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Punjab Nat. Bank: Falling short on capital buffer
Feb 2, 2012

Punjab National Bank (PNB) declared its results for the third quarter for the financial year 2011-2012 (3QFY12). The bank has reported 33% YoY and 5.5% YoY growth in interest income and net profits respectively for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 10% YoY in 3QFY12, on the back of a 19% YoY growth in advances.
  • Net interest margin (NIM) sees a slight decline to 3.9% from 4% in 9mFY11.
  • Net NPA (non-performing assets) to advances comes in higher at 1.1% in 9mFY12 from 0.7% in 9mFY11.
  • Other income improves by 11% YoY in 3QFY12. Fee income grows by 23% YoY on exchange profits, bills and remittances etc. The bank was also able to book income from new Metlife Insurance JV.
  • Capital adequacy ratio currently stands at 11.5% at the end of 3QFY12 from 11.9% at the end of 3QFY11 as per Basel II norms.


Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 71,191 94,810 33.2% 195,462 267,483 36.8%
Interest expense 39,158 59,444 51.8% 107,679 166,438 54.6%
Net Interest Income 32,033 35,366 10.4% 87,783 101,045 15.1%
Net interest margin (%)       4.0% 3.9%  
Other Income 8,572 9,541 11.3% 24,672 29,266 18.6%
Other Expense 17,106 18,143 6.1% 46,974 53,530 14.0%
Provisions and contingencies 7,139 9,461 32.5% 17,641 25,499 44.6%
Exceptional items - -   - -  
Profit before tax 16,360 17,303 5.8% 47,841 51,282 7.2%
Tax 5,463 5,803 6.2% 15,515 16,681 7.5%
Effective tax rate 33.4% 33.5%   32.4% 32.5%  
Profit after tax/ (loss) 10,898 11,500 5.5% 32,326 34,601 7.0%
Net profit margin (%) 15.3% 12.1%   16.5% 12.9%  
No. of shares (m)         316.8  
Book value per share (Rs)*         741.8  
P/BV (x)         1.3  
* (Book value as on 31st December 2011)

What has driven performance in 9mFY12?
  • Staying slightly above with the sector average in terms of growth, PNB kept its focus on loan growth in the SME and retail segments. The bank managed a 19% YoY growth in advances in 9mFY12, despite a tough credit environment in line with our estimates.

  • The growth of 23% YoY in deposits was led by higher growth in term deposits during the past nine months. The proportion of bulk deposits (deposits in excess of Rs 10 m, parked by corporates having surplus funds) has increased to 24% in 9mFY12 from 22% previously. The growth in the CASA (low cost deposit base) came in much slower, at around 12%. The proportion of CASA also decreased to 35% from 39% previously. The bank has seen pressure on this front on account of the spread between fixed deposits and savings bank rates. The bank expects muted CASA growth going forward, despite efforts to sustain the same.

  • The bank managed to keep its NIMs relatively stable despite, a fall in the low cost deposit base, on account of higher lending yields. The bank expects to sustain its NIMs at around 3.5% going forward. PNB has been able to maintain NIMs despite the RBI’s successive rate tightening. Thus with monetary easing expected over the next few quarters, the bank should be able to benefit from the same.

    Healthy growth in retail and SME...but CASA growth is slow
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 2,212,520   2,626,050   18.7%
    Agriculture 339,090 15.3% 383,060 14.6% 13.0%
    Retail 217,310 9.8% 260,090 9.9% 19.7%
    Housing 110,080 5.0% 123,730 4.7% 12.4%
    SME 252,490 11.4% 299,120 11.4% 18.5%
    Large corporate 765,450 34.6% 884,120 33.7% 15.5%
    Deposits 2,888,730   3,565,170   23.4%
    CASA 1,128,060 39.1% 1,259,660 35.3% 11.7%
    Tem deposits 1,760,670 60.9% 2,305,510 64.7% 30.9%
    Credit deposit ratio 76.6%   73.7%    

  • Other income in 9mFY12 saw a 19% increase on a YoY basis. Income from ATM operations, bills and remittances and forex income saw an increase. The company’s fee income is set to increase going forward, on account of its acquisition of a 30% stake in MetLife India, an affiliate of US based, MetLife Inc. The company was able to book some income on the same; however this started operations only in mid-November. Benefits should accrue from 4QFY12 onwards.

  • 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 2% in 3QFY11 to 2.4% in 3QFY12 and at the net level from 0.7% to 1.1%. However, the bank reiterated that it will maintain its asset quality at similar levels for FY12. The bank has one of the highest provision coverage ratios (of 81%) in the sector a year back. However, it has now come down from those levels. At 70% of gross NPAs, this coverage is still currently sufficient. However, the same may not be sustainable if the bank’s asset quality deteriorates further. Its slippages as a percentage of its restructured portfolio stood at 10.9% at the end of 9mFY12. Kingfisher was classified as an NPA this quarter, and there is still news awaited on the Air India deal.

  • PNB had standard restructured loans to the tune of Rs 169 bn at the end of 9mFY12, of which loans worth Rs 23.5 bn had slipped into NPAs. The bank has a 16% exposure to the infrastructure space, with around 8% coming from the power space. The power sector is definitely one of the stress sectors especially the distribution companies. State electricity boards (SEBs) have been bleeding losses, and the power ministry has come down strictly on banks not to fund their cash losses. PNB has Rs 71 bn of exposure to SEBs or around 3% of its loan book. Last quarter PNB recently restructured Rs 17.5 bn in loans to Tamil Nadu Electricity Board (TNEB). This quarter it did not restructure any SEB debt, however it expects some restructuring to come from the UP, Haryana, and Rajasthan SEBs in the coming few quarters. This quarter, out of the Rs 19.8 bn restructured, Rs 10 bn was came from exposure to the troubled GTL group.

  • Other entities in telecom side and iron and steel were also pushed into restructuring, with the bank’s industrial book seeing a big restructuring jump overall. The possibility of further accounts moving into this category is worrying as the bank will take a further hit on the provisioning front. Further slippages of these accounts into the NPA category may also be an issue.

  • PNB’s board has also approved a fund infusion of Rs 12.9 bn through preferential issue of shares to the government, which will help augment its capital base.

What to expect?
At the current price of Rs 956, the stock is valued at 0.9 times our estimated FY14 adjusted book value. Technological up gradation, increased reach and ability to sustain attractive margins are key to the bank’s healthy growth prospects. In light of monetary easing, the bank should be able to sustain margins at superior levels. The bank has seen stress on the NII front this quarter, and accretion to the CASA base remains a concern. However, the bank still has sufficient headroom on the margin front. The bank has also been able to grow its advance book appreciably.

PNB’s new insurance venture with MetLife will also help reap dividends in the future, and the bank has increased focus on its fee income vertical. However, the increase in corporate restructuring is our lingering concerns with regard to the bank. Exposure to the infra sector, especially power is a concern. Although the bank has not restructured any SEB debt this quarter, it expects further pain on this account going forward. While these accounts may not necessarily turn NPA (slippages of the restructured book into NPA remain at 11%), they attract higher provisioning, thus impacting profits. However the bank has been prudent in addressing this issue in a quick manner. The overall stress in the economy has contributed to the slippage in asset quality, and it is being seen across the board. The bank, however, maintains a sufficient coverage ratio and has comfort on the margin front. Increasing its capital buffer will also help the bank. We reiterate our positive view on PNB from a long term perspective; however we may need to revise our profit estimates on asset quality concerns.

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