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  • Stock recommendation: Punjab National Bank — Add — Target price Rs 90

    Publish date: August 8, 2018

    Results update: Hope and disappointment

    Punjab National Bank’s first quarter results was a case of the good, the bad and the ugly. Let’s start with the ugly: the bank reported a net loss of Rs 940 crore in the quarter-ended June, as against a profit of Rs 343 crore a year back. The bad news was that both credit costs and provisions remained on the higher side, while a recovery of non-performing assets and improving net interest margin (NIM) were the upsides for the scam-hit bank.

    Key highlights

    • The bank’s asset quality has improved because the gross non-performing loans have gone down by 4%. But concerns remain because slippages grew at 7% of loans.
    • Net interest margin (NIM), an indicator of a bank’s profitability, improved from 2.56% to 2.9% on the back of improved yields.
    • The bank’s current account, saving account (CASA) ratio saw a marginal drop. While savings account grew at 5%, current account dropped by 13% (YoY). A healthy CASA ratio indicates a bank’s ability to raise money at low cost.
    • Retail loans and corporate loans increased, but overall advances grew at a sluggish pace due to moderate growth in the SME loan and housing loan segments.
    • One of the reasons for the bank’s net loss was due to low income in treasury gains (dropped by 16% YoY) and fee income (-1%).
    • Punjab National Bank’s tier 1 capital ratio, a key measure of a bank’s financial strength, is at an alarming 7% despite the government’s decision to infuse capital. Ideally, a tier 1 ratio should not cross the 6%-level.

    Valuation & outlook

    Punjab National Bank’s losses were not unforeseen by the market. The worry, however, is its future profitability as the tier 1 capital ratio is hovering in the danger zone. The bank will have either reduce its risk-weighted assets or raise further capital to allay the concerns on the Street.

    We need to mention that the bank is expected to have healthy NIM numbers, while slippages will moderate going forward. The other factor that is helping the bank remain in good stead is the surprising growth in the deposit segment, which is a testament to the bank’s goodwill.

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