Dear Friends,
We are recommending Buy on our Actionable Ideas "Punjab National Bank" as per following:-
CMP: Rs 75 Target: Rs 85 (13% Upside)
Key Points:
Punjab National Bank: Q3FY2019 result update: Results surprise in a positive manner
· Back in the black: Punjab National Bank's (PNB) Q3FY2019 results surprised positively. improvement especially with respect to asset-quality performance. Hence, during Q3FY2019, the bank saw lower slippage run rate, which positively reflected in lower provisions and reduction in NPAs. Notably, despite fully providing for the fraud (in the gems and jewellery sector), PNB's provisions came lower sequentially, indicating a strong recovery pipeline for the bank. Also, the low residual slippage run rate indicated an improved outlook. Net interest income (NII) for the quarter increased by modest 7.6% y-o-y to Rs. 4,290 crore because of lower slippages rate and shift in asset mix. Overall non-interest income (OI) reduced by 41% y-o-y to Rs. 1,819.2 crore. Notably, there was a one-time gain trading profit of Rs. 1,231 crore from stake sale in PNB Housing Finance (PNBHF) to PNB during Q3FY2018. Hence, y-o-y comparison is strictly not meaningful. Net of that, other income (OI) performance, considering the low asset growth phase, is not too bad. Fee income declined a tad by 5.7% y-o-y to Rs. 1,005 crore, mainly impacted by lower forex income (down 50.7% y-o-y) to Rs. 100 crore and lower LC/BG fees (down 20.3% y-o-y) to Rs. 153 crore. Domestic advances registered decent growth of 6.7% y-o-y to Rs. 4,58,641 crore, wherein retail advances grew by 15% y-o-y to Rs. 85,766 crore and Share of Small Ticket Advances stood at 54.4% y-o-y. Domestic net interest margin (NIM) stood at 2.64% for 9MFY2019 from 2.59% in 9MFY2018, helped by decent advances growth and lower interest reversals pressures. Helped by improved revenue, cost-to-income ratio (C/I) declined by 70 BPS y-o-y to 49.3%, as a result of which the pre-provisioning profit stood at Rs. 3,009 crore, down by 27.4% y-o-y. We find that though PNB continues to have an elevated NPA position, it is seeing strong recovery traction, which has helped it offset with the elevated provisioning requirements during this quarter as well. Hence, provisions declined by 38.3% y-o-y and 71.8% sequentially to Rs. 2,753 crore.
· Decline in provisions helped profitability: However, notably, even though during Q3FY2019, PNB had made provision of Rs. 2,014.04 crore (Rs. 3,295 crore in Q2FY2019), thereby making full provision for the fraud under the gems and jewellery segment, its provisions were still lower sequentially as well as on a y-o-y basis. Moreover, strong recovery and a write-back of provision of Rs. 162.84 crore (NIL in Q3FY2018) for the 22 accounts under the provisions of Insolvency and Bankruptcy code (IBC) helped the bank maintain the provisions run rate under check. Going forward, management indicates that most of the large accounts have already been identified and does not expect a significantly large negative surprise in the near term on the asset-quality front. The provision coverage ratio has been increasingly improving; and at 68.85%, it is one of the highest among comparable peers.
· Asset quality improves: During the quarter, PNB reported improvement in its asset quality, as GNPA ratio declined by 83 BPS q-o-q to 16.33%, while net NPA declined by 68 BPS q-o-q to 8.22%. Even on an absolute basis, GNPA and NNPA ratios declined by 4.33% and 6.8%, respectively. Fresh stress accretion during the quarter declined sequentially as gross slippages were worth Rs. 3,988 crore, as against Q2FY2019 in Rs. 5,644 crore and Rs. 7,363 crore in Q1FY2019. Recoveries and upgrades for the quarter stood at Rs. 2,967 crore (Q2 was Rs. 2,321 crore) and Rs. 1,457 crore (Q2 was Rs. 1,418 crore), respectively. The bank has exposure of ~Rs 300 crore towards a beleaguered infrastructure finance conglomerate, which has dwindled down and is less of an overhang now. Total exposure to NCLT accounts is of Rs. 36,367 crore (includes list 1, list 2, and others). The bank has provision coverage of 75% in NCLT-related accounts, while overall PCR stands at 68.85% (up from 66.92% in Q2FY2019).
· Capital management, non-core asset divestment important: PNB has been successfully able to reduce its Risk Weighted Assets (RWA) growth by focusing on tweaking its portfolio mix towards better rated and less risky asset class. While this will sustain for some time, we believe going forward, capital infusion/sale of non-core assets will be necessary for the bank in the near to medium term. Management has indicated that stake sale of non-core assets is in various stages of development, while some development may be expected about PNBHF in the near term as well, which will be helpful in shoring up Capital Adequacy (CRAR at 10.52% and Tier-1 at 8.25%) of the bank.
· Outlook: PNB had come close to being placed under the Reserve Bank of India's (RBI) prompt corrective action (PCA) framework, but its recent recovery and controlled slippages have helped it in avoiding it. Following the fraud, PNB has done significant amount of business and process enhancement/upgradation to mitigate operational and credit risk, which we believe is a positive. Underwriting standards as well as risk management are much needed in most PSU Banks, and PNB improving on those parameters is a positive. Going forward, considering the capital position and asset-quality scenario, we opine it would be safe to assume a muted growth outlook for the bank, with more effort on capital conservation for the near term. We believe further resolution/recovery in NCLT exposures as well as other corporate/infrastructure exposures can be positive triggers for the banking industry as a whole, including PNB; however, as of now, more clarity is awaited. Hence, we expect margins to remain range bound. While, on one side, reducing stress asset and MCLR hikes would help, risks of chunky slippages/haircuts are present in the near term, which need to be monitored closely. Moreover, progress on non-core divestment will be keenly monitored for PNB.
· Valuation: PNB trades at reasonable valuations of <1x its FY2020E book value, as valuations reflect market concerns over growth and asset performance. However, considering the asset-quality outlook has improved for the bank, we upgrade our rating to Buy on the stock with a revised price target (PT) of Rs. 85.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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