Punjab National Bank's Q3FY19 results (Underperformer) - A small profit versus loss expectations

Q3FY19 result highlights

• PNB posted a small PAT of Rs2.5bn versus expectations of a loss. The beat was due to significantly low credit cost. . Credit cost ex Nirav Modi and a small fraud fell to 0.4% from 7.3%. At 0.4%, credit cost is the lowest amongst corporate banks we track. We believe this level of low credit cost is unsustainable. Asset quality improved with slippage declining to Rs39bn from Rs56bn qoq.
• Loans declined 4% yoy and were flat qoq. Retail loans grew 15% yoy, MSME 9% while overseas loans declined sharply. Domestic NIM for 9M19 improved to 2.64% from 2.46% for 1H19. NII grew 8% yoy and 9% qoq
• Non-interest income grew 6% qoq but declined 41% yoy. Operating expenses grew 6% yoy and 6% qoq. Opex included ESOP charges of Rs1.6bn excluding which growth would have been flat qoq and yoy
• Credit cost declined from Rs77bn to Rs25bn. The bank made the last tranche of provision of Rs20bn against Nirav Modi exposure. It also provided Rs1.27bn towards another fraud. Excluding fraud related provisions, credit cost was low at only 40bps in 3Q19 which is significantly lower than all corporate banks we cover. With calculated provisioning cover of 54%, we believe credit cost will move up in the following quarters.
• Slippage came in at Rs39bn with IL&FS of Rs3bn being the only lumpy account. Recoveries were strong at Rs30bn. The only big recovery was Uttam Galva for Rs5bn, the rest was from small loans. GNPAs declined 4% qoqto 16.3%.
• CET1 rose qoq from 6.45% to 6.93%. According to the CEO, they don’t need more capital infusion from the government (govt has already infused Rs82bn in 2Q) because they expect to conclude the stake sale in PNBHF before end Mar-19. Also 4Q PAT will be much higher according to him. The final bidding date for PNBHF is Feb 8. The Board has authorized the CEO to take a decision on the bids without calling a fresh Board meeting. So if bids are in order, the bank can announce the winning bid in 48 hours. The bank expects to conclude the stake sale by end March. The deal would add 1.2% to CET1 if it happens at CMP and closer to 2% for bids at premium.

Valuation and view

With unsustainably low credit cost and weak loan growth, we maintain Underperformer. Stake sale in PNBHF will be a positive trigger.