India's Punjab National Bank most exposed to relapse risk

This could continue near-term.

The 3QFY15 PAT of India's Punjab National Bank was a big miss due to very disappointing asset quality and resultant weak core PPOP.

According to a research note from Nomura, PAT of INR7.7bn was aided by INR6.5bn of treasury gains/investment write-back and ~600bps drop in NPA coverage, otherwise reported profitability would have been much weaker.

Further, asset quality continues to disappoint with the highest-ever slippage of INR55bn.

Nomura noted that the bank's 3QFY15 performance and muted guidance highlight PNB's weak underwriting and
reinforces Nomura's concerns over higher relapse risk for PNB.

Here's more from Nomura:

Anchor themes: PNB remains the most exposed to relapse risk from the restructured book -- management
commentary has been that this can continue in the near-term.

Asset quality disappointment continues: PNB reported total delinquency of ~INR80bn with INR55bn of slippages. Apart from the usual metal/Infra space, PNB had bulky slippages/restructuring in the cement and sugar sectors.

Slippages from the restructured book contributed ~30%/40% of slippages in 3Q/9MFY15. While slippages inched up ~50% q-q, credit costs were flat q-q, driven by ~600bps of rundown of coverage leading to 6-7% cut in adjusted book.

Near-term asset quality guidance was muted; we continue to remain cautious given PNB's weak underwriting and higher relapse risk.

Weak core PPOP: Core PPOP was ~20% lower than expected with margins lower due to high reversals and reported profit supported by INR6.5bn of treasury gains/investment depreciation. As asset quality could
take 3-6 months to recover, we expect PPOP improvement only then.