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PNB: Costs override growth - Views on News from Equitymaster
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PNB: Costs override growth
Feb 2, 2008

Performance summary
  • Interest income grows by 27% YoY on the back of 16% YoY growth in advances.

  • Other income grows 21% YoY with some help from the fee counter.

  • Net interest margins drop to 3.6% in 9mFY08 due to write off of amortisation expenses on investment.

  • Operating costs move up to 49% of total income from 45% in 9mFY07.

  • NPAs sequentially (QoQ) reduced at the gross as well as net level.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 28,715 36,361 26.6% 81,189 103,852 27.9%
Interest Expense 15,024 22,117 47.2% 42,515 63,683 49.8%
Net Interest Income 13,691 14,244 4.0% 38,674 40,169 3.9%
Net interest margin (%)       3.8% 3.6%  
Other Income 3,997 4,834 20.9% 11,348 14,603 28.7%
Other Expense 8,122 9,164 12.8% 22,671 26,977 19.0%
Provisions and contingencies 3,577 1,575 -56.0% 8,355 5,426 -35.1%
Profit before tax 5,989 8,339 39.2% 18,996 22,369 17.8%
Tax 1,691 2,923 72.9% 5,970 7,318 22.6%
Profit after tax / (loss) 4,298 5,416 26.0% 13,026 15,051 15.5%
Net profit margin (%) 15.0% 14.9%   16.0% 14.5%  
No. of shares (m) 315.3 315.3   315.3 315.3  
Book value per share (Rs)*         361  
P/BV (x)         1.8  
* Book value as on 30th September 2007

What has driven performance in 3QFY08?
  • Trailing behind the sector growth, PNB managed 16% YoY growth in advances and 17% YoY growth in deposits during 9mFY08. The same is well below the bank’s full year target of 22% growth in advances and our estimate of 20% YoY growth. It may be noted that we have already taken a conservative stance on the bank’s asset growth estimates due to its non-aggressive approach. However, the bank seems to have staggered its advance growth due to the risks on the delinquency front. Further PNB, until 1QFY08, was able to sustain its net interest margins (average of 4%) above the industry average. This was primarily by reducing the bulk and term deposit rates ahead of its peers. However, this advantage of the bank also seems to be swiftly depleting.

    PNB has historically maintained one of the highest proportions of low cost current and savings account deposits in the PSU banking sector (last 5-year average is 47%), which has partially hedged its net interest margins (NIMs). While the bank has set for itself a target of sustaining the CASA at 46% of total deposits, the same have dropped to 44% in 9mFY08.

    The overall delinquency rate for the bank having increased at the gross and net levels (from 3.5% and 0.8% of advances in 1HFY07 to 4.6% and 1.9% respectively in 1HFY08), the bank has re-worked its NPA management. This has helped reduce the NPA levels sequentially over the previous quarter (gross and net NPA 4.1% and 1.3% of advances respectively in 9mFY08).

    Sluggishness lingers…
    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Advances 876,805   1,015,340   15.8%
    Retail 134,875 15.4% 172,640 17.0% 28.0%
    Corporate 741,930 84.6% 842,700 83.0% 13.6%
    Deposits 1,302,235   1,526,220   17.2%
    CASA 599,028 46.0% 670,011 43.9% 11.8%
    Term deposits 703,207 54.0% 856,209 56.1% 21.8%
    Credit deposit ratio 67.3%   66.5%    

  • The 21% YoY growth in other income can be primarily attributed to higher contribution from fee income, which improved from 16% of total income in 9mFY07 to 18% of total income in 9mFY08.

  • While most PSU banks are paring their operational overheads by franchise and employee rationalisation, PNB has witnessed a spurt in its cost to income ratio from 45% in 9mFY07 to 49% in 9mFY08.

What to expect?
At the current price of Rs 534, the stock is valued at 1.3 times our estimated FY10 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. Having said that, inability to maintain a balance between growth and quality and inability to grow its fee income base along with the recurrence of treasury blushes are our lingering concerns with regard to the bank.

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