Punjab National Bank INR 117

Transcription

1 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 India Equity Institutional Research BFSI Visit note Punjab National Bank INR 117 Poised to get re-rated We met up with the top Management of Punjab National Bank (PNB) to understand the current business dynamics and future growth strategy. While the bad-book cleanup exercise remains on war footing, the period of consolidation is over. FY17 should witness 12% credit growth, normalization of credit costs and recovery rate exceeding slippage run-rate. Healthy liability franchise backed by 40%+ low cost deposit base and shift of focus to small ticket advances should prove as key catalysts to balance sheet growth. While the operating profits already stands on firm footing, the bank Management is now confident to put up an improved show on asset quality starting June 2016 quarter. UPGRADE TO BUY. Key takeaways: Target Price (INR): 165 Potential Upside: 40% Previous TP (INR): 79 Market Data Shares outs (Mn) 1963 EquityCap (INR Mn) 3927 Mkt Cap (INR Mn) Wk H/L (INR) 180/69 Volume Avg (3m K) Face Value (INR) 2 Bloomberg Code PNB IN De-risking the credit portfolio: While the year of consolidation is behind, PNB has now aligned the business strategy with economic cycles. Resultantly, the bank has chosen to opt for select higher rated corporate lending and expand small ticket advances book. While the current corporate loan book exposure has declined to 42% in FY16 as against 44% a year ago, the share of small ticket advances has surged to 56% from 53% during the same period. FY16 already witnessed traction in this area (robust 16% Y-o-Y growth in small ticket advances) driven by traction in retail credit reporting higher levels of 19% Y-o-Y growth supported by housing (25% Y-o-Y) and vehicle loans (17% Y-o-Y). Market Info: SENSEX NIFTY 8335 Share Price Performance 110 Going forward, the higher yielding retail or small advances book is expected to continue to clock 19-20% Y-o-Y growth in turn supporting margins for the bank. The shift of focus now from large ticket corporate credit to diversified small ticket book; viz, retail/ MSME/ agricultural portfolios should help PNB combat economic cycles With select high rated corporate lending and increased traction in small ticket lending, we believe the overall advances are poised to grow at 11% Y-o-Y for FY17E. As the bank ushers into the growth phase in FY18, we expect the advances to register healthy 14% Y-o-Y growth. Sensex PNB Leveraging on rich liability franchise: PNB s liability franchise stands one of the best in the industry both in terms of size and quality. With higher CASA share at 41.63% during FY16, PNB expects to maintain strong operating profits even going forward. Defying tough macros, PNB has successfully mobilized its low cost deposit base; CA in particular at 7.7% Y-o-Y coupled with SA growth of 12.8% for FY16. The proactive conversion of zero balance accounts under financial inclusion into value accounts continue to boost SA traction. The negligible share of bulk deposits (mere 0.24% of total as at the end of March 2016) further bolsters the liability franchise of PNB. Banking upon the pan-india network of 6760 branches and 7996 BCs and a wider customer base of 9.5 crs coupled with stable deposits growth, PNB s higher CASA share stands quite sustainable. We reckon the CASA share is poised to surge to 44% by FY18E from current levels of 41%+. Deposits for the bank should record healthy 13.5% CAGR over FY16-18E. Moreover, the chunky low cost deposit base keeps funding costs on lower side and proves margin accretive. Share Holding pattern (%) Particulars Mar16 Dec15 Sep15 Promoters FIIs DIIs Others Total Source: BSE Analyst Shweta Daptardar shweta.daptardar@krchokesy.com Ext KRChoksey Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ July 07, 2016

2 Asset quality improvement on the anvil: FY16 witnessed elevated stress for banking system followed by bad-loan clean-up exercise. While the clean-up resulted in dramatic jump in bank NPAs brewing short term trouble for the lenders, such an aggressive exercise should go a long way in reinstating the credibility of bank s balance sheets. PNB was no exception and hence reported elevated gross NPAs at 12.9% and net NPAs at 8.6% levels. The slippage ratio too stood higher at 11.1% for FY16 with almost 57% of total slippages emerged from RBI s AQR and SEB loan slippages. The net stressed loans stood at higher levels of 14.8% as at the end of Q4FY16. That said, the restructured loans for the quarter have stood lower both Q-o-Q and Y-o-Y at INR 201 bn forming 5% of overall advances. PNB, clearly, has already taken a huge NPA hit coupled with hefty provisions on its books in an effort to come out of the mess sooner than later. With rate of recoveries anticipated to exceed slippage run-rate and credit costs expected to normalize in FY18, we trim our NPA estimates downwards expecting now gross NPAs to decline to 9% and net NPAs to 5.3% levels by FY18E. While the asset quality pain not yet behind, it stands largely factored and improving economic scenario should only prove beneficial for the state owned PNB. Earnings traction round the corner: Post the year of consolidation and clean-up that weighed upon earnings of the bank, FY17 should witness net profit in positive territory. PNB has been strategically paring its exposure to stressed sectors in order to improve asset quality and conserve capital. Diversification through small ticket advances and reduced dependence on large ticket corporate credit, PNB has guarded its book as against economic cycles. Furthermore, the increasing market share in low cost CASA deposits and retail credit trajectory stand as growth catalysts for the bank. While the bank already stands on a strong footing at the operating profit levels, the declining slippages and higher recoveries should now translate into healthy earnings momentum start FY17 onwards. Against this backdrop, we envisage PNB to record 8-10% RoEs and % RoAs over FY17-18E. Valuations and View: While we are mindful of the weak performance of PNB during FY16 and the poor return profile, the picture is set to turnaround ahead. While FY16 turned out to be the year of consolidation and clean-up, FY17 should witness signs of early recovery. Given the bank s fight against NPAs stand on a war footing, June quarter 2016 onwards, PNB should begin witnessing better recoveries, declining slippages and normalizing credit costs. Besides Management s efforts towards combating stressed assets, macros have been turning supportive too. Better monsoons, speedy debt recast measures, kickstart of various road projects and pacing up of industry reforms and initial signs of improvement in corporate balance sheets should gradually help PNB regain its good old days of balance sheet strength. Rich liability franchise and small ticket advances traction will be the key catalyst to the strengthening of balance sheet growth ahead. While the current valuations of 1.3x P/ABV FY18E do factor the asset quality risks to a greater extent, they are ignoring the anticipated recovery in the asset quality from here on and the value addition that should emerge from the PNB Housing Finance stake sale. Therefore, we revise the target price upwards to INR 165 valuing the core bank now at 1.7x P/ABV FY18E and the PNB s post stake sale in housing finance subsidiary at INR 15 (inclusive of 20% discount). We are incorporating declining slippages, normalizing credit costs and improving EPS traction into the fair value estimation of the core bank. Subsequently, we upgrade the stock to BUY (earlier HOLD) and reckon that PNB stands as a better beneficiary of improving macros. Quality PSBs with resilient balance sheet, healthy liability franchise and improving credit outlook stand as biggest beneficiaries of the pick-up in economic cycle and industry reforms. PNB, we reckon, fits the bill. Key Financials INR in mn Net Interest Income 161, , , , ,388 Pre-provision profits 113, , , , ,643 Net Profit 33,425 30,616-39,744 28,943 38,863 EPS ( ) BVPS ( ) ABVPS ( ) P/E (x) P/ABV (x) KRChoksey - Institutional Research

3 Key takeaways: CASA growth target stands 12% for FY17 with both CA and SA balances to grow at 15%+ each for the full year. The bank is targeting youth coupled with optimum utilization of its vast branch network (6760 branches, 7996 BCs). CASA share of the bank has been consistently above 40% (currently at 41.63%) and the strong liability franchise will always remain biggest strength of PNB. The bank believes this rich liability franchise will help it to combat increasing competition, managing growth and quality of the overall balance sheet. No incremental increase in bulk deposits. The share of high cost deposits to overall deposits stand lowest in the industry at 0.24% inclusive of CDs and will continue to report a negligible number. The bank is targeting overall credit growth of 12% for the full year with MSME/retail book credit growth to be at 19-20% YoY for FY17. While the incremental corporate lending book has been under stress for quite some period, PNB stays cautious on the same and will lay greater focus on small ticket advances and not just retail book. Given the stressed corporate credit, PNB should continue to focus on retail/msme/agri credit capitalizing on the huge branch network and adequately trained employee base. CASA decline to 44.9% in FY16 the costs are only expected to decline as the bank has already shifted to LIC mortality tables long back (ahead of other peers), plus, the DA increments have only decreased, hence cost-income ratio at lower levels is expected to be maintained. The INR crs operating profit stood best in the industry for FY16 especially in the light of tough macros. While the operating profits look strong, the bank Management is now confident to put up an improved show on asset quality starting June 2016 quarter. The bank has provided almost 50% for the Punjab Food Credit, with remaining 50% to be provided in forthcoming quarter; however, this should not impact the earnings unduly. With upgradations and recoveries expected to improve June 2016 quarter onwards, PNB expects revival in asset quality during the year. The rate of recoveries is expected to exceed the slippage rate during FY17 run-rate of recoveries to be at around INR crs per quarter. The total stressed book that stands elevated since past few quarters now is also expected to see signs of revival start June quarter Credit costs should normalize to 2.5% levels, but should decline thereafter as the asset quality resolution is on war footing. As cited by the Management, no big bad accounts are in the pipeline. Also, road projects, DISCOMS and power revival are round the corner according to the Management with many stalled projects picking up, also because the major road projects are those belonging to refinance category with lesser likelihood of turning bad. The road portfolio NPAs stand at mere INR 464 crs for PNB and the bank does not see any unforeseen difficulties in its infra portfolio going ahead. While the incremental corporate lending has declined, the bank has not ceased corporate lending but has turned choosy, opting proposals customer-wise with sufficient due diligence at initial stages itself leveraging upon the upgraded technology and increased checks. The bank remains cautious on overseas portfolio given the global uncertainties. Margins improvement, clearly, now is a function of improved asset quality. While the MCLR implementation did pose 20 bps impact, the strenuous efforts to enhance asset quality should help NII expansion ahead, thereby leading to margins expansion. The bank expects to beef up its capital base further via FPO in the form of Tier I and Tier II capital and stands confident to clock 12% annual credit growth. Besides, the consistent efforts towards ploughing back of profits, anticipated declining slippages, write-backs and the committed govt capital infusion stands sufficient for the bank to fulfill its ambitious growth targets. 3 KRChoksey - Institutional Research

4 Where do we derive confidence in PNB? (1) Strong liability franchise Highest CASA share lowest bulk deposits share (2) Capital conservation measures should aid beef up capital base and in turn support growth (3) Asset quality combat on war footing major risks priced in (4) Earnings growth visibility in place Return ratios to start looking up FY17 onwards (1) Strong liability franchise Pan India branch network Branches FY14 FY15 FY16 Rural 28% 28% 28% Semi-Urban 24% 24% 24% Urban 21% 21% 21% Metro 16% 16% 16% Total Branch Network resulting into strong CASA traction CASA ratio (%) (2) Capital conservation measures Capital conservation on radar Capital Conservation/ new initiatives Diversification of loan portfolio towards low risk sectors & borrowers requiring lower RWAs Emphasis on better quality collaterals while taking fresh exposure to ensure capital conservation Efforts for sale of non-core assets to ensure release of capital As part of capital raising exercise, the bank has plans to sell its stake in non-core businesses. To illustrate, PNB holds 51% stake in PNB Housing Finance which should be getting monetized as the latter is on the verge of getting listed on the bourses. Going by the market estimates, the stake-sale deal that is set to be valued at INR 12,500 crs and should prove value generator for the core business. We value PNB s post stake sale in housing finance at INR 15 (with a 20% holding company discount). PNB and its subsidiaries value unlocking here can help beef up capital base Subsidiaries Country of % Stake in Incorporation subsidiaries PNB Housing Finance Ltd India 51.0 PNB Met Life India Insurance Company Ltd India 30.0 PNB Gilts Limited* India 74.1 Punjab National Bank (International) Ltd. United Kingdom PNB Investment Services Ltd India Druk PNB Bank Ltd. Bhutan 51.0 PNB Insurance Broking Pvt Ltd India KRChoksey - Institutional Research

5 Current Capital position - Particulars FY15 FY16 Capital Fund Tier I Of Which Common Equity Additional Tier Tier II Total (Tier I+II) Risk-weighted Assets Capital Adequacy ratio Tier I 9.30% 8.41% Of Which Common Equity 8.74% 7.87% Additional Tier 0.56% 0.54% Tier II 2.91% 2.87% Total (Tier I+II) 12.21% 11.28% (3) Asset quality combat on war footing Current Asset quality snapshot Asset Quality (INR bn) Q1FY 14 Q2FY 14 Q3FY 14 Q4FY 14 Q1FY 15 Gross NPA Net NPA Gross NPA (%) Net NPA (%) Provision Coverage (%) - Rep Credit Cost (%) Slippages Upgradations/Recov eries Net Slippages 1 5 Slippage ratio (%) Q2FY 15 Q3FY 15 Q4FY 15 Q1FY 16 Q2FY 16 Q3FY 16 Q4FY 16 Restructured Loans Outstanding Restructured Loans Net additions to Restructured Loans Net Restructured Std. (%) Stressed Loans Net Stressed Loans (Net NPA + Net Restructured Std.) Net Stressed Loans (%) KRChoksey - Institutional Research

6 NPA decomposition Category FY15 FY16 Sub Standard Doubtful Doubtful Doubtful Loss Total NPAs (Gross) Industry wise O/S Restructured Accounts Snapshot Sl. Sector FY15 (INR mn) % Share FY16 (INR mn) % Share 1 Iron & Steel Infrastructure Power of which SEBs Telecom Drilling Textiles Aviation Sugar Paper/Printing Chemical/Fertiliser/Drugs Cement Manufacturing Engineering Auto parts Hotel Education Finance Others Total Industries Improving scenario restructuring pace declining 6 KRChoksey - Institutional Research

7 Creation of war room for speedier resolution of bad assets FY17-FY18 show signs of early recovery - Gross NPA on declining trend Gross NPLs (%) Net NPLs (%) Provisions cover (%) (4) Earnings growth visibility in place Return ratios to start looking up FY17 onwards Dupont Analysis As % of avg assets NII 3.1% 2.9% 2.4% 2.4% 2.5% Fee Income 0.8% 0.8% 0.9% 0.9% 0.9% Treasury Income 0.1% 0.2% 0.2% 0.1% 0.1% Operating Cost 1.8% 1.8% 1.7% 1.7% 1.7% Provisions 1.3% 1.4% 2.6% 1.2% 1.1% Tax 0.3% 0.2% -0.1% 0.2% 0.3% ROAA 0.6% 0.5% -0.5% 0.4% 0.5% ROAE 10.2% 8.5% -9.5% 8.1% 10.2% 7 KRChoksey - Institutional Research

8 Q4FY16 Earnings Snapshot INR in mn Q4FY16 Q4FY15 Q3FY16 Y-o-Y Q-o-Q Income Statement Interest income 108, , , % -11.4% Interest expense 80,563 78,589 81, % -0.6% Net interest income 27,677 37,916 41, % -32.8% Non interest income 24,522 18,051 16, % 46.8% Total Net Income 52,199 55,967 57, % -9.9% -- Employee costs 10,076 15,069 19, % -49.4% -- Other operating expenses 9,845 8,872 8, % 11.7% Operating expenses 19,920 23,940 28, % -30.6% Pre-provision profits 32,279 32,027 29, % 10.6% Provisions % 177.7% Profit before tax -72,574-6,315-8, % 746.2% Tax expense -18,902-9,381-9, % 108.0% Net profit -53,671 3, % % Balance Sheet summary Networth 383, , , % -9.2% Deposits 5,530,511 5,013,786 5,485, % 0.8% Borrowings 597, , , % 49.4% Advances 4,123,258 3,805,344 3,929, % 4.9% Key ratios Q4FY16 Q4FY15 Q3FY16 Spread Analysis Yield on avg advances 7.7% 9.4% 9.4% Yield on avg investments 7.7% 7.6% 8.1% Yield on avg int. earning assets 7.0% 8.3% 8.2% Cost of funds 5.7% 6.0% 5.8% Reported NIM 2.6% 2.8% 2.8% Other ratios CD ratio 74.6% 75.9% 71.6% CASA ratio 37.2% 36.7% 36.1% GNPA ratio 12.9% 6.6% 8.5% NNPA ratio 8.6% 4.1% 5.9% Provision coverage ratio 36.5% 40.1% 33.1% Cost to income ratio 38.2% 42.8% 49.6% Capital Adequacy ratio Tier I 8.4% 9.3% 8.5% CAR 11.3% 12.2% 11.3% KRChoksey - Institutional Research

9 Income Statement INR in mn Interest income 432, , , , ,137 Interest expenses 270, , , , ,749 Net Interest Income 161, , , , ,388 Non interest income 45,767 58,907 68,770 73,935 80,744 Operating income 207, , , , ,132 Operating expenses 93, ,916 99, , ,489 -Employee cost 65,104 73,369 75,704 81,898 90,948 Pre-provision profits 113, , , , ,643 Provisions 66,939 79, ,542 82,929 86,760 Profit before tax 46,904 39,573-57,379 43,199 58,884 Tax expense 13,479 8,957-17,635 14,256 20,020 Net profit 33,425 30,616-39,744 28,943 38,863 Balance Sheet INR in mn Equity share capital 3,621 3,709 3,927 4,728 4,728 Reserve and Surplus 355, , , , ,873 Net worth 358, , , , ,601 Deposits 4,513,967 5,013,786 5,530,511 6,219,930 7,124,677 Borrowings 480, , , , ,830 Other liabilities and provisions 150, , , , ,283 Total 5,504,199 6,033,336 6,673,905 7,332,553 8,278,390 Cash in hand and Bal. with RBI 452, , , , ,040 Investments 1,437,855 1,512,824 1,578,459 1,879,077 2,095,485 Advances 3,492,691 3,805,344 4,123,258 4,582,510 5,224,218 Fixed assets 34,197 35,515 52,227 42,889 46,503 Other assets 87, , , , ,144 Total 5,504,199 6,033,336 6,673,905 7,332,553 8,278,390 Key ratios Business Profile Advances 3,492,691 3,805,344 4,123,258 4,582,510 5,224,218 Credit Deposits ratio 77.4% 75.9% 74.4% 73.7% 73.3% Deposits 4,513,967 5,013,786 5,530,511 6,219,930 7,124,677 CASA Deposits 1,728,721 1,837,805 2,044,909 2,307,120 2,664,074 CASA Ratio 41.3% 40.6% 40.1% 42.2% 44.0% Asset Quality Gross NPA 188, , , , ,548 Net NPA 99, , , , ,316 Gross NPA as % of Advances 5.3% 6.6% 12.9% 11.7% 9.4% Net NPA as % of Advances 2.8% 4.0% 8.6% 6.9% 5.3% Credit Costs 1.8% 2.3% 4.1% 3.0% 2.0% Spread Analysis Avg Yield On Advances 10.1% 9.9% 9.9% 9.2% 8.6% Avg Yield On Investments 7.5% 7.2% 7.3% 7.3% 7.1% Avg Yield On Int Earning Assets 8.7% 8.4% 7.9% 7.9% 7.6% Avg Cost Of Deposits 6.0% 5.8% 5.7% 5.3% 5.0% Avg Cost of Funds 5.8% 5.7% 5.5% 5.2% 4.9% Spread 2.9% 2.7% 2.7% 2.7% 2.7% NIM 3.3% 3.0% 2.6% 2.7% 2.7% 9 KRChoksey - Institutional Research

10 Growth ratios Net interest income 8.7% 2.5% -7.5% 11.6% 14.3% Pre-provision Profits 4.4% 5.0% 2.2% 3.2% 15.5% Net Profits -29.6% -8.4% % #VALUE! 34.3% Advances 13.1% 9.0% 8.4% 11.1% 14.0% Deposits 15.3% 11.1% 10.3% 12.5% 14.5% Total Assets 14.9% 9.6% 10.6% 9.9% 12.9% Per share data INR EPS DPS BVPS ABVPS P/E P/ABV Dividend Yield 1.8% 2.9% 3.2% 3.5% 4.2% 10 KRChoksey - Institutional Research

11 Punjab National Bank Date CMP Target Recommendation 07-July BUY 19-May HOLD 09-Feb ACCUMULATE 09-Nov ACCUMULATE 11-May ACCUMULATE 13-Apr BUY 4-Feb ACCUMULATE 7-Jan REDUCE 28-Oct ACCUMULATE 8-Oct BUY 28-Jul ACCUMULATE 9-Jul ACCUMULATE 19-May ACCUMULATE Rating Legend Our Rating Upside Buy More than 15% Hold 5% - 15% Reduce 0 5% Sell Less than 0% ANALYST CERTIFICATION: I Shweta Daptardar (B.Com, MBA), research analyst, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. 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