Wednesday, February 1, 2012

>PUNJAB NATIONAL BANK: Q3FY12 RESULTS REVIEW- Operating performance inline, asset quality disappoints

Punjab National Bank (PNB) reported earnings with net profits at INR11.5bn (+6% YoY) in 3Q, below our estimates of INR12.54bn (consensus estimates at INR12.58bn), on higher than expected loan loss provisioning. However, core earnings progression positively surprised on better than expected NII traction and stronger recoveries in written-off accounts. Higher slippages and deterioration in asset quality ratios were the key negative that emerged from the result.

■ Moderation in b/s growth in line with industry; margins compress on expected lines
Loan growth moderated to 19% YoY, pretty much in line with the industry, driven by infrastructure, retail and MSME loans. Margins for the bank came compressed by 7bps sequentially to 3.88% on the back of rise in cost of funds. Given the high interest rate environment, the bank has witnessed signs of cannibalisation of low cost deposits to retail term deports leading to erosion in CASA by 100bps with CASA ratio share declining to 36.1%. While the momentum in savings and current deposits accretion slowed down, retail term deposits continued to be robust at 31% YoY. Going forward, management is guiding sedate NIMs at 3.5% levels for full year FY12e and moderate b/s growth.

■ Asset quality deteriorates
Asset quality for the bank substantially deteriorated with GNPA accretion at 25%QoQ. Slippages came in at INR16.83bn (delinquency ratio at 2.6% vs. 1.6% in 2QFY12) as the bank recognized its exposure to Kingfisher as NPL (INR7.5bn). Overall, provisioning came in higher at INR9.46bn on the back of NPV provisioning of INR1.2-1.3bn linked to GTL exposure under CDR. However, lower recoveries and upgrades were key disappointment during the quarter. Restructured book increased by INR18.9bn (one
large chunky account related to telecom of INR9.9bn) to INR168.8bn at 6.4% of advances. While the bank is likely to witness SEB restructuring (related to Rajasthan & Haryana) during 4Q, the management is confident of containing GNPA ratio at <2%.

■ Valuation and outlook
While slippages and credit costs continue to remain high for the bank, risk adjusted margins (margins - credit costs) continue to remain amongst the highest within PSU banks. PNB continues to remain one of the best deposit franchises with best in class margins and returns profiles and has adequate earnings power to absorb any negative surprises on asset quality. Hence, we reiterate a BUY with a target price of INR1,340.