Punjab National Bank's 2QFY15 asset quality worse than expected

An increase was noted on incremental stress.

India-based Punjab National Bank's (PNB) asset quality for 2QFY15 was noted to be worse than Nomura's expectations, as PNB reported ~INR36bn of slippages significantly higher than INR29.6bn in 1QFY15 and INR33bn of restructuring which was >2x v/s 1QFY15.

According to a research note from Nomura, while restructuring is likely to

come off given low referrals, management is still not confident of an asset quality turnaround as it believes NPA recovery could pick up with a lag.

Meanwhile, the report noted that relapse from restructuring continues to remain high: PNB had ~INR13bn of slippages from the restructured book in 2QFY15.

Cumulatively ~INR29bn of INR66bn of total 1HFY15 slippages (~43% of total slippages) is from the restructured book indicating high relapse rate.

Nomura noted that its interest coverage analysis of large CDR cases indicates that financial stress in these companies have not eased and hence it continues to remain relatively concerned on PNB’s asset quality as the size of their restructured book is the highest (>10% of loans).

Here's more from Nomura:

Profitability was not as bad as what reported numbers implied: PNB’s dismal PAT performance (43% lower than expected) was impacted by 1) INR3bn of interest/FITL reversals which do not recur in

similar quantum given lower restructuring expected by the bank 2) INR3.5bn of additional wage and pension provisioning of which pension provisions will only recur partly and 3) Higher effective tax rate of 48% - Adjusted for these and higher NPA recovery, PPOP was in line (~10% y-y growth) and PBT was only ~20% lower rather the ~43% PAT miss.

Operationally PNB’s NIMs are being pulled down by higher growth in low margin retail business and overseas book but with lower interest reversals especially related to restructuring, we expect margins for PNB to recover over the next 6-9 months.

Some read-through for PSU banks. Some negative surprise on pensions: PNB realigned its actuarial assumptions in 2QFY15 and hence pension provisioning was ~INR3bn higher. Our estimates on pensions indicate that PNB is relatively better placed on pensions vs peers and its pension provisioning increased materially, there could be some negative surprise for other PSUs in the short term, we believe. Longer run we think P&L pension expenses have increased 3-4x in the last 4-5 yrs and this run-rate looks reasonable.

Relapse from restructuring to remain high- PNB’s 1HFY15 performance was weak + Bank of Baroda (BOB IN, Buy) is guiding for higher relapse.