Punjab National Bank's Q3FY18 results (Neutral) - Profitability remains weak with a pre-tax loss for 3Q

• PNB’s PAT of Rs2.3bn was lower than the consensus estimate of Rs5bn due to lower NII and higher MTM losses. Even after booking Rs12bn as gains from the stake sale in PNB Housing the bank reported a loss at the pre-tax level, but a tax write back helped the bank post a profit at the post tax level. The bank posted a loss of Rs2bn at the pre-tax level against PBT of Rs8bn qoq.  
• GNPAs remained flat qoq amounting to 12% of loans. Slippage at Rs46bn remained stable qoq. There are not enough details to calculate total stress loans which stood at 19% in 2Q. 
• Loan growth accelerated to 17% yoy and 10% qoq from 8% yoy in 2Q. While the yoy growth is partly driven by base effect the sequential growth is worth noting. At 10% qoq, the sequential growth is amongst the highest in the sector (sector loans grew 1% qoq). The sharpest sequential growth was seen in housing at 18.8% qoq, MSME at 12% qoq and large industry at 9% qoq. The bank has not given details of overseas NIMs for 3Q or 9M. Based on the 9-month figure we calculate domestic NIMs of 2.55% for 3Q which is a decline of 9 bps qoq. NII grew 6.9% yoy but declined 0.7% qoq. Most of the incremental business appears to have been booked at very low rates.
• Trading gains at Rs15bn were higher than Rs7bn qoq and included gain of Rs12bn from stake sale in PNB Housing. The bank made MTM provisions of Rs11bn in 3Q. Core non-interest income excluding trading gains grew -23% yoy and 28% qoq. Opex declined 9% yoy and rose 7% qoq. Employee expenses declined 17% yoy and grew 9.5% qoq. CI ratio stands at 40% versus 44.6% qoq.
• Credit cost of 2.8% was slightly higher than 2.7% qoq. The bank has pending provisions of Rs10.5bn on the NCLT accounts that will be provided in 4Q.

Valuation and view

We cut earnings for FY19/20E to factor in higher MTM and lower NIMs. We are cutting our target price to Rs175. We value the core business at 0.85x P/adjBV FY20E.  PNB’s quarterly disclosures remain weaker than other state banks like SBI, BoB, OBC, Union. We expect RoE to remain weak and below 10% throughout our forecast period. We are also sceptical of the higher than sector loan growth in a weak environment. While profitability is likely to remain weak, we maintain Neutral given the steep price correction. Longer term, M&A is the key risk.