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Punjab National Bank (PNB) has come out with a disappointing set of numbers
for 3QFY2016. Although we had expected the results to be unimpressive, but the
quantum of rise in the Gross NPAs has surprised us. The bank reported a PAT of
only Rs. 51cr for the quarter despite a tax write back of Rs. 908cr.
Loan growth remained subdued; NIM under pressure: For the quarter, advances
growth at 8.4% yoy remained subdued, while deposit growth was decent at 13.3%
yoy. CASA deposits grew by 14.3% yoy with Current deposits growing by 22.9%
yoy and Savings deposits growing by 12.5% yoy. The CASA ratio stood at 40.4%.
The NIM for the quarter declined by 22bp qoq to 2.75% due to lower yield on
advances, which is largely due to base rate cuts. Provisions doubled to Rs. 3,775cr
compared to Rs. 1,882cr in the sequential previous quarter, resulting in a loss at the
PBT level to the tune of Rs. 857cr. The bank got a tax write back of Rs. 908cr; as a
result the bank generated a PAT of Rs. 51cr for the quarter.
Sharp deterioration in asset quality: Asset quality deteriorated sharply during the
quarter with gross slippages of Rs. 12,715cr (annualized slippages ratio of 13.4%).
Nearly Rs. 5,000cr of assets (from the steel sector) were recognized as NPAs from
the RBI’s Asset Quality Review accounts. PNB refinanced assets worth Rs. 6,800cr
under the 5:25 scheme and initiated SDR on assets worth Rs. 7,200cr during the
quarter. GNPAs went up by 37.7% qoq; the GNPA ratio for the quarter stood at
8.47% vs 6.36% in 2QFY2016. Pain on the asset quality front is expected to
continue as we expect the bank to report similar rise in NPA levels (as in
3QFY2016) in 4QFY2016 as well. The NNPA ratio stood at 5.86% vs 3.99% in
2QFY2016, a rise of 187bp qoq.
Outlook and valuation: After the bank having seen a deceleration in its slippages
in the previous two quarters, the trend has reversed now with substantial
deterioration in asset quality witnessed during 3QFY2016. In our view, the asset
quality is not likely to improve in the near term which will keep the return ratios of
the bank weak. However, we believe the pricing correction has been harsh in the last
one quarter. At the current market price, the stock trades at 0.5x FY2017E P/ABV. Given
the current economic scenario we don’t expect any meaningful improvement in the
bank’s asset quality, earnings as well as return ratios. Hence, we recommend a Neutral
rating on the stock.

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