PPoP surprises positively; asset quality improves sequentially
* PNB reported PPoP of INR32.8b (+2%/-1% QoQ/YoY; 10% beat). Lowerthan-estimated non-core income was compensated by a 10% beat on operating expenses. Provisions of INR24.4b (in-line) led to PAT of INR5.6b (+63% QoQ on a low base), which beat estimate by 35%.
* Slippages moderated to INR34.6b (3.5% annualized), of which 30% is fresh debit to existing NPA v/s 10% for 1QFY18. Total net stressed loans (including net NPA and standard restructured assets) stood at 11% of total advances (11.4% in 1Q).
* Domestic NIM improved 8bp QoQ to 2.64%, with a 4bp decline in cost of funds and a 3bp increase in yield on advances. Loan book grew 3%/4% QoQ/YoY, impacted by muted growth in the corporate segment. Retail loans grew 5%/16% QoQ/YoY, driven by 34% YoY growth in housing loans.
* Other highlights: a) CASA deposits grew 19% YoY, driven by 21% YoY growth in SA deposits; average CASA ratio stood at ~44.4% v/s 44% a quarter ago and 42.1% a year ago. b) Fee income growth was strong at 15% YoY, helped by better retail fees. c) CET1 ratio of ~7.67% remains a concern – management is looking to raise capital in FY18.
* Valuation view: Significant stress is being recognized over the last several quarters, and now resolution (especially under IBC) in key sectors like steel, power, construction and roads remains a key for upgrades and recoveries. Investments in key ventures add ~23% to overall market cap. We have increased FY18/FY19 PAT estimates by 46%/23% to factor in improvement in margins and controlled opex. Due to low RoAs (~0.25%), even a 10bp change in the NIM (30%) and credit cost (20%) can impact profitability significantly. We maintain Buy with an SOTP-based target price of INR250 (v/s our earlier TP of INR184, as we increase core bank valuation multiple to 1x Sept BV from 0.7x June 19 BV in view of improved profitability).
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