Punjab National Bank’s (PNB) Q109 performance shows early signs of slowdown. While the net profits increased 20.6% y-o-y to Rs5,241 million, the increase reflects the positive impact of Agriculture Debt Waiver scheme.
Operating profits increased by merely 5.3% y-o-y. While the loans and advances grew by 19.6%, NIM remains visibly under pressure, partly because of falling CASA ratio and stagnant lending rates despite an increase in CRR and repo rates.
While retail lending, the most profitable segment for the bank, increased 16.9% y-o-y, but we see deceleration in growth vis-à-vis last quarter. With tighter credit conditions and slowing economy, we expect the growth in this segment to slow down sharply over the next few quarters. Consequently, we expect that NIMs will continue to be under pressure.
A sharp fall in gross and net NPA ratios is primarily driven by write-back of non performing advances, following the implementation of Agriculture Debt Waiver and Debt Relief Scheme.
While in 2007, the Bank stepped up its recovery efforts to reduce NPAs (and the results are reflected in a sequential decline in NPA ratios), we expect increased stress on the loan book because of higher interest rates, and, in our view, a potential increase in priority sector lending mix.
We have valued the Bank using SOTP methodology. Our fair value estimate of Rs555 indicates a potential upside of 10.5% from the current market price. We have consequently changed our rating on the stock from Buy to HOLD.