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Punjab Nat. Bank: Earnings profile weakens - Views on News from Equitymaster

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Punjab Nat. Bank: Earnings profile weakens
Feb 21, 2014

Punjab National Bank (PNB) declared its results for the third quarter (3QFY14) for the financial year 2013-2014. While the net interest income increased by 13.1% YoY for the quarter, the net profits declined by 42.1% YoY. For 9mFY14, the profits declined by 29.9% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 13.1% YoY in 3QFY14, on the back of modest 9.7% YoY growth in advances.
  • Other income too declined by 3.5% YoY in 3QFY14. But it grew 4.4% YoY during 9mFY14.
  • The profitability for the quarter has declined by higher percentage of 42.1% YoY and down 26.9% YoY for 9mFY14 on account of dramatic rise in provisions.
  • Net NPA (non-performing assets) to advances comes in higher at 4.96% in 3QFY14 from 4.61% in 3QFY13. On sequential basis, the NPAs have moved down for the quarter.
  • Capital adequacy ratio currently stands at 11.02% at the end of 3QFY14 as per Basel III norms.

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 105,273 109,839 4.3% 315,092 321,219 1.9%
Interest expense 67,954 67,628 -0.5% 204,367 199,778 -2.2%
Net Interest Income 37,318 42,211 13.1% 110,725 121,442 9.7%
Net interest margin (%)       3.5 3.6  
Other Income 9,720 9,384 -3.5% 30,472 31,798 4.4%
Other Expense 20,219 24,572 21.5% 60,641 71,130 17.3%
Provisions and contingencies 8,016 15,900 98.4% 29,079 45,553 56.7%
Profit before tax 18,803 11,123 -40.8% 51,478 36,558 -29.0%
Tax 5,747 3,569 -37.9% 15,309 11,196 -26.9%
Effective tax rate 30.6% 32.1%   29.7% 30.6%  
Profit after tax/ (loss) 13,056 7,554 -42.1% 36,169 25,362 -29.9%
Net profit margin (%) 12.4% 6.9%   11.5% 7.9%  
No. of shares (m)         362.1  
Book value per share (Rs)*         936.9  
P/BV (x)         0.5  
* (Book value as on 31st December 2013)

What has driven performance in 3QFY14?
  • Succumbing to asset quality pressures, country's third largest bank continues to observe sharp fall in profitability. Mirroring the current subdued economic scenario, like many other public sector banks Punjab National Bank has witnessed stress in asset book and earnings.

  • The profits for the quarter shrunk 42.1% YoY on account of increased provisioning and higher cost inefficiencies. The profits for 9mFY14 were seen down by 29.9% YoY.

  • Followed by poor earnings growth is the weak business growth of the company. The advances for the quarter grew by mere 10.1% YoY driven by growth in MSME and retail segments. The loan growth in the large corporate segment remained sluggish and reported mere 7.3% YoY growth.

    MSME growth picks up…deposit growth continues to remain sluggish
    (Rs m) 3QFY13 % of total 3QFY14 % of total Change
    Advances 3,037,590   3,345,810   10.1%
    Agriculture 417,500 13.7% 441,490 13.2% 5.7%
    Retail 306,950 10.1% 360,660 10.8% 17.5%
      Housing 137,150 4.5% 160,050 4.8% 16.7%
    MSME 358,940 11.8% 436,610 13.0% 21.6%
    Large corporate 873,160 28.7% 936,570 28.0% 7.3%
    Deposits 3,857,850   4,206,470   9.0%
    CASA 1,424,420 36.9% 1,609,610 38.3% 13.0%
    Tem deposits 2,433,430 63.1% 2,596,860 61.7% 6.7%
    Credit deposit ratio 78.7%   79.5%    

  • While the CASA ratio stood moderately higher on YoY basis at 38.3%, the CASA and total deposit traction was not satisfactory. The total deposits grew 9% YoY supported by 13% growth in CASA base.

  • The tepid loan growth translated into 13.1% YoY increase in net interest income for the bank. Lower costs on funds did help in boosting the net interest income performance of the bank. Further supported by CASA growth, the margins for the company improved to 3.6% in 3QFY14 from 3.5% same quarter a year ago. However, lower yields restricted the margins growth. Given the subdued market conditions, the margin pressures stand imminent for the bank.

  • The other income proved to be a disappointment during 3QFY14 on account of weak core non-interest income performance. The core non-interest income barely grew 5.6% YoY. That said, the trading profits during the quarter stood higher restricting further fall in non-interest income for the bank.

  • One of the major drag on profitability were the higher operating costs reported during 3QFY14. The operating expenses jumped 21.5% YoY primarily due to higher administrative expenses. As a result, the cost-income ratio for the company spiked to 48% in 3QFY14 from 43% same quarter a a year ago.

  • Besides, the steep increase in provisioning expenses marred the profitability of the bank during 3QFY14. The provisions for the quarter spiked as high as 98.4% YoY. The provisions towards NPAs stood on the higher side leading to increase in overall operating expenditure.

    The fact that the gross NPAs have touched 5% mark during 3QFY14 and the net NPAs at around 3% make the asset quality of the bank highly vulnerable. With continued exposure to beleaguered sectors of the economy such as power and infrastructure, metals and textiles, the credit quality pressures are not expected to abate soon. Moreover, fresh slippages at Rs 62.6 bn still look higher and the recoveries still stand inadequate for the bank. Moreover, PNB's coverage ratio at around 59% levels is not quite encouraging. To add to that, the cumulative restructured stock at Rs 312.9 bn also add to the asset quality woes of PNB. With continued economic slowdown and barely any respite on bad loans, PNB's asset quality would continue to weigh down the earnings profile of the bank.

  • Poor asset quality and earnings fall has depressed the return ratios of the bank. With RoE at 8.9% and RoA at 17.4%, PNB has reported lowest return ratios ever.

  • The capital adequacy ratio at 11.02% (as per BASEL III norms) may prove inadequate if the situation is to worsen further. Also given the successive fall in earnings QoQ, this probability cannot be ruled out.
What to expect?
At the current price of Rs 536, the stock is valued at 0.5 times our estimated FY16 adjusted book value.

Given the rough patch that the macro economy is undergoing, PSU banks have been the biggest victims. And PNB is no exception to that. Being the country's third largest lender, the bank has been facing asset quality issues on account of its exposure to infrastructure and other stressed segments. As a result, the provisions against the bad loans have also stood higher, hampering the overall profitability of the company. The restructured pipeline has also exacerbated its woes.

Moreover, rising wage and pension costs coupled with other expenses and poor income base has together marred the cost metrics of the bank.

We would prefer to wait and watch particularly the shaping up of asset quality of the bank in the light of tough macroeconomic environment. Hence, we reiterate our Hold view on PNB from a long term perspective, provided exposure to it is less 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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