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Punjab National Bank 2QFY2013 performance highlights and results update

Contributed by Angel Broking

Punjab National Bank (PNB) registered a disappointing performance for 2QFY2013, with its net profit declining by 11.6% yoy. The bankRs.s disappointing performance was a result of a muted performance on the operating front (operating profit came in flat yoy) and considerably higher provisioning expenses on the back of significant deterioration in the asset-quality, evident from elevated slippages (quarterly slippages at a high of 6.2%) and ballooned restructuring.

NIM declines sequentially, slippages surge: During 2QFY2013, advance for the bank grew by healthy pace of 18.4% yoy aided by strong traction in services and retail lending. Growth in CASA deposits came in healthy at 15.6% yoy (current deposits grew by 19.2% yoy, while savings deposits grew by 14.8% yoy). Reported CASA ratio improved by 170bp sequentially to 37.0%. Interest reversal of Rs.163cr on slippages and full effect of base rate reduction, resulted in a 43bp qoq decline in the yield on advances, which coupled with a 6bp qoq decline in yield on investment, resulted in a10bp qoq decline in reported NIMs to 3.5%. Non-interest income (excl. treasury) de-grew by 2.4% yoy, due to flat performance on the fee income front and lower recoveries. During the quarter, the bank disappointed on the asset quality front, with slippages of Rs.4,544cr compared to Rs.2,769cr in 1QFY2013 and Rs.2,819 in 4QFY2012. Annualized slippage ratio came in at 6.2% compared to 3.8% in 1QFY2013 and 4.7% in 4QFY2012. Recoveries and upgrades during the quarter came in much lower at Rs.492cr compared to Rs.1,466cr in 1QFY2013. Consequently, the gross and net NPA levels increased significantly, on an absolute basis, by 40.4% and 60.3%, qoq respectively. Going ahead, the management expects slippages to continue in-line with the slowing economy. The bank restructured ~Rs.2,770cr during the quarter, thereby taking its outstanding restructured book to Rs.27,852cr.

Outlook and valuation: The bank's valuations are currently at a low of 0.8x FY2014 ABV compared to its eight year range of 1.0—1.6x and median of 1.4x, due to the asset quality concerns facing the sector, which are likely to persist for the next few quarters for lack of visible macro-economic catalyst for improvement in the near term. We have adjusted our estimates and target price downwards to factor in the continued asset quality deterioration. The bank structurally has lower cost of deposits than peers and has cyclically already experienced relatively higher asset quality pain than peers. That said, valuation-wise, the stock trades at even below the lower end of its historical range, factoring in most of the fundamental concerns. Hence, we recommend an Accumulate with a target price of Rs.843.