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Punjab Nat. Bank: No reprieve on bad loans - Views on News from Equitymaster
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Punjab Nat. Bank: No reprieve on bad loans
Nov 25, 2013

Punjab National Bank (PNB) declared its results for the second quarter (2QFY14) and first half of the financial year 2013-2014. While the net interest income increased by 10.1% YoY for the quarter, the net profits declined by 52.6% YoY. For first half (1HFY14), the profits declined by 23.0% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 10.1% YoY in 2QFY14, on the back of modest 6.5% YoY growth in advances.
  • Other income declined marginally by 0.9% YoY in 2QFY14. But it grew by 8% YoY during 1HFY14.
  • The profitability for the quarter has declined by higher percentage of 52.6% YoY and down 23.0% YoY for the 1HFY14 on account of a dramatic rise in provisions.
  • Net NPA (non-performing assets) to advances comes in higher at 3.07% in 2QFY14 from 2.69% in 2QFY13. Also, on a sequential basis the NPAs have moved up for the quarter.
  • Capital adequacy ratio currently stands at 11.62% at the end of 2QFY14 as per Basel III norms.

Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 104,280 107,335 2.9% 209,820 211,381 0.7%
Interest expense 67,804 67,180 -0.9% 136,413 132,150 -3.1%
Net Interest Income 36,476 40,155 10.1% 73,407 79,231 7.9%
Net interest margins (NIM) (%) 3.5% 3.5%        
Other Income 9,072 8,993 -0.9% 20,752 22,414 8.0%
Other Expense 20,219 23,800 17.7% 40,421 46,558 15.2%
Provisions and contingencies 10,738 18,987 76.8% 21,063 29,652 40.8%
Profit before tax 14,590 6,361 -56.4% 32,674 25,434 -22.2%
Tax 3,935 1,306 -66.8% 9,562 7,626 -20.2%
Effective tax rate 27.0% 20.5%   29.3% 30.0%  
Profit after tax/ (loss) 10,656 5,055 -52.6% 23,113 17,808 -23.0%
Net profit margin (%) 10.2% 4.7%   11.0% 8.4%  
No. of shares (m)   353.5        
Book value per share (Rs)*   976.2        
P/BV (x)   0.5        
* (Book value as on 30th September 2013)

What has driven performance in 2QFY14?
  • The profits for the third largest bank halved during 2QFY14 on a YoY basis. PNB reported 52.6% YoY decline in profits on account of higher provisioning and weak core income performance. Slower loan growth and worsening asset quality conditions marred the earnings performance of the bank. Profits for the first half of FY14 reported a de-growth of 23% YoY.

  • The NII grew by modest 10.1% YoY at Rs 40 bn. The weak credit growth that was recorded at 6.5% YoY and the stagnant margins at 3.5% levels during 2QFY14 impacted the core income performance. While the cost of deposits was seen down marginally, the yields were down too. Hence, the margin expansion was restricted. Also in the near term, yields may come under pressures on account of rate reduction with respect to few retail products.

  • The overall loan growth at 6.5% YoY remained tepid during 2QFY14. MSME (18.8% YoY growth) and retail (14.6% YoY growth) were the only two growth engines that drove the business for PNB. Due to lack of corporate credit pick-up the management is keen to grow its retail loan book. Hence, the bank had to cut the interest rates on various products early November 2013 to augment retail credit.

    Retail and MSME driven advances growth; deposits remain sluggish
    (Rs m) 2QFY13 % of total 2QFY14 % of total Change
    Advances 2,947,870   3,138,520   6.5%
    Agriculture 402,910 13.7% 409,470 13.0% 1.6%
    Retail 298,700 10.1% 342,260 10.9% 14.6%
    Housing 133,030 4.5% 153,320 4.9% 15.3%
    MSME 307,010 10.4% 364,820 11.6% 18.8%
    Large corporate 934,870 31.7% 968,660 30.9% 3.6%
    Deposits 4,007,470   4,056,990   1.2%
    CASA 1,434,290 35.8% 1,563,820 38.5% 9.0%
    Tem deposits 2,573,180 64.2% 2,493,170 61.5% -3.1%
    Credit deposit ratio 73.6%   77.4%    

  • Deposits reported subdued growth during the second quarter of FY14 at mere 1.2% YoY and the CASA base grew by 9.0% YoY. The CASA share remains at 40% levels largely supported by growth in savings deposits.

  • The other income portfolio of the bank that declined by 1% YoY also disappointed during 2QFY14. The core fee income performance stood decent with 14.1% YoY growth.

  • The asset quality story is no different from the previous quarter and the bad loans continue to pile up. The gross NPAs during 2QFY14 increased to higher levels of 5.14% from 4.66% in 2QFY13. Also, net NPAs spiked to 3.0% levels in 2QFY14 from 2.7% in 2QFY13. The fresh slippages at Rs 59.7 bn have toned down vis-a-vis same quarter previous year. As cited by the management, the slippages were across industries and not concentrated to a particular geography. Also, no lumpy accounts form part of these slippages. Provisions for the quarter stood higher reporting 76.8% YoY increase in 2QFY14. Almost 50% of the provisions were towards NPAs during the September quarter.

  • The restructured loans pile-up continues to linger and 1HFY14 reported Rs 55.4 bn of restructured asset staking the total cumulative number to Rs 370.6 bn as at the end of September 2013-14.
What to expect?
At the current price of Rs 521, the stock is valued at 0.5 times our estimated FY16 adjusted book value.

Poor business growth, weak NII, higher costs and deteriorating asset quality are the few major issues plaguing the earnings of PNB since many quarters now. Some 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. However, we are not particularly enthused with the bank's quality control measures.

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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