Punjab National Bank – (Q2 FY12)

• Loan growth remained modest; deposit growth continue to be strong
• NIM expansion was better than expected; guidance factors some margin compression 
• Core fee income declines sharply on sequential basis; C/I ratio deteriorates 
• Asset quality continues to be weak; capital adequacy remains reasonable 
• Valuation re-rating unlikely in near term; Retain Market Performer

Loan growth remained modest; deposit growth continue to be strong

Against our expectation of 3-4% qoq growth, PNB’s loan book grew lower by 2.5% qoq. On yoy basis, growth momentum moderated further to 19% yoy (23.5% in Q1 FY12 and 30% in Q4 FY11). Growth in large corporate segment (3.6% qoq and 25% yoy) continues to be better than overall bank. Deposits growth remained buoyant, better than advances, at 5.5% qoq (25% yoy) mainly driven by substantial mobilization of retail TDs (9% qoq) due to high rates offered. Share of bulk deposits declined marginally to 23.7% while CASA share was lower by nearly 100bps at 36%. The C/D ratio deteriorated for yet another quarter to 73%. On account of modest credit expansion in H1 FY12, we believe that it would be difficult for PNB to grow ahead of the system in FY12.

NIM expansion was better than expected; guidance factors some margin compression    

PNB’s NIM improved sequentially by 11bps to 4% driven by significant improvement in YoA (50bps) and contained increase in CoD (20bps qoq). Yield improvement was aided by material lending rate hikes before and during the quarter and lower-than-expected increase in deposits cost could have been driven by beneficial re-pricing on bulk deposits. Management guidance on NIM continues to be conservative at 3.5% implying that bank would be hesitant in passing further funding cost increases and also higher emphasis to be laid on growth going ahead.    

Core fee income declines sharply on sequential basis; C/I ratio deteriorates

Driven by lower processing fees and muted LC/LG income (both impacted by modest credit expansion in H1), core fee income of the bank declined by sharp 18% qoq. Trading profit (Rs530mn) was nearly flat on sequential basis while recovery in written-off accounts was significantly lower (Rs0.8bn v/s Rs1.1bn). Overall opex growth was modest at 5% qoq despite the sharp increase in non-employee cost. C/I ratio deteriorated by 80bps qoq to 41.8% on account of lower other income.

Asset quality continues to be weak; capital adequacy remains reasonable  

PNB slippages were material at ~1.6% during Q2 FY12 pushing up absolute GNPL 5% qoq. GNPL ratio increased to 2.1%, the top-end of bank’s guidance. Of the Rs10bn fresh additions during the quarter, Rs1.7bn (Rs2.8bn in Q1 FY12) was slippage from the restructured book. There was substantial increase (~Rs41bn) in the bank’s restructured book; currently standing at significant 8% of advances (one of the highest in the sector). One of the large restructuring done during the quarter was of TNEB exposure worth ~Rs17.5bn. The entity has now been given five years to repay the loan (no moratorium and interest rate reduction). With LLP at Rs3.2bn, credit cost was modest at 0.5% (0.9% in the previous quarter). There was substantial increase in provisioning for standard restructured assets (at Rs790mn) and investment depreciation (Rs1.61bn, partly higher due to conservatism). We expect credit cost to materially increase in coming two quarters as asset quality would likely remain weak. Including Q2 FY12 plough backs, CAR stood at 13.2%; should be able to support bank’s medium-term growth objective.

Valuation re-rating unlikely in near term; Retain Market Performer

Overall, PNB’s results were a mixed-bag with key negatives being muted credit growth, lower other income, higher loan restructuring and key positives being significant NIM expansion and lower LLP. The critical concern for PNB is with regards to asset quality given alarming restructured assets and bank’s higher exposure to troubled sectors of infrastructure (power) and real estate. Though the return profile of the bank is likely to remain better than many other public banks, valuation is unlikely to re-rate significantly in near-term. We maintain Market Performer rating with price target of Rs1,090.