Stock Update

Punjab National Bank

Merger to present further challenges

Punjab National Bank (PNB) posted weak Q3FY2020 performance, with

Sector: Banks & Finance
muted business growth and deteriorating asset quality. Net interest
Result Update income (NII) was up by 1.5% y-o-y (we expected 17% y-o-y growth), but
reported strong growth in non-interest income, up 32.5% y-o-y, helped
Change the operating profit. The bank saw elevated slippages from agriculture
and other (including MSME) segment, apart from large Rs. 1,100 crore
Reco: Hold  slippage from the troubled HFC account. Rise in provisions was in part
CMP: Rs. 59 due to an impact of divergence of GNPA of Rs. 2,617 crore and provisions
of Rs. 2,091 crore. As a result of the above, the bank posted net loss of
Price Target: Rs. 65 â Rs. 492 crore, as against our PAT estimate of Rs. 916 crore. Loan book
shrunk by 2.5% y-o-y, and management had guided for FY2020E loan
á Upgrade  No change â Downgrade growth of ~8%, which appears difficult to achieve. Going forward, the
bank has indicated future recovery of Rs. 8,800 crore from NCLT-related
Company details cases. We believe there is uncertainty on the asset-quality outlook,
while profitability can be hit if the outcome of NCLT-related cases is
Market cap: Rs. 39,617 cr not as per expectations or delayed. Moreover, impending merger and
stress on the agri and SME portfolio may keep the asset quality volatile
52-week high/low: Rs. 100/56 till Q1FY2021E. We expect credit growth and business expansion/
reorganisation may take a back-seat due to the impending merger
NSE volume: (No of (likely to merge post Q4). Moreover, we expect the merger may throw up
shares)
271.7 lakh further integration and harmonisation issues, which will impact growth
and profitability. We have introduced FY2022E estimates in this report.
BSE code: 532461 We maintain our rating to Hold with a revised price target (PT) of Rs. 65.
Key positives
NSE code: PNB
ŠŠ Healthy growth in the retail portfolio of 13.6% y-o-y and housing loans
Sharekhan code: PNB of 20.4% y-o-y. In light of bleak credit demand Retail remains the sole
bright spot.
Free float: (No of
113.2 cr ŠŠ Relatively improved SMA-2 of Rs. 15,046 crore or 3.5% of loans from
shares) 4.9% in Q2FY2020.
Key negatives
Shareholding (%) ŠŠ Fresh slippages at Rs. 6,783 crores are still at elevated levels, nearly
double than levels in Q3FY2019.
Promoters 83.2 ŠŠ Weak loan growth, with a 2% y-o-y decline indicates that impact of
slippages will be more pronounced in the backdrop of low growth.
FII 2.4
Our Call
DII 8.3 PNB currently trades at <0.5x its FY2022E book value, which reflects
its weak asset-quality outlook and sluggish loan growth prospects. We
Others 6.1 believe lot depends on outcomes of large NCLT-related cases, as credit
cost can vary accordingly and can have a meaningful effect on profitability
due to ageing-related and deferred provisions. Increased stress in the agri
Price chart and SME loan book along with corporate book will continue to be viewed
cautiously. We have introduced FY2022E estimates in this report. We
100
maintain our rating to Hold with a revised PT of Rs. 65.
85
70
Key Risks
55
Negative surprises in outcomes of resolutions in large accounts and spike
in NPA due to the merger impact may affect profitability.
40
Feb-19

Feb-20
Jun-19

Oct-19

Valuation Rs cr
Particulars FY19 FY20E FY21E FY22E
Net interest income (Rs cr) 17,156 16,270 18,124 22,027
Price performance Net profit (Rs cr) -9,975 1,214 1,891 3,160
(%) 1m 3m 6m 12m EPS (Rs) -46.9 5.7 8.9 14.9
PE (x) -1.3 10.3 6.6 4.0
Absolute -11.8 -14.6 -15.2 -22.4 Book value (Rs/share) 89.5 106.0 113.2 125.2
P/BV (x) 0.7 0.6 0.5 0.5
Relative to
-8.3 -14.0 -21.3 -29.8 RoE (%) -23.2 3.4 7.1 11.0
Sensex
RoA (%) -1.3 0.1 0.2 0.3
Sharekhan Research,
Sharekhan Research, Bloomberg
Bloomberg
Source: Company; Sharekhan estimates

February 07, 2020 16

 Stock Update
Q3FY2020 Analyst Meet – Key Takeaways
ŠŠ PNB’s management has provided credit growth guidance of 8-10% for FY2021E.
ŠŠ PNB has taken up account harmonisation between itself and the other two PSU banks being merged with
it. Its activity is largely over and would be completed by March end. Some accounts may be NPA with one
bank and may still be standard with other two banks, which will need to be aligned accordingly at merger.
PNB is aiming that its recognition/harmonisation work is completed by March.
ŠŠ Stress in Agriculture and SME sector still continues and is expected to continue till Q1 of next year.
ŠŠ Credit cost trajectory is expected to improve post Q1FY2021E.
ŠŠ Outlook on the MSME sector has improved due to RBI’s dispensation for the sector to continue.
ŠŠ Divergence for PNB was mostly comprised agri-related accounts.
ŠŠ Slippage in the agri portfolio was high because the promised state governments have not released the
amount, lesser restructuring and some borrowers delaying repayments.
ŠŠ PNB has already done Rs. 1,800 crore restructuring of its MSME portfolio.
ŠŠ As a general case, the bank sees 40-50% slippages from MSME accounts once it exits moratorium.
ŠŠ Total recovery expected is Rs. 8,800 crore (from 17 Accounts under NCLT), of which PNB has already done
Rs. 6,700 crore provisions. Hence, there will be provision release as well as GNPA decline if recovery/
resolution is favourable.
ŠŠ It expects resolution in two accounts, in Steel and Power and one with the telecom company.
ŠŠ During the quarter, the bank saw Rs. 2,100 crore from the resolution of an oil and gas account.
ŠŠ The watchlist (corporate) is at Rs. 2,900 crore and along with it Rs. 2,000 crore in the retail agri MSME
(RAM) segment.
ŠŠ PNB has already passed resolution of maintaining minimum 26% ownership in its housing finance
subsidiary. The subsidiary is likely to raise capital of Rs. 1,400 crore, which will be sufficient for 4-5 years.
ŠŠ System level credit growth is muted also because of recovery and resolutions impacting growth.
ŠŠ PNB carries Rs. 30,000 crore liquid surplus, which it can look to deploy in credit creation.
ŠŠ Slippages going forward are expected to be Rs. 2,500 crore (from agri and MSME) and some slippages
expected from the watchlist (Corporate) of Rs. 2,900 crores.
ŠŠ SMA 1 is at Rs. 10,000 crore, but it is a dynamic number and frequently changes.
ŠŠ PNB has already done ~30% provision for HFC exposure and has taken ~50% provision for a private
airline exposure.
ŠŠ Expects to see some release of provision by March if resolution happens.
ŠŠ Expects to see Rs. 19,000 crore net slippage for FY2020E, GNPA at 15% and NNPA at 6% for FY2020E.

Results Rs cr
Particulars Q3FY20 Q3FY19 YoY (%) Q2FY20 QoQ (%)
Interest income 13,562.7 13,035.1 4.0 13,291.9 2.0
Interest expense 9,207.6 8,745.0 5.3 9,028.1 2.0
Net interest income 4,355.1 4,290.1 1.5 4,263.8 2.1
Non-interest income 2,404.8 1,819.2 32.2 2,264.7 6.2
Net total income 6,759.9 6,109.2 10.7 6,528.5 3.5
Operating expenses 2,997.0 3,009.4 -0.4 2,966.6 1.0
Pre-provisioning profit 3,762.9 3,099.9 21.4 3,562.0 5.6
Provisions 4,146.0 2,753.8 50.6 2,928.9 41.6
Profit before tax -383.1 346.0 NA 633.0 NA
Tax 109.4 99.5 9.9 126.0 -13.2
Profit after tax -492.5 246.5 NA 507.0 NA
Source: Company; Sharekhan Research

February 07, 2020 17

 Stock Update
Outlook
Fresh NPA additions continued to be elevated in Q3FY2020 as well, while apart from the corporate loan book,
the agri and SME segments have also started showing stress. Though management has indicated that overall
stress levels could decline post Q1, we believe in the interim there are lot of uncertainty to results. Credit cost
is likely to depend on resolutions of NCLT cases and with development in merger-related activities, we believe
credit growth will also remain muted. We expect credit growth and business expansion/reorganisation may
take a back-seat due to the impending merger (likely to merge to a consolidated entity post Q4). Moreover,
we expect the merger may throw up further integration and harmonisation issues, which will impact growth
and profitability.
Valuation
PNB currently trades at <0.5x its FY2022E book value, which reflects its weak asset-quality outlook and
sluggish loan growth prospects. We believe lot depends on outcomes of large NCLT-related cases, as credit
cost can vary accordingly and can have a meaningful effect on profitability due to ageing-related and
deferred provisions. Increased stress in the agri and SME loan book along with corporate book will continue
to be viewed cautiously. We have introduced FY2022E estimates in this report. We maintain our rating to Hold
with a revised PT of Rs. 65.

One year forward P/BV (x) band

2.0

1.5

1.0

0.5

-
Feb-16

Feb-17

Feb-18

Feb-19

Feb-20
PBV +1 sd 3-yr Avg -1 sd

Source: Sharekhan Research

Peer Comparison
CMP P/BV(x) P/E(x) RoA (%) RoE (%)
Particulars
Rs/Share FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
Punjab National Bank 59 0.6 0.5 10.3 6.6 0.1 0.2 3.4 7.1
State Bank of India 320 15.9 9.3 15.9 9.3 0.5 0.7 9.4 13.7
Bank of India 65 0.5 0.5 -18.2 7.6 0.0 0.4 -1.8 5.6
Source: Company, Sharekhan research

February 07, 2020 18

 Stock Update
About company
Punjab National Bank is an Govt. owned bank with a network of ~7000+ branches, 8900+ ATM’s and 7900+
business correspondents. Its majority presence is in the states of Punjab, Haryana, Uttar Pradesh, Madhya
Pradesh and Bihar. More than 60% of its branches are in rural and semi- urban areas. Its gross advances are
at Rs 4714 bn. The Bank has been rationalizing its overseas operations which have resulted into shrinking of
overseas business. Domestic CASA ratio for the bank stands at 43.7% as on Dec 2019.

Investment theme
Punjab National Bank has worked upon in bringing significant improvement in the internal systems and
processes post the discovery of frauds in one of its branches in 2018. It has restructured its processes, with
a focus on recovery and resolution, hence taking stapes like creating a Stressed Asset Management vertical
with dedicated team of over 2700 employee, along with creating dedicated branches to focus on SME, Retail
etc disbursments. It has seen results of them, in terms of improved recovery. The recent IBC amendment
is a positive development and will aid recovery and resolution of the stressed assets. Also, the significant
provision cover on its exposure to NCLT filed accounts, which as and when will see resolution, will be a
positive for the bank.

Key Risks
Negative surprises in outcomes of resolutions in large accounts and spike in NPA due to the merger impact
may affect profitability.

Additional Data
Key management personnel
Mr. S.S Mallikarjuna Rao MD & CEO
Mr Balbir Singh Company Secretary
Mr Agyey Kumar Azad Executive director
Mr Sunil Mehta Non-Executive Chairman
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Life Insurance Corp of India 5.0
2 HDFC Asset Management Co Ltd 1.6
3 Vanguard Group Inc/The 0.5
4 Kotak Mahindra Asset Management Co 0.3
5 Norges Bank 0.3
6 SBI Funds Management Pvt Ltd 0.2
7 Dimensional Fund Advisors LP 0.2
8 State of California 0.2
9 Reliance Capital Trustee 0.2
10 Pzena Investment Management LLC 0.2
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 07, 2020 19

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