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PNB: Restructuring takes toll on quality - Views on News from Equitymaster
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PNB: Restructuring takes toll on quality
Jan 29, 2010

Performance summary
  • Interest income grows by 15% YoY in 9mFY10 on the back of 20% YoY growth in advances.
  • Net interest margin drops marginally to 3.8% in 9mFY10 despite higher proportion of CASA.
  • Cost to income ratio remains stable at 42%.
  • Growth in other income in 9mFY10 led by higher treasury income.
  • CAR comfortable at 14.6% as per Basel II, Net NPA at 0.5% of advances (0.4% in 9mFY09).


Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 52,909 55,055 4.1% 140,798 161,202 14.5%
Interest Expense 33,274 31,764 -4.5% 89,593 98,343 9.8%
Net Interest Income 19,635 23,291 18.6% 51,205 62,859 22.8%
Net interest margin (%)       3.9% 3.8%  
Other Income 9,452 7,310 -22.7% 20,641 23,698 14.8%
Other Expense 11,066 12,419 12.2% 30,323 36,618 20.8%
Provisions and contingencies 1,776 2,819 58.7% 7,059 7,996 13.3%
Profit before tax 16,245 15,363 -5.4% 34,464 41,943 21.7%
Tax 6,188 5,250 -15.2% 12,213 14,239 16.6%
Profit after tax / (loss) 10,057 10,113 0.6% 22,251 27,704 24.5%
Net profit margin (%) 19.0% 18.4%   15.8% 17.2%  
No. of shares (m)       315.3 315.3  
Book value per share (Rs)*         493.0  
P/BV (x)         1.8  
* Book value as on 31st December 2009

What has driven performance in 9mFY10?
  • While keeping its focus on loan growth in the agricultural segment, a higher disbursal of loans to the SME segment helped PNB grow its advance book by 20% YoY in 9mFY10. PNB has one of the largest proportions of agricultural debt due to its presence in the Gangetic belt. More importantly, the growth of 18% YoY in deposits was outstripped by the growth in low cost deposits (CASA) during the past nine months. It may be noted that PNB’s CASA proportion had a steady downward trend over the past few quarters. However, the bank has managed to reverse this trend in 3QFY10 and CASA stood at 39.5% of deposits at the end of 9mFY10. The bank, however, witnessed pressure on its net interest margins due to the downward re-pricing of loans. We have estimated the bank’s NIM at 3.5% for full year FY10.

    CASA led growth
      9mFY09 % of total 9mFY10 % of total Change
    Advances 1,416,590   1,704,270   20.3%
    Agriculture 219,120 15.5% 272,240 16.0% 24.2%
    Large corporate 391,140 27.6% 448,490 26.3% 14.7%
    Retail 148,180 10.5% 178,740 10.5% 20.6%
    SME 240,640 17.0% 326,540 19.2% 35.7%
    Deposits 1,970,690   2,339,460   18.7%
    CASA 737,120 37.4% 924,920 39.5% 25.5%
    Term deposits 1,233,570 62.6% 1,414,540 60.5% 14.7%

  • The overall delinquency rate for the bank showed some signs of stress at the net levels. This can be accorded to loan restructuring with higher exposure to agri and SME segments. Although the NPAs reduced at the gross level from 2.1% in 9mFY09 to 1.8% in 9mFY10, they were higher at the net level from 0.4% in 9FY09 to 0.5%. The bank has one of the highest provision coverage ratios (of 83%) in the sector at the end of 9mFY10. PNB had fresh slippage to the tune of Rs 3.6 bn from the agri debt waiver scheme during 9mFY10.

  • The lower growth in other income in 3QFY10 can be primarily attributed to lower treasury income and mere 17% growth in fee income. The bank had 88% of investments in the HTM basket. It also earned 10% of the fee-based income by transacting the government business. The bank is a principal banker for Ministry of Corporate Affairs, Ministry of Finance, Ministry of Personnel, Public Grievances and Pension and Ministry of Civil Aviation and Tourism.

  • PNB had restructured NPAs to the tune of Rs 2.5 bn at the end of 9mFY10.

  • The book value per share for PNB shareholders from PNB Housing Finance and PNB Gilts stood at Rs 5.9 and Rs 13.2 respectively at the end of December 2009.

What to expect?
At the current price of Rs 900, the stock is valued at 1.2 times our estimated FY12 adjusted book value. Sustenance of a healthy current and savings account mix, technological upgradation and ability to sustain attractive margins are key to the bank’s healthy growth prospects. Also, the bank’s healthy CAR as per Basel II compliance with revised AS-15 is a matter of comfort. Having said that, the low proportion of fee income and agricultural delinquencies are our lingering concerns with regard to the bank. We retain our positive view on the stock

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