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Punjab & Sind: Flat profit growth on prov. expense - Views on News from Equitymaster
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Punjab & Sind: Flat profit growth on prov. expense
May 3, 2011

Punjab & Sind Bank declared its FY11 (financial year 2011) results. The bank has reported 25 % YoY and 3% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 32% YoY in FY11 on the back of 31% YoY growth in advances.
  • Net interest margin marginally falls to 2.6% in FY11 from 2.7% in FY10 on higher cost of funds.
  • Other income grows 6% YoY in FY1, however falls by 19% in 4QFY11.
  • Cost to income ratio rises from 45% to 49% in FY11 due to pension and gratuity provisions.
  • CAR at 12.9% as per Basel II, Net NPA at 0.6% of advances at the end of FY11.
  • The board recommends a dividend of Rs 2 per equity share (dividend yield 2%).

Rs(m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 10,812 13,655 26.3% 39,342 49,325 25.4%
Interest expense 7,530 9,719 29.1% 27,502 33,721 22.6%
Net Interest Income 3,282 3,936 19.9% 11,840 15,605 31.8%
Net interest margin (%)       2.7% 2.6%  
Other Income 1,484 1,200 -19.1% 4,118 4,371 6.1%
Other Expense 1,747 2,237 28.1% 7,182 9,840 37.0%
Provisions and contingencies 557 701 25.8% 2,111 2,439 15.5%
Profit before tax 2,463 2,199 -10.7% 6,665 7,696 15.5%
Tax 971 897 -7.7% 1,577 2,435 54.4%
Profit after tax/ (loss) 1,492 1,303 -12.7% 5,088 5,262 3.4%
Net profit margin (%) 13.8% 9.5%   12.9% 10.7%  
No. of shares (m)         223.1  
Book value per share (Rs)*         127.7  
P/BV (x)         0.8  
* (Book value as on 31st March 2011)

What has driven performance in FY11?
  • Staying ahead of the sector average in terms of growth, Punjab & Sind Bank (PSB) kept its focus on loan growth in the SME and large corporate segments. The bank managed a healthy 31% YoY growth in advances in FY11. This came in higher than our estimates. The growth of 21.5% YoY in deposits was led by growth in low cost deposits (CASA) during the past 12 months. The bank maintained its net interest margins (NIM) at similar levels compared to FY10. The NIM came in slightly higher than our more conservative estimates.

    Sees strong advance growth
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 327,380   428,330   30.8%
    Agriculture 49,749 15.2% 59,910 14.0% 20.4%
    Deposits 491,550   597,230   21.5%
    CASA 123,080 25.0% 143,040 24.0% 16.2%
    Tem deposits 368,470 75.0% 454,190 76.0% 23.3%
    Credit deposit ratio 66.6%   71.7%    

  • In line with moves coming from the competition, and post the RBI's monetary policy tightening, the bank changed its base rate from 9.5% to 10% and its benchmark prime lending rate (BPLR) from 14.25% to 14.50%.

  • As against the RBI's mandate of provision coverage ratio of 70% for all banking entities by September, 2010, PSB had a coverage ratio of 81.8% at the end of FY11. Although this includes loans written off, the net NPA ratio which stood at 0.6% of advances was amongst the lowest in the industry. This shows the bank's conservative stance with regard to provisioning policies. However, this level increased from 0.4% seen at the end of FY10. This may indicate, a slight deterioration in credit quality going forward, especially with the current rising interest rate environment.

  • The growth in other expenses in FY11 is primarily attributable to pension and gratuity provisions. While the proportion of cost to income (49%) is certainly high compared to other PSU banks we expect this to get normalized in the medium term. Irrespective, profit growth, which was flat for FY11, came in line with our estimates.

What to expect?
At the current price of Rs 101, the stock is attractively valued at 0.6 times our estimated FY13 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. It plans to increase its CASA (current account and savings account) deposit base, as well as focus more on its SME, retail and agricultural advances.

The bank may however need to dilute equity to strengthen its capital base over the next 1-2 years. Although its historical return on equity is comparable to that of the best managed banks, PSB is currently priced at a considerable discount to its PSU peers. We believe that the stock of PSB offers considerable upside and may even double over the next 3 to 4 years. We reiterate our positive view on the bank from a long term perspective.

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