Rating of the National Bank of Punjab – “Under review”: asset quality continued to disappoint in Q4
Punjab National Bank’s (PNB) PAT T4FY21 of Rs 5.9 billion was supported by rising other income, although operational momentum remained weak. The quality of assets reflects persistent challenges. Slippages remained high at> 14% (annualized) and SMA-2> 4.4%. Although the restructured loans were lower than expected, still evolving and stress low stock provision costs high to squeeze credit in the future.
The recent capital increase of the bank was dilutive (persistent challenge for PSBs). In addition, uncertainty persists due to: (i) the merger effect that is playing out – we expect the transition to be difficult; and (ii) the impact of the second wave on the quality of assets. Keep under review pending stabilization of profits and gradual clarity on bad debts.
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Asset quality continues to disappoint
GNPL / NNPL fell to 14.1% / 5.7% from 14.7% / 5.65% pro forma in Q3FY21. The key disappointment came from the high slippages – Rs 240 billion,> 14% (annualized) – the highest among established peers at T4FY21. While restructuring seemed reasonably under control, we are not comfortable enough to form a decisive opinion on the sanctity of fairness. There is something to keep us on our toes: (i) the potential pool of stressed SMA-2, still at 4.4%, remains high despite significant slippages; (ii) the expectations of a new restructuring and the resulting arrangements; (Iii) insufficient provisions to absorb potential losses. Asset quality issues will persist and the cost of credit is expected to remain high in the short to medium term.
Core earnings momentum remains weak
Business momentum remains weak – the gross loan portfolio fell 3% and deposits increased 3% year-on-year, significantly lower than its peers. This, added to the pressure on NIMs (down> 30bp qoq), affected core operating profitability, although operating costs were under control. With limited leverage to improve the NIM and in the absence of growth, operational profitability will remain sluggish. We believe that the operational problems encountered by PNB will continue to be a challenge.
Outlook: uncertainty persists
A weak earnings profile, operational problems and a diluted franchise make PNB a structurally challenged investment proposition. Moreover, the merger brings its own uncertainties and remains a controllable key. Pending clarification on critical issues, we are maintaining the inventory under review.