Punjab National Bank's Q2FY19 results (Underperformer) - Weak on all counts

Q2FY19 result highlights

• PNB’s posted net loss of Rs45bn higher than the loss of Rs9bn in 1Q. The result was weak on all counts – with decline in NIMs, high opex, sharp increase in credit cost even ex jewellery fraud, high MTM provisions due to fresh provisions this quarter plus amortization of the previous quarters and decline in core fees. The loss would have been higher had it not been for the unamortized charges of Rs20bn.
• In two transactions, the government has infused a total of Rs82bn capital in PNB. Rs28bn was infused on Sep-19 while the remaining was allotted on Nov-1. For the purpose of calculating CAR, the entire infusion has been considered in 2Q. Despite capital infusion of Rs82bn and reduction in risk-weighted assets qoq, CET1 has increased by Rs16bn only due to the net loss. CET1 ratio improved to 6.49% from 6.05% earlier but remains amongst the lowest. Also, if we take into account the unamortized fraud provision, MTM losses and gratuity, CETI declines by an additional 14bp to 6.35%.
• Loan grew 9% yoy and 4% qoq. Retail and MSME loans have grown strongly. Retail loans have grown 14% yoy and 9% qoq while SME loans grew 14% yoy and 11% qoq. NII declined 15% qoq and 1% yoy.  In 1Q, PNB booked Rs8bn from NCLT recoveries. Ex NCLT, NII grew 2% qoq. Ex NCLT, domestic NIM remained stable qoq while including NCLT recoveries, NIM dropped sharply to 2.46% from 2.9%. 
• Opex rose sharply by 16% qoq and 8% yoy. Core fees declined 17% qoq but rose 9% yoy. Trading gains declined 19% qoq. Total non-interest income declined 10% yoy and 13% qoq. Core PPOP declined 33% qoq and increased by a modest 2.8% yoy.
• Credit cost increased sharply to Rs77bn from Rs49.8bn qoq. Both quarters have fraud related provisions. Ex-fraud, credit cost rose to 4.2% of loans from 3.1% qoq and remains uncomfortably high. Unadjusted credit cost rose to 7.4% from 4.9% qoq. MTM provisions rose sharply to Rs12.7bn from Rs7bn qoq. Rs5bn were fresh charges for the quarter while the remaining was amortization of prior losses.
• Slippage declined qoq to Rs56bn but remains high at 5.5% of lagged loans. GNPAs declined 2% qoq. GNPAs of 17.2% in 2Q are amongst the highest in the sector.

Valuation and view:

We are cutting our earnings and lowering TP to Rs60. With weak core operating performance likely to continue, low capital and likely delay in the stake sale of PNB Housing Finance we expect the stock to underperform.