Punjab National Bank's Q1FY20 results (Underperformer) - Profitability remains weak

Q1FY20 result highlights

• PNB posted PAT of Rs10bn versus loss yoy and qoq. The delta came from a significant reduction in credit cost and high trading gains of Rs5bn. While the bank did post a profit, profitability remains weak with low loan growth, high NPLs and weak RoA.
• The bank has deferred provisions worth Rs7bn. In addition the bank will have to write-off Rs18.8bn in FY20 on Bhushan Power and Steel which was classified as fraud in 2Q. So total known but unrecognized provisions are high at Rs25bn and are significantly higher than the PAT of 1Q20.
• Gross loans grew 3% yoy but declined 8% qoq. Domestic loans grew 7% while overseas loans declined 52%. Retail loans remain the key driver growing 22%.
• On a beaten down base, NIM fell 4bps qoq to 2.36% due to rising cost of funds. Last year (1Q19) NIM was much higher at 2.9%. NII remained weak declining 12% yoy / 1% qoq.
• Total non-interest income was Rs20.8bn versus Rs19.5bn yoy and 18.8bn qoq. The bank booked Rs5bn of trading gains higher than Rs2.5bn qoq and Rs2.3bn yoy. Recovery in written-off accounts declined to Rs3.2bn versus Rs5bn yoy.
• Operating expenses declined 15% qoq but grew 11% yoy. Core PPOP declined 25% yoy but grew 14% qoq.
• Slippage fell to Rs54bn from 73bn qoq but remains high at 5.2% of lagged loans. While GNPAs declined 1.5% qoq in absolute terms, the GNPA ratio rose as loans declined. GNPA ratio rose to 16.5% from 15.5% qoq. PCR fell marginally from 61.7% to 60.9% qoq.
• Loan provisions declined to 21bn from 92bn qoq.
• CET 1 of 6.35% remains uncomfortably low and below regulatory requirement.
• Guidance for FY20 – 1) Loan and deposit growth of 10% 2) Slippage of Rs140bn 3) Recoveries of Rs200bn plus Rs40bn from 2 NCLT accounts.
• The bank plans to raise Rs50bn of fresh equity through QIP or rights in FY20. The bank also plans to raise Rs10bn from the sale of non-core assets of which Rs6bn will be from sale of its erstwhile headquarters in South Delhi to the income tax department.

Valuation and view

While PNB posted profit in 1Q, there have been frequent negative surprises on slippages and earnings. Also profitability remains weak and capital adequacy is the lowest amongst banks we cover. As such we reiterate Underperform with TP of Rs60.