>PUNJAB NATIONAL BANK: Q1FY13 Result Update

Healthy core performance, asset quality slips


PNB reported healthy core earnings performance in Q1FY13 with PPP coming in 4% above our estimates, though asset quality disappointed forcing PAT marginally below our expectations. Slippages were high at 3.8% and restructured loans inched up to 8.7% of loans – which collectively kept the provisioning cost high at ~1.4%. While the troubled SEB and aviation exposures have been restructured, we still see asset quality concerns persisting due to the challenging macro. We suggest accumulate stance on the stock led by cheap valuations.


Asset quality deterioration...: Asset quality matrices for PNB continued to deteriorate further during the quarter with 1) higher delinquency rate of 3.8% on annualised basis 2) inching up of %GNPA by ~35bps to 3.3% 3) further increase in restructured assets to 8.7% of advances. Given the large outstanding restructured book and exposure to agri and SME, we have factored in stiff credit cost assumptions at 1.3% for FY13 vs 1% for FY12.


…mars an otherwise healthy core performance: Despite the marginally lower bottomline, the core performance of the bank during Q1FY13 was healthy with a 10 bps QoQ expansion in NIM and higher than estimated other income. The NIM expansion can be traced to higher lending and investment yields during the quarter. This, along with a healthy 21.2% YoY credit growth, led to a respectable 18.6% YoY growth in NII.



Loan growth healthy: Loan portfolio expanded 21.2% YoY with clear preference towards agriculture (30.6% YoY) and retail (21.2% YoY) segments. From an industry perspective, incremental disbursement remained skewed towards the infra sector as past sanctions come up for disbursals. Meanwhile, on the deposit front, CASA share eroded by 80 bps QoQ to 34.6%. While an above industry credit growth is encouraging, it is a risky strategy to aggressively build up the loan book in adverse economic scenario and hence we remain cautious on asset quality.


Non-interest income surprises positively: Non-interest income surprised positively during the quarter led by strong treasury gains (YoY). However, the core fee income growth was weak at 2% YoY. The TPD revenue stream is likely to gain more traction as PNB has begun selling insurance products of Metlife Insurance (PNB now holds 30% in the company).


Accumulate on cheap valuations: PNB continues to report a weakening asset quality matrix with pressures likely to continue for a few more quarters led by incremental restructuring and high slippage rate. However, our stiff assumptions (credit cost and slippage rate) and lowered valuation multiple (1x FY14E) amply factors in asset quality challenges and resulting pressure on return ratios. Current valuation seems reasonable at 0.9x FY14E PABV considering RoE of ~18% for FY13E and FY14E. Hence we recommend investors to accumulate the stock from a 12-15 month perspective given that asset quality concerns should lead to underperform in near term. Failure of monsoon in northern India and resulting risks to agri loan book is key risk to our stance.

RISH TRADER