Punjab National Bank's Q3FY20 results (Underperformer) - PNB reports lossagain

Q3FY20 result highlights

• PNB’s performance remains weak with the bank reporting a loss of Rs4.9bn in 3Q20 versus profit of Rs5bn in 2Q20 and Rs2.5bn in 3Q19. Despite recovery of Rs26bn from Essar Steel, weak core performance coupled with higher divergence related provisioning drove the loss. The bank has deferred provisions (mainly fraud related) of Rs16bn. If these were upfronted the loss would be higher. Slippages remain high at Rs74bn though lower than Rs81bn qoq.
• Net loans declined 2% yoy. Retail grew 13% yoy with housing growing 20% yoy while MSME and corporate declined.
• Domestic NIM declined 12 bps qoq to 2.3% while global NIM declined 20bps yoy to 2.4%. Excluding Rs4bn of Essar recovery, NIM would have been even lower (by 20 bps) at 2.06%. Reported NII grew 1.5% yoy while adjusted NII declined 8% yoy.
• While core fees were under pressure declining 3% yoy, total non-interest income grew 32% yoy and 6% qoq led by recovery related income. Opex remained flat yoy and qoq.
• Loan provisions grew sharply by 37% yoy and 73% qoq despite a write back of Rs22bn on Essar. The sharp rise was led by divergence related provisioning of Rs21bn, ageing provisions and higher-than-mandated provisions on Jet Airways and DHFL. The bank has deferred provisions of Rs16bn which will be charged in the forthcoming quarters.
• The bank reported a pretax loss of Rs3.8bn and a post-tax loss of Rs4.9bn.
• Slippage of Rs74bn remained uncomfortably high at 6.8% of lagged loans though lower than Rs81bn qoq. This includes divergence related slippage of Rs26bn. While slippage was high recoveries also rose qoq driven by recovery Essar Steel of Rs22bn. Recovery rose from Rs19bn to Rs50bn qoq. Write-off was also higher at Rs34bn versus Rs29bn. Overall GNPAs declined 3% qoq but remain high at 16.3%. PCR rose qoq from 59% to 60%.

Valuation and view

PNB plans to clean up agri / MSME portfolios and align provisions with OBC and United which will be amalgamated with PNB. The clean-up will happen in 4Q20 and 1Q21. We find the new CEO very forthcoming. While he appears to be a good leader, the bank will take time to clean up its agri / MSME NPLs and will also have to deal with merger related integration issues including higher opex and credit cost. With below average operating performance, weak asset quality and a high amount of deferred provisions, we maintain Underperformer. We cut TP to Rs50 (0.5xBV). The next key trigger is the merger ratio.