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Punjab Nat. Bank: NIMs see a dip

Feb 7, 2013

Punjab National Bank (PNB) declared its results for the third quarter for the financial year 2012-2013 (3QFY13). The bank has reported 11% YoY and 13.5% YoY growth in interest income and net profits respectively for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 11% YoY in 3QFY13, on the back of a 13% YoY growth in advances.
  • Net interest margin (NIM) sees a decline to 3.5% from 3.9% in 9mFY12.
  • Net NPA (non-performing assets) to advances comes in higher at 2.56% in 9mFY13 from 1.1% in 9mFY12.
  • Other income improves by 1.7% YoY in 3QFY13. Fee income falls by 10% YoY on lower fees, exchange profit etc. The bank was also able to book higher income from new Metlife Insurance JV.
  • Capital adequacy ratio currently stands at 11.66% at the end of 3QFY13 from 11.5% at the end of 3QFY12 as per Basel II norms.

Standalone financial performance
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 94,810 105,485 11.3% 267,483 315,145 17.8%
Interest expense 59,444 68,151 14.6% 166,438 204,367 22.8%
Net Interest Income 35,366 37,333 5.6% 101,045 110,778 9.6%
Net interest margin (%)       3.9% 3.5%  
Other Income 9,541 9,705 1.7% 29,266 30,419 3.9%
Other Expense 18,143 20,219 11.4% 53,530 60,641 13.3%
Provisions and contingencies 9,461 8,016 -15.3% 25,499 29,079 14.0%
Profit before tax 17,303 18,803 8.7% 51,282 51,478 0.4%
Tax 5,803 5,747 -1.0% 16,681 15,309 -8.2%
Effective tax rate 33.5% 30.6%   32.5% 29.7%  
Profit after tax/ (loss) 11,500 13,056 13.5% 34,601 36,169 4.5%
Net profit margin (%) 12.1% 12.4%   12.9% 11.5%  
No. of shares (m)         339.2  
Book value per share (Rs)*         884.0  
P/BV (x)         1.0  
* (Book value as on 31st December 2012)

What has driven performance in 9mFY13?
  • Staying slightly below the sector average in terms of growth, PNB kept its focus on loan growth in the SME and retail segments. The bank managed a 13% YoY growth in advances in 9mFY13, despite a tough credit environment.

  • The growth of 8% YoY in deposits was led by higher growth in CASA during the past nine months. The proportion of bulk deposits (deposits in excess of Rs 10 m, parked by corporates having surplus funds) has decreased to 15.3% in 9mFY13 from 24% previously. This is in line with RBI guidelines for banks to reduce dependence on these expensive deposits. The growth in the CASA (low cost deposit base) came in at a decent pace, at around 13% YoY. The proportion of CASA also increased to 37% from 35% previously.

  • The bank's NIMs saw a decline from 3.9% at the end of 9mFY13 to 3.5% currently mainly on account of an interest income reversal. The bank has been reducing its bulk deposit base, which will be NIM accretive going forward. Post the monetary easing announcement by the RBI the bank reduced its base rate by 0.25% which will impact yields. However, the bank expects to sustain its NIMs at around 3.5% as per its guidance. It may have to divest some portion of its SLR investments which stands at 30% as opposed to a regulatory limit or 23% and invest this in expanding the credit portfolio.

    Healthy growth in retail and SME...but deposit growth slows
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 2,626,050   2,973,130   13.2%
    Agriculture 383,060 14.6% 417,500 14.0% 9.0%
    Retail 260,090 9.9% 302,950 10.2% 16.5%
    Housing 123,720 4.7% 149,390 5.0% 20.7%
    MSME 268,430 10.2% 311,860 10.5% 16.2%
    Large corporate 884,120 33.7% 942,170 31.7% 6.6%
    Deposits 3,565,170   3,857,850   8.2%
    CASA 1,259,660 35.3% 1,424,420 36.9% 13.1%
    Tem deposits 2,305,510 64.7% 2,433,430 63.1% 5.5%
    Credit deposit ratio 73.7%   77.1%    

  • Other income in 9mFY13 saw a tepid 3% increase on a YoY basis. Income from ATM operations, insurance and mutual funds, bills and remittances and forex income saw an increase. However processing fees saw declines as most banks have been cutting fees income in order to attract customers and general lack of corporate demand.

  • The overall delinquency rate for the bank continues to show signs of stress at the gross and net levels. However, the bank has been able to contain fresh slippages and has shown a sustained focus on recovery. NPAs went up at the gross level from 2.42% in 9mFY12 to 4.61% at the end of 9mFY13. However it has reduced sequentially from the 4.66% levels in 1HFY13. At the net level from 1.11% in 9mFY12 to 2.56% currently (2.69% in 1HFY13). The bank had one of the highest provision coverage ratios (of 81%) in the sector two years back. However, it has now come down from those levels. At 56% of gross NPAs, the provision coverage is poor. However the bank wants to increase it going forward. The bank saw Rs 30 bn in fresh slippages during the quarter, none of which was from realty sector.

  • The bank has a 19.7% exposure to the infrastructure space, with around 10.4% coming from the power space. The power sector is definitely one of the stress sectors; especially the distribution companies. State electricity boards (SEBs) have been bleeding, and the power ministry has come down strictly on banks not to fund their cash losses. However, a bailout plan has now been set in place involving the banks and the state government. Around 25% of the incremental disbursements in the power space were towards financing working capital requirements of the troubled discoms.

  • PNB saw fresh restructuring of Rs 25 bn during the quarter. Cumulatively since April '12 Rs 67.4 bn was restructured. Its slippages as a percentage of its restructured portfolio stood at 12.8% at the end of 3QFY13. Total restructured loans are in excess of Rs 303.3 bn till December 2012 and contribute 10% to total gross advances. Plus there is some further restructuring in the pipeline on account of the continued stress in the economy. Restructuring was driven by Suzlon, infra (especially in the power space), chemicals and fertilizers, and the hotel space.

  • Capital adequacy ratio currently stands at 11.66% at the end of 3QFY13 from 11.5% at the end of 3QFY12 as per Basel II norms. Tier 1 ratio stands at 8.62%. If the 9 month profit is ploughed back upto Dec'12, the CRAR works out to 12.81% with Tier-I capital at 9.78%. The bank expects a Rs 12.5 bn equity infusion from the government which help further boost the capital adequacy ratio.

What to expect?
At the current price of Rs 881, the stock is valued at 1 time our estimated FY15 adjusted book value. Sharp deterioration in asset quality and a ramp up restructuring activity was a huge dampener on the bank's performance over the past few quarters. However the bank has now stepped up recovery efforts and has seen some improvement on account of the same. The bank saw its profits eroded on account of increased NPA provisioning (on account of aging of NPA) and heightened provisioning on account of restructured assets. Even at the operating level the performance was muted on account of interest income reversal on NPAs.

Technological up gradation, increased reach and ability to sustain attractive margins are however key to the bank's healthy growth prospects. In light of monetary easing, the bank should be able to sustain margins at 3.5% as per management expectation, despite lower yields. PNB has, however seen stress on the NIM front since last year (on account of a drop in yields and income reversal), and accretion to the CASA base remains a concern. However, the bank has reduced costly bulk deposits, which will help in improving profitability and margins going forward.

The increase in corporate restructuring is our lingering concern with regard to the bank, especially since the stress is still not over at it amounts to 10% of gross advances. Exposure to the infra sector, especially power is a concern. PNB has restructured most of its SEB debt last year, and expects further restructuring going forward on some other accounts. While these restructured accounts may not necessarily turn NPA (slippages of the restructured book into NPA remain high), they attract higher provisioning, thus impacting profits. On the plus side PNB has been prudent in addressing this issue in a quick manner and has been focusing on recoveries and up-gradation. The overall stress in the economy has contributed to the slippage in asset quality, and it is being seen across the board. Until the economy seems some sustained improvement, the bank may continue to see some stress. We appreciate the fact that the bank has opted for structural changes in the balance sheet including a focus on retail loans as well as a reduction in bulk deposits which will benefit the bank in the long run. We reiterate our Hold view on PNB from a long term perspective, provided exposure to it is less than 2 to 3% of one's overall portfolio. Also one needs keep track of the bank's quarterly performance on the asset quality front.

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