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Punjab Nat. Bank: Profits continue to decline - Views on News from Equitymaster

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Punjab Nat. Bank: Profits continue to decline
May 14, 2014

Punjab National Bank (PNB) declared its results for the fourth quarter (4QFY14) and the financial year 2013-2014. While the net interest income grew 6.0% YoY for the quarter, the net profits dropped 28.7% YoY. For full year FY14, the profits decline 29.6% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 6.0% YoY in 4QFY14, on the back of 13.1% YoY growth in advances.
  • Other income grows 18.8% YoY in 4QFY14, and modest 8.4% YoY for FY14
  • Margins decline to 3.4% in FY14 from 3.5% a year ago.
  • Provisions spike 44.7% YoY during 4QFY14.
  • Consequently, profits decline 28.7% YoY for 4QFY14, while for full year FY14, profits seen down by 29.6% YoY.
  • Net NPA (non-performing assets) to advances comes in higher at 2.85% in FY14 from 2.35% in FY13, but gross NPA still came higher at 5.25% during FY14.
  • Capital adequacy ratio currently stands at 11.52% at the end of FY14 as per BASEL III norms.

Financial Performance : A snapshot
Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 103,766 111,013 7.0% 418,858 432,233 3.2%
Interest expense 66,001 70,995 7.6% 270,368 270,773 0.1%
Net Interest Income 37,765 40,018 6.0% 148,490 161,460 8.7%
Net interest margin (%)       3.5% 3.4%  
Other Income 11,762 13,969 18.8% 42,234 45,767 8.4%
Other Expense 21,010 22,253 5.9% 81,651 93,382 14.4%
Provisions and contingencies 14,777 21,387 44.7% 43,856 66,939 52.6%
Profit before tax 13,740 10,347 -24.7% 65,218 46,905 -28.1%
Tax 2,432 2,283 -6.1% 17,741 13,479 -24.0%
Effective tax rate 17.7% 22.1%   27.2% 28.7%  
Profit after tax/ (loss) 11,308 8,064 -28.7% 47,477 33,426 -29.6%
Net profit margin (%) 10.9% 7.3%   11.3% 7.7%  
No. of shares (m)         362.1  
Book value per share (Rs)*         991.4  
P/BV (x)         0.8  
* (Book value as on 31st March 2014)

What has driven performance in FY14?
  • The country's third largest bank has reported a dissapointing earnings performance for the year FY14. While this comes as no surprise, asset quality issues continue to weigh down the earnings quality of PNB. And therefore, the FY14 profits fell 30% short of our estimates. That said, we were positively surprised with the better than expected core earnings performance.

  • The advances for FY14 have grown by healthy 13.1% YoY. Unlike FY13, the credit growth for FY14 has improved and getting closer to the industry average. Robust growth in agri, retail and MSME segments boosted the credit growth for the bank during the year. The large corporate segment has grown by modest 8.8%; however its share to the total loan portfolio remains almost stable. The overseas loan growth has remained buoyant and has grown 26% YoY.

  • The deposits for the year have grown by strong 15.3% YoY during FY14. While the low-cost deposits growth did not stand quiet encouraging, the CASA ratio stood at 38.3% for the year.

    Agri growth picks up...CASA growth remains sluggish
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 3,087,959   3,492,691   13.1%
    Agriculture 380,550 12.3% 530,530 15.2% 39.4%
    Retail 317,210 10.3% 388,640 11.1% 22.5%
    Housing 143,320 4.6% 170,380 4.9% 18.9%
    MSME 375,930 12.2% 464,990 13.3% 23.7%
    Large corporate 878,220 28.4% 955,140 27.3% 8.8%
    Deposits 3,915,600   4,513,970   15.3%
    CASA 1,533,440 39.2% 1,728,720 38.3% 12.7%
    Tem deposits 2,382,160 60.8% 2,785,250 61.7% 16.9%
    Credit deposit ratio 78.9%   77.4%    

  • The NII has grown by 6.0% YoY for 4QFY14, while for full year the growth has been reported as 8.7% YoY. Margins were seen down to 3.2% during 4QFY14 from higher levels of 3.5% same quarter a year ago. Lower yields and higher costs restricted the margins expansion during the quarter. Write-back of slippages has impacted the yields which in turn dampened the margins for the quarter. The yields for the quarter also were strained on account of rationalization of card rates. The bank aims to give certain concessions in interest rates to the existing well-rated borrowers. Nonetheless, for the full year the margins have turned out to be healthy at 3.44% and the management is confident to sustain above 3.25% levels going forward. We estimate the bank margins to hover around 3.2%-3.25% for the next two years as the bank continues to consolidate its book in tune with the tough environment.

  • The company put up a decent show for other income during 4QFY14. Backed by robust 17.6% YoY improvement in core non-interest income and healthy growth in processing fees, the other income have grown by 18.8% YoY during 4QFY14.

  • The operating costs have increased by modest 5.9% YoY during 4QFY14, and 14.4% YoY for the full year. Wage-related provisions and the change in mortality tables have beefed up the employee costs. The cost-income ratio stood at 41% during 4QFY14.

  • We did mention in the 3QFY14 earnings update that the asset quality pressures will continue to haunt the earnings performance of PNB. And 4QFY14 stood no different. The rising trend of NPAs continues and the gross NPAs have stood at as high as 5.25% as at the end of March 2014, up from 4.27% a year ago. The net NPAs too have got closer to 3% levels and stood at 2.85% during FY14. The total slippages have stood at Rs 44.5 bn for 4QFY14; consisting of Rs 41.9 bn of fresh slippages and Rs 2.6 bn of additional slippage. Iron and steel, pharma, textiles, food processing are the sectors that witnessed higher slippages for the bank. The stock of restructured assets has stood at Rs 350 bn as at the end of March 2014. For 4QFY14, assets worth Rs 31 bn were restructured. The further pipeline of restructured assets stands at Rs 12 bn.

  • Provisions during the quarter stood significantly higher and were up by 44.7% YoY. For full year, the provisions jumped 52.6% YoY depressing the earnings and return ratios of the bank.

  • The capital adequacy ratio was registered at 11.52% at the end of FY14 as per BASEL III norms.
What to expect?
At the current price of Rs 831, the stock is valued at 0.8 times our estimated FY16 adjusted book value.

Going by the bank's credit exposure to the troubled sectors of the economy and the pertinent asset quality pressures we had already forecasted higher bad loans for the bank. And the reported numbers stand in sync with our NPA estimates. Therefore, while we maintain our NPA estimates, we may have to tweak our estimates for provisions and hence will incorporate the same in our forward estimates.

That said, given the rough patch that the macro economy is undergoing, PSU banks have been the biggest victims. And PNB being one of the largest banks has been amongst the worst affected. The bank is already undergoing the process of business consolidation to combat macro challenges. The improving core income performance is the outcome of the same. Going forward, although the bad loans are not expected to subside soon, the pace of recoveries and fall in slippages is definitely going to come through. Until we get clarity on the shaping up of asset quality, we reiterate our Hold view on PNB from a long term perspective, provided exposure to it is less 3% of one's overall portfolio.

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