Punjab National Bank's Q1FY19 results (Underperformer) - Some improvement but still weak

Q1FY19 result highlights

• PNB’s net loss of Rs9.4bn is lower than the consensus estimate and lower than 4Q18 loss of Rs134bn.  While there is a sequential improvement, it is on a low base and profitability remains weak. The pre-tax loss is higher at Rs15.6bn but the net loss is lower at Rs9.4bn because of a tax write back of Rs6.2bn. If the bank had not deferred provisions of Rs66bn, the pre-tax loss would have been higher at Rs80bn plus.
• Some green shoots: 1) NII rebounded on a low base growing 22% yoy and 53% qoq driven by recoveries from Bhushan Steel and other accounts and also due to lower slippage 2) The Nirav Modi slippage is fully factored in 3) Recovery+upgrades in 1Q were high at Rs85bn, much higher than Rs56bn for full year FY18. Full year target of recovery is Rs230bn. 4) Total monetization of non-core assets in FY19 will be Rs86bn including Rs1.5bn that is already realized. 5) The RWA density declined to 56% from 59% in 4Q. 6) Loan growth revived to 7.5% yoy from 6.7% in 4Q.
• GNPAs declined 4% qoq to 18.3%. Slippage of Rs74bn was lower than Rs310bn qoq but higher than 3Q18. Of the total slippage, fresh slippage was Rs53bn while addition to existing NPLs was Rs21bn. Addition to existing NPLs was mainly from SBLCs of Videocon. Recoveries plus upgrades were strong at Rs85bn. Apart from Bhushan and Electrosteel of Rs35bn; there were recoveries/upgrades of Rs50bn from small ticket loans across sectors. Total standard restructured loans (including all earlier dispensations) now stand at Rs40bn. Total SMA Loans are Rs400bn of which SMA2 is Rs80bn. The bank has guided that the SMA2 exposure is the watch list. Total stress loans account for 20% of loans.

Valuation and view

We increase our earnings to factor in sale of non-core assets of Rs86bn in FY19. Without these gains, PNB would have posted a net loss of Rs35bn based on our model. We expect RoE to remain low at 6% and CET1 at less than 7% even in FY20E. We believe core profitability will remain weak and will decline from 1Q levels as wages rise and interest income from cash recoveries falls. As such we maintain our Underperformer. We do not have details of the non-fund exposures associated with stress loans. These exposures will pose downside risks to our earnings as they would add to slippages. PNB lags other banks in earnings disclosures. Global NIM figures, details on power exposure or details of the watch list have not been disclosed unlike other banks. We revise TP to Rs78.