Punjab Nat. Bank: Lower provisions aid profits - Views on News from Equitymaster

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Punjab Nat. Bank: Lower provisions aid profits

Sep 3, 2014 | Updated on Oct 30, 2019

Punjab National Bank (PNB) declared its results for the first quarter of the financial year 2014-2015 (1QFY15). While the net interest income increased by 12.1% YoY for the quarter, the net profits moved up by 10.2% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 12.1% YoY in 1QFY15, on the back of 13.9% YoY growth in advances.
  • Net interest margin (NIM) declined to 3.4% in 1QFY15 from 3.5% a year ago.
  • Other income disappoints and falls by 7.9% YoY in 1QFY15 on the back trading losses.
  • Net NPA (non-performing assets) to advances comes in higher at 3.02% in 1QFY15 from 2.98% in 1QFY14. Also, on sequential basis the NPAs have moved up for the quarter.
  • Capital adequacy ratio currently stands at 11.52% at the end of 1QFY15 as per Basel III norms.

Standalone financial snapshot
Rs (m) 1QFY14 1QFY15 Change
Interest income 104,045 115,887 11.4%
Interest expense 64,970 72,090 11.0%
Net Interest Income 39,075 43,797 12.1%
Net interest margin (%) 3.5% 3.4%  
Other Income 13,421 12,364 -7.9%
Other Expense 22,758 24,908 9.5%
Provisions and contingencies 10,665 9,276 -13.0%
Profit before tax 19,073 21,977 15.2%
Tax 6,320 7,926 25.4%
Effective tax rate 33.1% 36.1%  
Profit after tax/ (loss) 12,753 14,051 10.2%
Net profit margin (%) 12.3% 12.1%  
No. of shares (m)   362.1  
Book value per share (Rs)*   991.3  
P/BV (x)   1.0  
* (Book value as on 30th June 2014)

What has driven performance in 1QFY15?
  • 1QFY15 turned out to be a decent quarter for PNB with modest 10.2% YoY growth in profits backed by decent interest income performance and lower provisions.

  • While the loan book for the quarter has grown by 13.9% YoY, the deposit base has moved up by 12.1% YoY. CASA growth has remained subdued at 9.1% YoY during 1QFY15, and CASA share has stood at 39.9% levels. The credit portfolio was largely driven by agri loan book growth, corporate loan portfolio and retail loans.

  • While the costs have come down, the yields on loan book have stood weaker too. Hence, the margins for the bank have remained tepid.

  • The concerns over asset quality continue to linger for PNB. While the gross NPAs were up from 4.84% in 1QFY14 to 5.48% in 1QFY15, the net NPAs too have spiked to 3.02% (1QFY15) from 2.98% a year ago. Backed by higher exposure to troubled sectors of the economy, PNB's asset quality continues to remain vulnerable. That said, decline in slippages during the June quarter 2014 have brought some respite. However, the recoveries and loan upgrades continue to fall short of expectations.
What to expect?

At the current price of Rs 951, the stock is valued at 1.0 times our estimated FY16 adjusted book value.

PNB being one of the largest banks, and heavily exposed to the agri and corporate loan segment, has been amongst the worst affected by restructured loans. 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. Moreover, the stock has witnessed sharp momentum in recent periods. We, therefore, reiterate our SELL recommendation on the stock.

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Jun 22, 2021 (Close)