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Punjab Nat. Bank: Higher NPAs mar profits - Views on News from Equitymaster

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Punjab Nat. Bank: Higher NPAs mar profits
Jul 26, 2013

Punjab National Bank (PNB) declared its results for the first quarter for the financial year 2013-2014 (1QFY14). While the net interest income increased by 5.8% YoY for the quarter, the net profits moved up by 2.4% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 5.8% YoY in 1QFY14, on the back of modest 4% YoY growth in advances.
  • Net interest margin (NIM) declined to 3.5% in 1QFY14 from 3.6% a year ago.
  • Net NPA (non-performing assets) to advances comes in higher at 2.98% in 1QFY14 from 1.68% in 1QFY13. Also, on sequential basis the NPAs have moved up for the quarter.
  • Other income rose 14.9% YoY in 1QFY14 on the back whopping trading gains and dividends from liquid MFs.
  • Capital adequacy ratio currently stands at 11.79% at the end of 1QFY14 as per Basel III norms.

Rs (m) 1QFY13 1QFY14 Change
Interest income 105,540 104,045 -1.4%
Interest expense 68,608 64,970 -5.3%
Net Interest Income 36,931 39,075 5.8%
Net interest margin (%) 3.6% 3.5%  
Other Income 11,680 13,421 14.9%
Other Expense 20,203 22,758 12.6%
Provisions and contingencies 10,325 10,665 3.3%
Profit before tax 18,084 19,073 5.5%
Tax 5,627 6,320 12.3%
Effective tax rate 31.1% 33.1%  
Profit after tax/ (loss) 12,457 12,753 2.4%
Net profit margin (%) 11.8% 12.3%  
No. of shares (m)   354.0  
Book value per share (Rs)*   920.2  
P/BV (x)   0.7  
* (Book value as on 30th June 2013)
What has driven performance in 1QFY14?
  • The profitability for the quarter grew by mere 2.4% YoY with higher NPAs weighing down the profits. Moreover, the net interest income that grew by 5.8% YoY during the first quarter also failed to put up a good show. The interest income declined with loan book reporting mere 3.6% YoY growth during the quarter. While the costs improved, the yields suffered by a greater margin. Consequently, margins were seen down to 3.5% in 1QFY14 from 3.6% same period a year ago. The management admits margins remaining under stress and expects to hover in the range of 3.25% to 3.5% going forward.

  • Other income for PNB rose 14.9% YoY in 1QFY14 on the back whopping trading gains and dividends from liquid MFs.

  • PNB witnessed weak business performance during the first quarter of current year, largely mirroring the poor market conditions. While the bank reported mere 3% YoY growth on deposits, the loan book grew by meager 3.6% YoY. The CASA base grew by 12.6% YoY, but declined by 2.2% QoQ during 1QFY14. The savings deposits grew by 14.7% YoY, whereas the current account deposits managed to grow by 3.9% YoY during the quarter.

  • The disappointment largely came from the weak loan book performance. The agri portfolio witnessed a huge decline of almost 17.3% YoY. The MSME portfolio reported mere 4.8% YoY growth. The bank being cautious with lending to large corporates, the growth here was reported at 11.0% YoY. The housing loans portfolio that recorded 13.9% YoY growth showed up decent performance, whereas the overall retail loan portfolio failed to make a mark. However, the worrying part is the PNB’s loan book continues to remain largely exposed to troubled sectors of the economy such as power, telecom, metals and textiles amongst others. That said, the management is taking endeavors to consolidate its balance sheet which is reflective of the poor loan growth performance during the quarter ended June 2013.

    Housing growth picks up…deposit growth continues to remain sluggish
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 2,944,680   3,050,660   3.6%
    Agriculture 445,910 15.1% 368,580 12.1% -17.3%
    Retail 292,800 9.9% 315,730 10.3% 7.8%
    Housing 129,490 4.4% 147,490 4.8% 13.9%
    MSME 309,600 10.5% 324,320 10.6% 4.8%
    Large corporate 874,860 29.7% 971,370 31.8% 11.0%
    Deposits 3,853,550   3,968,280   3.0%
    CASA 1,331,490 34.6% 1,499,470 37.8% 12.6%
    Tem deposits 2,522,060 65.4% 2,468,810 62.2% -2.1%
    Credit deposit ratio 76.4%   76.9%    

  • The deposits growth turned out to be quite discouraging reporting mere 3% YoY growth during 1QFY14. Besides the difficult market conditions, the bank’s strategy to pare down the bulk deposits has weighed down the deposit mobilization. Consequently, the bulk deposits declined by as high as 59.1% YoY and formed merely 8.8% of the total deposits. The core deposits growth picked reporting 20.6% YoY growth. While savings deposits improved by 14.7% YoY, the current deposits reported mere 3.9% YoY growth during the quarter. On account of healthy savings accounts traction, the CASA for the bank improved to 39.6% in 1QFY14 from 35.6% in 1QFY13.

  • The concerns over asset quality continue to linger for PNB. Net NPAs came in higher at 2.98% in 1QFY14 from 1.68% in 1QFY13. Also, on sequential basis the NPAs have moved up for the quarter. A major account pertaining to gems and jewellery of Rs 16.56 bn that became NPA during the quarter exacerbated the asset quality woes. Fresh slippages to the tune of Rs 35.9 bn in 1QFY14 shot up from Rs 27.7 bn in 1QFY13.The outstanding restructured assets stood at Rs 341.5 bn with addition of a sum of Rs 27.7 bn during the quarter ended June 2013. The restructured advances stood at 10.9% as a percentage of gross advances as at the end of June 2013. The PSU restructuring comprising of power-SEBs (Rs 77 bn) and aviation (Rs 16 bn) formed the lumpy accounts.

  • Capital adequacy stood at 11.79% at the end of 1QFY14 as per Basel III norms.

What to expect?

At the current price of Rs 601, the stock is valued at 0.7 times our estimated FY15 adjusted book value. With no major signs of recovery, we expect the asset quality stress to continue to plague the earnings of PNB. PNB's exposures remain vulnerable to the beleaguered sectors of the economy such as power and infrastructure which are yet to show meaningful signs of recovery. The sluggish economic activity and lethargic approach towards clearance of infrastructure gridlock may continue to deter the earnings performance of the bank.

That said, certain concerted efforts such as paring down of corporate loan book, reduction in bulk deposits, balance sheet consolidation and expansion in retail loan book has been auguring well for the bank. RoEs at average 16% levels and RoAs at 1.0% hold good for the bank vis-à-vis few of its peers.

We would prefer to wait and watch particularly the shaping up of asset quality of the bank in the light of tough macroeconomic environment; before we recommend our investors to buy into the stock. 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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