Punjab National Bank's Q4FY18 results (Downgrade to Underperformer) - Not only a net loss, PNB posts loss even at the operating level. CET1 lowest among peers

Q4FY18 result highlights

• PNB posted a huge net loss of Rs134bn versus net profit of Rs2.3bn qoq. The bank also posted a loss of Rs4.4bn at the operating level versus PPOP of Rs42bn qoq. The operating loss was driven by a huge interest reversal due to high slippage and a sharp increase in employee expenses. Credit cost rose sharply from Rs30bn to Rs162bn as the bank provided Rs72bn for the scam and other slippages were also high during 4Q. Exposure to fraud jewellery accounts stands at Rs143.6bn of which Rs135bn is LoUs. The bank has recognised 50% of fraud as NPL in 4Q, the rest will slip in FY19. The bank has deferred provisions of Rs102bn without which the loss would be higher.
• GNPAs rose sharply by 50% qoq to 18% from 12%.  Of the slippage of Rs310bn, Rs72bn is scam related and Rs102bn is from various RBI restructuring schemes which slipped post the Feb 12 circular. Slippage outside the watch list is very high at Rs136bn.
• Loan and deposit growth moderated as mgmt. focused on dealing with the scam. Loans grew 3% yoy and fell 4% qoq.
• It was not only the high slippage that is a dampener, even the fall in NI and unexplained sharp rise in wages are negatives. NII declined 23% qoq and 12% yoy. The interest reversal on non-LoU NPLs looks high because the bank had been accruing interest on SDRs which had to be reversed in 4Q as all loans under SDR slipped.  The sharp rise in wages from Rs17bn to Rs39bn qoq is because of provisions for the new wage agreement according to mgmt. The rise looks too sharp to be justified fully by the new wage agreement. We note that in 4Q17, the bank had shown negative employee expenses as they had credited a surplus provision of Rs20bn to wages. There is a possibility of part of this write back being reversed in 4Q18.
• The bank has deferred to FY19 1) fraud NPLs of Rs72bn and 2) total provisions of Rs102bn including gratuity of Rs1.9bn, MTM loss of Rs11bn,  NPL provisions of Rs72bn and NCLT provisions of Rs16.8bn.

Valuation and view

PNB’s quarterly loss was higher than the capital infusion of Rs104bn in FY18. We believe with a sharp decline in CET1 to 5.96% and a sharp rise in GNPAs, RBI could bring PNB under its PCA framework.  We downgrade to Underperform as we expect PNB to post loss even in FY19E. RoE will remain low at 3.8% in FY20E, in our view.  PNB’s accounting and disclosures remain weaker than peers. Cut TP to Rs75.