IGI Logo

Asset quality disappoints; elevated slippages a key concern

Weak core operating performance

* PNB reported a weak operating performance, impacted by a 6% QoQ decline in NII, despite a loan growth of 5%. Domestic margin contracted by 15bp QoQ to 2.86%. PPOP fell 7% YoY to INR52.6b (2% miss).

* On the asset quality front, slippages stood elevated yet again (~6.2% annualized) at INR105b, a jump of 111% QoQ. All business segments, Retail (INR11b), Agri (INR28b), MSME (INR28b), and Corporate (residual) contributed to slippages.

* Total restructured book (COVID-19 and earlier schemes) stood at 2.4% of loans (v/s 2.8% in 3QFY22). Total SMA overdue (over INR50m) saw a sharp improvement QoQ at INR1.2b (0.02% of loans) as against INR30.9b (0.42% of loans) in 3QFY22.

* We cut our FY23/FY24 earnings estimate sharply by 23%/26% as we build in higher provisioning and project a RoA/RoE of 0.5%/6.6% by FY24. We maintain our Neutral rating.

Weak NII growth; higher write-offs and recoveries supports asset quality

* PAT fell 66% YoY and 82% QoQ to INR2b due to the elevated provisioning of INR48.5b (38% miss). NII saw a 5% YoY growth (down 6% QoQ) to INR73b. However, a decline in employee cost cushioned the impact on PPOP growth. As a result, PPOP fell by 7% YoY to INR52.6b (2% miss). Domestic margin compressed by 15bp QoQ to 2.86%.

* Other income declined by 35% YoY to INR24.5b on muted treasury gains in 4QFY22 v/s INR6.2b in 3QFY22 and INR9.8b in 4QFY21. OPEX fell 20% YoY to INR44.9b. Thus, the C/I ratio improved to 46% (v/s 51.7% in 3QFY22).

* Loan book grew at 8% YoY (up 5% QoQ) to INR7.3t, with Retail/Agri growing at 6.7%/9.8% YoY. Among Retail segments, Vehicle/Personal loans grew at 23%/14% YoY, while Housing grew at 4%. On the liability front, deposit grew by ~4% YoY (up 2% QoQ) and CASA grew by 8.3% YoY. CASA mix improved to 47.4% (+178bp QoQ).

* On the asset quality front, slippages stood elevated at INR105b (annualized at 6.2% of loans). However, higher write-offs of INR105b and healthy recoveries and upgrades supported asset quality. As a result, the GNPA/ NNPA ratio improved by 110bp/10bp QoQ to 11.78%/~4.8%. PCR fell 293bp QoQ to 62%.

* The SMA-2 (above INR50m) book showed a robust improvement and stands at just 0.02% of loans (INR1.2b) v/s 0.42% of loans (INR30.9b) in 3QFY22. Total restructured book (COVID-19 and earlier schemes) stands at 2.4% of loans (2.8% in 3QFY22).

Highlights from the management commentary

* The bank has guided at a loan growth of 10% in FY23.

* It declared dividend after a gap of eight years.

* It endeavors to ensure fresh slippages are lower than recoveries in FY23

Valuation and view

PNB reported a weak operating performance, affected by tepid NII, as domestic margin contracted by 15bp QoQ, along with elevated slippages. However, a decline in OPEX cushioned the impact on PPOP growth. Headline asset quality saw an improvement, supported by higher write-offs and healthy recoveries and upgrades. The restructured portfolio improved marginally to ~2.4% of loans on which the bank is carrying provisions to the extent of ~12%. SMA overdue (with loans over 50m) has reduced sharply to 0.02% of loans. We cut our FY23/FY24 earnings estimate by 23%/26% as we build in higher provisioning and estimate a RoA/RoE of 0.5%/6.6% in FY24E. We maintain our Neutral rating with a TP of INR30/share (0.4x FY24E ABV).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer