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PNB: Moving from strength to strength - Views on News from Equitymaster
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PNB: Moving from strength to strength
Feb 3, 2009

Performance summary
  • Interest income grows by 36% YoY in 9mFY09 on the back of a sterling 40% YoY growth in advances.
  • Net interest margins move up from 3.7% to 3.9% despite lower proportion of CASA; cost to income ratio comes down to 42% in 9mFY09 from 49% in 9mFY08.
  • Higher growth in other income boosts bottomline performance.
  • CAR comfortable at 13.9% as per Basel II, NPA reduces (YoY) at the gross as well as net level.


Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 36,361 52,947 45.6% 103,852 140,836 35.6%
Interest Expense 22,117 33,273 50.4% 63,684 89,593 40.7%
Net Interest Income 14,244 19,674 38.1% 40,168 51,243 27.6%
Net interest margin (%)       3.7% 3.9%  
Other Income 4,834 9,452 95.5% 14,604 20,641 41.3%
Other Expense 9,165 11,066 20.7% 26,978 30,323 12.4%
Provisions and contingencies 1,576 1,813 15.0% 5,427 7,096 30.8%
Profit before tax 8,337 16,247 94.9% 22,367 34,465 54.1%
Tax 2,923 6,188 111.7% 7,318 12,213 66.9%
Profit after tax / (loss) 5,414 10,059 85.8% 15,049 22,252 47.9%
Net profit margin (%) 14.9% 19.0%   14.5% 15.8%  
No. of shares (m)       315.3 315.3  
Book value per share (Rs)*         380.7  
P/BV (x)         1.0  
* Book value as on 30th September 2008

What has driven performance in 3QFY09?
  • At a time when not just the Indian but the global banking sector has been reeling under shortage of liquidity and poor credit demand, PNB managed to grow its loan book well above the sector average at 40% YoY. The bank has attributed this to its ability to price the loans aggressively and garner a larger share of accounts by way of financial inclusion in the under-banked areas. The same is higher the bank’s full year target of 22% growth in advances and our estimate of 19% YoY growth.

    The growth of 29% YoY in deposits was, nevertheless, without commensurate growth in low cost deposits (CASA) during 9mFY09. During the third quarter, the bank largely relied on growth in term deposits. Although, PNB has managed to improve its net interest margins in the nine month period with re-pricing of loans, the swift depletion of CASA may soon lead the bank to give up its status of having the best NIM amongst PSU banks. We have estimated the bank’s NIM at 3.4% for full year FY09. PNB has one of the largest proportions of agricultural debt due to its presence in the Gangetic belt. The reimbursement of 30% of the farm loan waiver in 3QFY09 has also to an extent relieved the cost pressures for the bank.

    Pricing power…
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 1,015,342   1,416,586   39.5%
    Retail 234,020 23.0% 269,860 19.1% 15.3%
    Corporate 781,322 77.0% 1,146,726 80.9% 46.8%
    Deposits 1,526,217   1,970,691   29.1%
    CASA 702,060 46.0% 764,628 38.8% 8.9%
    Term deposits 824,157 54.0% 1,206,063 57.0% 46.3%
    Credit deposit ratio 66.5%   71.9%    

  • The overall delinquency rate for the bank has reduced in the nine month period in percentage as well as absolute terms. While the gross NPAs dropped from 4.1% in 9mFY08 to 2.3% in 9mFY09, the net NPAs dropped from 1.3% to 0.4%. NPAs in housing and auto loans were, however, higher at 4% and 5% of advances respectively.

  • The higher growth in other income in 9mFY09 can be primarily attributed to the growth in treasury income due to the drop in interest rates. PNB continues to have a lower proportion of other income. The bank earned 10% of the fee-based income by transacting the government business. It 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.

What to expect?
At the current price of Rs 391, the stock is valued at 0.8 times our estimated FY11 adjusted book value. Although the current rate of growth in balance sheet may be unsustainable, 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 even after providing for additional capital towards starting the bank’s subsidiary in London and good asset quality are matters of comfort. Having said that, inability to grow its fee income base at a quicker pace is our lingering concerns with regard to the bank. We retain our positive view on the stock.

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