CMP Rs716, Target Rs830, Upside 15.9%
Sequentially flat advances; deposit profile improves
NIM improvement came as surprise; likely to weaken in coming quarters
Core fee income growth sluggish; C/I ratio reverts to above 40%
Deterioration in asset quality continues; outlook remains perturbing
Asset quality issues to act as an overhang on stock
As per our expectation, PNB’s loan book was flat qoq and represented a growth of 21% yoy. While domestic advances marginally declined qoq, international advances witnessed strong expansion of 20%. Within domestic credit, large manufacturing, MSME manufacturing and agriculture segments witnessed sequential contraction of 3-4% qoq. During FY13, PNB intends to focus more on consolidation than balance sheet expansion and therefore loan growth is likely to be near that of the system. Aided by continued robust traction in retail TDs (6% qoq/33% yoy), the overall deposits growth stood healthy at 19% yoy. Bank shed some bulk deposits with its share declining to 22%. Though savings growth was decent at 13% yoy, the current account balances declined sharply on qoq basis as witnessed by many other banks. CASA ratio came-off by 70bps qoq to 34.6%.
NIM expansion of 10bps qoq to 3.6% came as a positive surprise as we expected a similar contraction. While the cost of deposits increased as expected, higher loan yield (despite substantial slippages and 25bps base rate cut in April) and material improvement in investment yield pushed margin higher. NIM outlook remains weak in the medium term as advances are likely to re-price faster than deposits in rate cut cycle. Against 3.8% earned in FY12, the bank has guided for NIM of 3.5% for FY13.
Fee income growth excluding forex (up 62% yoy) was weak at 9% yoy. Sequentially, it was higher by 4% driven by seasonality in the booking of processing fees (up 100% qoq/6% yoy). Trading profit was substantially lower at Rs880mn v/s Rs1.6bn in the previous quarter. Opex jumped qoq by 23% on higher employee benefits provisioning. From Q1 FY13, the bank has started providing for pension and gratuity liability based on actuarial valuation (earlier it was done towards the end of the year with provisioning being adjusted accordingly in Q4). Further actuarial assumptions have been updated with wage increases likely from November. C/I ratio therefore reverted to a more normalized level of 41% from 36% in Q4 FY12.
Against expectation of Rs15-16bn, PNB reported significantly higher slippages at Rs27bn representing an annualized delinquency ratio of near 4%. There was no lumpiness in slippages (Top 7 accounts contributed Rs10bn) and were largely diversified across sectors. GNPL ratio deteriorated significantly to 3.3%. PNB indicated that elevated slippages could continue in coming quarters due to weak economic conditions. Restructuring during the quarter was modest at Rs12bn in comparison to previous three quarters - Rs86bn in Q4 FY12, Rs19bn in Q3 FY12 and Rs41bn in Q2 FY12. The outstanding restructured book stood at Rs255bn, a substantial 8.7% of advances. Credit cost remained high at 1.2% in response to substantial slippages while provisioning for restructured assets was significantly lower. PCR was stable at 63% and Net NPL ratio increased to 1.7%. With slippages outlook perturbing and a low PCR, credit cost is likely to remain near 1% during the remainder of FY13.
With a view of continued stress on asset quality of PNB, we cut BV estimates of FY13/14 by 10-11%. Though our lowered 9-month target price of Rs830 implies an upside, the stock is unlikely to perform in the near term with perturbing NPL outlook acting as an overhang.