAT traction was also revised lower to 14% CAGR in FY14-16E vs. 17% earlier to reach | 4310 crore by FY16E. Asset quality under pressure relative to large peers The restructured book (RA) has grown from | 10000 crore to | 35000 crore in FY10-14, | 34333 crore as on Q3FY15 (9.5% of advances vs. ~6- 7% for industry). The GNPA ratio in the past seven years has risen from lows of 1.6% to 5.97% at | 22211 crore. We expect GNPA and NNPA ratios to hover around~5% and 2.9%, respectively, by FY16E. Maintain BUY from long term perspective but reduce target price PNB had highest RoA, RoE among PSU banks in FY08-10 but took a huge knock as deteriorating asset quality led to elevated provisioning. Return ratio improvement is unlikely in the near term on provision for stressed assets. PNB will be a major beneficiary of MTM reversal on investment book (AFS book proportion of 29%). We have raised our NPA estimates further and, accordingly, the provisioning cost. Our PAT CAGR over FY14- 16E dips to 14% from 17% earlier. We maintain BUY from a long term perspective but reduce TP to | 215 based on 1.2x FY17E ABV of | 179.

LINK
http://content.icicidirect.com/mailimages/IDirect_PNB_Q3FY15.pdf