Punjab National Bank's Q4FY19 results (Underperformer) - A big miss, reiterate Underperformer

Q4FY19 result highlights

• PNB posted a big loss of Rs 48bn versus PAT of 2.5bn qoq. There was a huge tax write back of 24bn driven by bad loan write-offs without which the loss would have been higher.
• Loans grew 6% yoy and 5% qoq while deposits grew 5% yoy and 4% qoq. NII grew 37% yoy on a low base, but declined 2% qoq.
• Core PPOP declined 3% qoq.
• Slippage rose sharply to Rs73bn versus 40bn qoq. Of the total slippage, divergence in GNPAs was 9bn, IL&FS was Rs18bn and the remaining was small accounts. GNPAs remain high at 15.5% of loans though they are lower than 16.6% qoq. Other stress loans amount to 1.8%. We had expected slippage to stay stable qoq given the huge NPL recognition already done by PNB in the last few years. The sequential increase in slippage was a negative surprise. Also, Jet Airways has still not been classified as NPL though the bank has provided 15% against it.
• Key stress exposures for PNB – Jet - Rs8bn, DHFL –Rs18bn, Essel group – Rs23bn, ADAG (standard) – Rs10bn.
• Exposure to MUDRA loans amounts to Rs70-80bn. GNPAs in Mudra are high at 10%. PNB is now cautious in this segment.
• Loan provisions rose sharply from 26bn to 92bn qoq. Divergence related provisions were high at 38bn. PCR ex write-offs rose from 54% to 62% qoq.
• Despite the capital infusion of 59bn in 4Q19, CET1 slipped to 6.2% versus 6.9% qoq because the loss during the quarter consumed the new capital. This is the lowest CET1 amongst banks we cover and lower than the mandated requirement. Rs6bn of fraud provisions have been charged to reserves.
• Guidance for FY20 – 1) Loan and deposit growth of 10% 2) Slippage of Rs120bn 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

This is the weakest result among banks we cover. There are media reports that the government is contemplating a merger of PNB, OBC and Allahabad which if true will be an additional burden on profitability. After frequent negative surprises on slippages and earnings, we reiterate Underperform with TP of Rs60.