High relapse rate loom over India's Punjab National Bank

The bank remains the most exposed.

1QFY15 PPOP of INR30bn of India-based Punjab National Bank was in line with analyst expectations and is finally stabilising with margins normalising, but PAT at INR14bn was a large beat driven by investment provision write-back (INR3.8bn) and lower specific provisions (15% lower than expected).

According to a research note from Nomura, while fresh stress accretion trend is encouraging and has positive implications for PSU banks, our concerns on high relapse from the restructured book is playing out as expected and PNB remains the most exposed there.

The report said that the key negative in 1QFY15 is the quantum of relapse from the restructuring book, with ~INR16.7bn of slippages from ~INR35bn of reduction in the restructured book, leading to a relapse rate of ~45%.

Cumulatively, of the INR210bn of reduction in PNB's restructured book, there have been INR75bn of slippages, leading to a relapse rate of 35%.

Here's more from Nomura:

We have been highlighting a high relapse risk from the restructured book and, we note, PNB remains most exposed to this risk given the size of its restructured book (9.8% of loans vs. 4-7% of loans for peers).

Provisions were ~35% lower than expected largely due to INR3.8bn of investment depreciation write-back. Specific credit loss was ~15% lower than expected.

Overall, we have been positively surprised by lower stress accretion but relapse rates (+40%) from restructured book are concerning.

Lower incremental stress: NPA accretion of INR29bn was higher than our expectations, but of this INR16.7bn was due to slippages from the restructured book and fresh NPA accretion was low at INR12bn.

Also, incremental restructuring of INR14.2bn was ~50% lower than the trend of the past 12 months and thus fresh NPAs + restructuring accretion trend is relatively positive.