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PNB: Weak set of numbers
Nov 9, 2012

Punjab National Bank (PNB) declared its results for the second quarter for the financial year 2012-2013 (2QFY13). The bank has reported 16% YoY growth in interest income and a 12% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 5.7% YoY in 2QFY12, on the back of a 18.4% YoY growth in net advances.
  • Capital adequacy ratio currently stands at 11.7% at the end of 2QFY13 from 12.2% at the end of 2QFY12 as per Basel II norms.
  • Net interest margin (NIM) sees a decline to 3.6% from 3.9% in 1HFY12 on higher costs.
  • Other income improves by 2% YoY in 2QFY13 on a fall in recoveries, and flattish fee income despite an increase in mutual fund dividends.
  • Net income is flat for 1HFY13, and falls 12% in 2QFY13 on higher provisioning and slow NII growth.
  • Net NPA (non-performing assets) to advances came in much higher at 2.7% in 2QFY13 from 0.8% in 2QFY12.

Standalone performance summary
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 89,520 104,211 16.4% 172,673 209,661 21.4%
Interest expense 54,994 67,717 23.1% 106,994 136,216 27.3%
Net Interest Income 34,526 36,494 5.7% 65,679 73,445 11.8%
Net interest margin (%)       3.9% 3.6%  
Other Income 8,889 9,054 1.9% 19,725 20,714 5.0%
Other Expense 18,137 20,219 11.5% 35,387 40,421 14.2%
Provisions and contingencies 7,103 10,738 51.2% 16,038 21,063 31.3%
Exceptional items - -   - -  
Profit before tax 18,175 14,590 -19.7% 33,979 32,674 -3.8%
Tax 6,124 3,935 -35.8% 10,878 9,562 -12.1%
Effective tax rate 33.7% 27.0%   32.0% 29.3%  
Profit after tax/ (loss) 12,050 10,656 -11.6% 23,101 23,113 0.0%
Net profit margin (%) 13.5% 10.2%   13.4% 11.0%  
No. of shares (m)         339.2  
Book value per share (Rs)*         845.5  
P/BV (x)         0.9  
* (Book value as on 30th September 2012)

What has driven performance in 1HFY13?
  • Staying in line with the sector average in terms of growth, PNB kept its focus on loan growth in the retail segment. Overseas business also saw good growth of 62% YoY because of rupee depreciation. Retail growth came in at over 20% with housing loans and car loans seeing good growth. The bank managed a 19.5% YoY growth in gross advances in 1HFY13, despite a tough credit environment. However, in the domestic book the growth came in closer to the sector average at 16.5% YoY.

  • The growth of 17% YoY in deposits was led by higher growth in term deposits during the past year. The proportion of bulk deposits (deposits in excess of Rs 10 m, parked by corporates having surplus funds) has decreased to 21% in 1HFY13 from 24% previously. The bank has strategically been shedding these deposits as per RBI guidelines. The growth in the CASA (low cost deposit base) came in at 15.6%. Both savings and current accounts have seen healthy growth. The proportion of CASA stayed steady at around 36%.

  • The bank's NIMs dipped mainly on account of slower NII growth. This was on account of interest income reversal on NPAs added during the quarter and higher interest costs. NIMs came in at 3.6% in 1HFY13 compared to 3.9% earlier. However, with a plan in place to reduce bulk deposits, this should improve going forward. The bank expects to sustain its NIMs at around 3.5% going forward.

    Healthy growth in overseas and retail advance book
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Gross advances 2,517,050   3,008,730   19.5%
    Overseas 165,110 6.6% 267,720 8.9% 62.1%
    Agriculture 350,760 13.9% 402,910 13.4% 14.9%
    Retail 247,320 9.8% 297,450 9.9% 20.3%
    Housing 119,200 4.7% 144,200 4.8% 21.0%
    MSME 291,450 11.6% 307,010 10.2% 5.3%
    Large corporate 873,180 34.7% 934,870 31.1% 7.1%
    Deposits 3,417,830   4,007,470   17.3%
    CASA 1,240,220 36.3% 1,434,290 35.8% 15.6%
    Bulk deposits 811,170 23.7% 833,140 20.8% 2.7%
    Tem deposits 2,177,610 63.7% 2,573,180 64.2% 18.2%
    Credit deposit ratio 73.6%   75.1%    

  • Other income in 1HFY13 saw flattish growth of 5% on lower recoveries from written off accounts and dividends from mutual funds. Fee income increased by 10% for the first half. Income from incidental charges and processing fees saw a decline. The company's fee income from insurance distribution increased on account of its partnership with MetLife India, an affiliate of US based, MetLife Inc. The company saw a big jump on this account; however this was on a smaller base.

  • The overall delinquency rate for the bank continues to show deep signs of stress at the gross and net levels. NPAs went up at the gross level from 2.05% in 1HFY12 to 4.66% in 1HFY13 and at the net level from 0.84% to 2.69%. The bank's entire performance has been seriously marred by its poor asset quality. The bank's has 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 54.3% of gross NPAs, this coverage is poor. The bank saw Rs 68.9 bn in fresh slippages during the quarter, out of which there was no real sector concentration. Agriculture and industry have seen major slippages of Rs 11.7 bn and Rs 18 bn respectively.

  • The bank has a 18.8% exposure to the infrastructure space, with around 9.8% 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 losses, 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. PNB has over Rs 85 bn of exposure to SEBs or around 2.8% of its loan book. If the economy continues to remain weak there may be further pressure on asset quality.

  • PNB saw fresh restructuring of Rs 28 bn during the quarter. Its slippages as a percentage of its restructured portfolio stood at 10.7% at the end of 2QFY13. Total restructured loans are in excess of Rs 278.5 bn till September 2012. Plus there is some further restructuring in the pipeline on account of the continued stress in the economy. Restructuring was driven by infra (especially in the power space), textiles, drilling and iron and steel.

What to expect?
At the current price of Rs 779, the stock is valued at 0.8 times its 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. The bank saw its profits eroded on account of increased NPA provisioning. 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. PNB has, however seen stress on the NIM front this quarter (on account of a drop in yields and income reversal), and accretion to the CASA base remains a concern. The bank plans to reduce bulk deposits, which will help in improving profitability.

The increase in corporate restructuring is our lingering concern with regard to the bank, especially since the stress is still not over. 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. Especially if the new RBI recommendations for further provisioning on restructured accounts are taken forward. It has recently been decided by the central bank to increase the provisioning for restructured standard accounts from the existing 2% to 2.75%, which will affect the bottom line of banks. However PNB has so far 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 reiterate our Hold view (as per our September 2012 performance review) 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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