PNB gets a lift from non-core revenue streams

Loan quality continues to improve; sustainability of healthy profit growth appears difficult

Heightened focus on bad loans, as well as ramping up loan recoveries, has led to Punjab National Bank (PNB)'s asset quality inching upwards. This trend continued in December quarter (Q3). Incremental bad loans fell for the third quarter in a row sequentially at Rs 4,800 crore, the lowest in the past five quarters for the bank. Gross non-performing assets (NPAs) ratio remained largely unchanged sequentially at 13.7 per cent and has been in a tight band since June 2016 quarter. But the bank still has a long way to go and needs to sustain and improve this performance for a meaningful improvement in its asset quality.

Despite demonetisation, domestic loans grew 3.4 per cent, in line with recent trends, fuelled by 12 per cent growth in retail (consumer) segment even as corporate loans fell seven per cent in Q3, compared to year ago. Within retail, housing and vehicle finance grew at a healthy rate. Given high-growth retail segment forms a small (15 per cent) proportion of PNB's loans, it wasn't enough to fire up the overall loan number in Q3, which fell 1.8 per cent. Jump of 50.5 per cent in other income to Rs 2,514 crore saved the day. While fee income grew 28 per cent, other income was boosted by higher recovery in written-off accounts (up 81 per cent) as well as trading profit (up 73 per cent). The last two income streams are volatile. Loan-loss provisions grew in low single digit, aiding four-fold jump in net profit to Rs 207 crore. A decline of 9.4 per cent year on year in net interest income (difference between interest income earned and interest expended) pulled down domestic net interest margin, even as cost of funds fell. Analysts believe sustainability of healthy profit growth appears difficult.

The stock trades at undemanding valuation of 0.8 times the bank’s FY18 estimated book value. Given that net profit missed Bloomberg consensus estimate of Rs 613 crore by a wide margin, there could be earnings downgrades. Improvement in loan growth and quality is a pre-requisite for a re-rating. Any value unlocking in insurance and housing finance subsidiaries or non-core assets could provide near-term cheer.