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MOSL: PUNJAB NATIONAL BANK (Neutral)-Modest operating performance-Lower provisions aid earnings

PUNJAB NATIONAL BANK: Modest operating performance; Lower provisions aid earnings

(PNB IN, Mkt Cap USD4.5b, CMP INR68, TP INR75, 10% Upside, Neutral)

 

• PNB reported a surprise 1QFY20 PAT of INR10.2b (v/s our est. of INR1.9b loss; Bloomberg Consensus: INR3.25b loss), led by lower provisions of INR20.2b (-80% QoQ).
• NII declined 12% YoY (4% below our est.) to INR41.4b affected by 8% QoQ decline in advances. Domestic NIM declined 8bp QoQ (-54bp YoY) to 2.36%. Other income grew 6%/10% YoY/QoQ to INR20.7b resulting in total income of INR62.2b (2% miss). Opex declined 15% QoQ leading to a PPoP growth of 22% QoQ to INR34.8b.
• Loan book declined sequentially by 8% QoQ due to a sharp decrease in Agri/MSME book, which de-grew 8%/6%. Retail; however, continued strong YoY growth at 22%. Within retail, home loans grew 29.6% YoY (+4.8% QoQ).
• Deposit growth was modest at 6.7% YoY as CASA deposits grew 8.7% YoY led by both CA deposits (+18.2% YoY) and SA deposits (+7.3% YoY). Domestic CASA mix moderated to 42.8% v/s 43.5% in 4QFY19.
• Slippages moderated to INR54b (fresh slippages at INR47.1b) while upgrades, recoveries and write-offs came in at INR66.2b, resulting in 1.5% QoQ decline in GNPA. PCR declined 80bp QoQ to 60.9% (74.6% incl. TWO). GNPL/NNPL ratio increased 100bp/60bp QoQ due to sharp decline in loans.
• Other Highlights: (a) CET-1 stands at 6.35% with Tier-1 ratio of 7.6%, (b) PNB reported a fraud account in Power & Steel sector with a total exposure of INR37.6b (PCR of 50%), and (c) PNB has deferred INR7.3b of provisions in respect of few fraud accounts to subsequent quarters.
• Valuation and view: PNB has reported sharp moderation in provisioning expenses; however, large NPL pool and relatively lower coverage ratio (ex of fraud account) will necessitate higher provisions during FY20E. We revise our estimates as we lower loan growth and reduce credit cost to reflect 1QFY20 performance. This has resulted in 87%/14% increase in our FY20/FY21E earnings and 3%/4% increase in FY20/FY21E BV. Maintain Neutral with a TP of INR75 (0.7x FY21E BV).