Few cheers in PNB first quarter results

Small improvement in bad loans, but credit growth remains below par

The market cheered Punjab National Bank’s June quarter results as the state-owned firm seems to have slammed brakes on non-performing assets (NPA). It reported gross NPAs of 6.47 per cent in the quarter against 6.55 per cent in the preceding quarter and 5.48 per cent a year ago. Net NPA declined marginally to 4.05 per cent from 4.06 per cent in the March quarter and up from 3.02 per cent a year ago.

Bulls were also enthused by an improvement in the capitalisation. The Tier-I capital ratio improved to 9.18 per cent in the quarter from 8.82 per cent a year ago, but down from 9.3 per cent in the March 2015 quarter.

The stock gained five per cent on Tuesday, the highest among banking and Nifty 50 stocks. The traders were also happy that the bank had stepped up the provisioning in the quarter and seemed cleaning up its balance sheet. Provisioning nearly doubled in the quarter to Rs 1,811.4 crore from Rs 927.6 crore a year ago.

 

But this is where the good news ends. The net profit nearly halved in the quarter, weighed down by a decline in net interest income (NII) and higher provisionings. The biggest worry was the slower growth in the core lending business.   

The lending or advances growth was below par at 9.6 per cent year-on-year (y-o-y), slower than 16.3 per cent growth in deposits during the period. Advances were flat on a sequential basis. The result was a small 3.8 per cent growth in interest income (gross) while interest expense was up 10 per cent.

The bank was saved blushes due to a 13 per cent y-o-y growth in other income and 12.3 per cent decline in employee expenses. It cancelled out the 6.3 per cent decline in the net interest income. Operating profit (excluding provisions) was flat at Rs 3,132 crore.

Analysts say the mismatch between lending and deposit growth could weigh on earnings. “The results were a relief from a disastrous quarter in March. But the relief would be short-lived unless credit growth picks up and there is a decline in bad loans led by a broad-based industrial recovery,” says Dhananjay Sinha, head, institutional equity, Emkay Global Financial Services.

Analysts worry about low provisioning coverage ratio. It was 59.32 per cent in the quarter, down from 60 per cent a year ago and up from 58.21 per cent in the March 2015 quarter.

The stock is now trading at only 8.5x its trailing earnings and at a 35 per cent discount to its book value, which makes it a value buy for patient investors.