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PNB: Provisions dent profits
Jan 25, 2011

Punjab National Bank declared its 3QFY11 results. The bank has reported a 45% YoY and 8% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 46% YoY in 9mFY11 on the back of 30% YoY growth in advances.
  • Net interest margin improves to 4% in 1HFY11 from 3.4% in 9mFY10 due to stability in CASA proportion and re-pricing of assets.
  • Other income falls by 7% YoY in 9mFY11 due to treasury losses.
  • Cost to income ratio stable at 42% as was the case in 9mFY10.
  • CAR at 11.9% as per Basel II, Net NPA at 0.7% of advances at the end of 9mFY11.


Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest Income 53,887 71,191 32.1% 158,373 195,462 23.4%
Interest Expense 31,764 39,158 23.3% 98,343 107,678 9.5%
Net Interest Income 22,123 32,033 44.8% 60,030 87,784 46.2%
NIM (%)       3.4% 4.0%  
Other Income 8,478 8,572 1.1% 26,526 24,672 -7.0%
Other Expense 12,419 17,106 37.7% 36,618 46,974 28.3%
Provisions and contingencies 2,819 7,134 153.1% 7,996 17,641 120.6%
Profit before tax 15,363 16,365 6.5% 41,942 47,841 14.1%
Tax 5,250 5,463 4.1% 14,239 15,515 9.0%
Profit after tax/ (loss) 10,113 10,902 7.8% 27,703 32,326 16.7%
Net profit margin (%) 18.8% 15.3%   17.5% 16.5%  
No. of shares (m)         315.3  
Book value per share (Rs)*         617.0  
P/BV (x)         1.8  
* (Book value as on 31st December 2010)

What has driven performance in 9mFY11?
  • Staying ahead of the sector average in terms of growth, PNB kept its focus on loan growth in the SME and large corporate segments. The bank managed 30% YoY growth in advances in 9mFY11. The growth of 24% YoY in deposits was led by higher growth in term deposits during the past two quarters. However, the CASA (low cost deposit base) almost remained stable. The bank also improved its net interest margins due to the upward re-pricing of loans. The NIMs in fact improved to 4% at the end of 9mFY11; being one of the highest in the sector.

    CASA base remains stable...
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Advances 1,704,270   2,212,520   29.8%
    Agriculture 272,240 16.0% 339,090 15.3% 24.6%
    Retail 178,740 10.5% 217,320 9.8% 21.6%
    SME 194,560 11.4% 252,490 11.4% 29.8%
    Large corporates 600,470 35.2% 765,450 34.6% 27.5%
    Deposits 2,339,460   2,888,730   23.5%
    CASA 924,920 39.5% 1,128,060 39.1% 22.0%
    Term deposits 1,414,540 60.5% 1,760,670 60.9% 24.5%
    Credit/Deposit 72.8%   76.6%    

  • The overall delinquency rate for the bank, though not alarming, continued to show some signs of stress at the gross and net levels. NPAs went up at the gross level from 1.8% in 9mFY10 to 2% in 9mFY11 and at the net level from 0.5% to 0.7%. The bank had one of the highest provision coverage ratios (of 83%) in the sector a year back. At 77% of gross NPAs, this coverage is currently well above the RBIís mandate of 70%. However, the same may not be sustainable if the bankís asset quality deteriorates further. PNB has one of the largest proportions of agricultural debt due to its presence in the Gangetic belt. This impacted the bankís asset quality in this portfolio due to debt restructuring.

  • The fall in other income in 9mFY11 can be primarily attributed to lower treasury gains despite 16% growth in fee income. The proportion of fee to total income at around 17% has shown no signs of improvement.

  • PNB had restructured loans to the tune of Rs 144 bn at the end of 1HFY11, of which loans worth Rs 12 bn had slipped into NPAs.

What to expect?
At the current price of Rs 1,136, the stock is attractively valued at 1.1 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). Sustenance of a healthy current and savings account mix, technological upgradation and ability to sustain attractive margins are key to the bankís healthy growth prospects. The bank may need to dilute equity to strengthen its capital base in the medium term. Having said that, the low proportion of fee income and agricultural delinquencies are our lingering concerns with regard to the bank. We reiterate our positive view on the bank from a long term perspective.

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