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Punjab Nat. Bank: Core business stays robust - Views on News from Equitymaster

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Punjab Nat. Bank: Core business stays robust
May 5, 2011

Punjab National Bank (PNB) declared its results for the financial year 2010-2011 (FY11). The bank has reported 26% YoY and 14% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 39% YoY in FY11, on the back of a 30% YoY growth in advances.
  • Capital adequacy ratio currently stands at 12.4% at the end of FY11 from 14.2% at the end of FY10 as per Basel II norms.
  • Net interest margin (NIM) sees an improvement to 4.0% from 3.6% in FY10.
  • Net NPA (non-performing assets) to advances comes in higher at 0.9% in FY11 from 0.5% in FY10.
  • Other income improves by 31% YoY in 4QFY11 and by 5% for the full year FY11.
  • The board has recommended a dividend of Rs 22 per share for FY11, working out to a dividend yield of 2%.


Standalone numbers
Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 55,847 74,403 33.2% 214,221 269,865 26.0%
Interest expense 31,097 44,113 41.9% 129,440 151,791 17.3%
Net Interest Income 24,751 30,290 22.4% 84,781 118,073 39.3%
Net interest margin (%)       3.6% 4.0%  
Other Income 8,761 11,454 30.7% 34,573 36,126 4.5%
Other Expense 11,001 16,668 51.5% 47,619 63,642 33.6%
Provisions and contingencies 6,219 7,279 17.1% 14,215 24,920 75.3%
Exceptional items 815 -   (1,528) -  
Profit before tax 17,106 17,796 4.0% 59,048 65,637 11.2%
Tax 5,756 5,787 0.5% 19,994 21,302 6.5%
Effective tax rate 33.6% 32.5%   33.9% 32.5%  
Profit after tax/ (loss) 11,350 12,009 5.8% 39,054 44,335 13.5%
Net profit margin (%) 20.3% 16.1%   18.2% 16.4%  
No. of shares (m)         316.8  
Book value per share (Rs)*         661.2  
P/BV (x)         1.7  

What has driven performance in FY11?
  • Staying ahead of the sector average in terms of growth, PNB kept its focus on loan growth in the SME and large corporate segments. The bank managed 30% YoY growth in advances in FY11. The growth of 26% YoY in deposits was led by higher growth in term deposits during the past year. The growth in the CASA (low cost deposit base) came in much slower. The bank also improved its net interest margins due to the upward re-pricing of loans. The bank decided to raise its Base Rate from 9.5% to 10% and BPLR (benchmark prime lending rate) from 13% to 13.5%. This should further increase yields, in anticipation of a rise in funding costs. The NIM in fact improved to 4% at the end of FY11; being one of the highest in the sector. The bank expects to sustain its NIMs at around 3.5% going forward. The bank's performance on the balance sheet front was pretty much in line with our estimates.

    Healthy advance growth overall
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 1,883,060   2,439,980   29.6%
    Agriculture 302,700 16.1% 354,620 14.5% 17.2%
    Retail 192,140 10.2% 236,210 9.7% 22.9%
    SME 206,590 11.0% 268,480 11.0% 30.0%
    Large corporate 234,470 12.5% 872,240 35.7% 272.0%
    Deposits 2,493,300   3,128,990   25.5%
    CASA 1,018,500 40.8% 1,203,250 38.5% 18.1%
    Tem deposits 1,474,800 59.2% 1,925,740 61.5% 30.6%
    Credit deposit ratio 75.5%   78.0%    

  • 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 1.7% in FY10 to 1.8% in FY11 and at the net level from 0.5% to 0.9%. The bank had 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 73% of gross NPAs, this coverage is currently well above the RBI's mandate of 70%. However, the same may not be sustainable if the bank's asset quality deteriorates further. PNB has one of the largest proportions of agricultural debt due to its presence in the Gangetic belt. This impacted the bank's asset quality in this portfolio due to debt restructuring. Its slippages as a percentage of its restructured portfolio stood at 11.3% at the end of FY11.

  • PNB had restructured loans to the tune of Rs 153 bn at the end of FY11, of which loans worth Rs 17 bn had slipped into NPAs, definitely a worrying sign.

  • The benign increase in other income in FY11 can be primarily attributed to lower treasury gains despite 20% growth in fee income. The proportion of fee to total income at around 17% has shown no signs of improvement.

  • Approximately Rs 7 bn was charged to the P&L due to the second pension option and increased gratuity. A further Rs 26.6 bn needs to be amortized over the next four years on this account. On account of increased provisioning as well as the employee pension expenses, the bank underperformed our profit estimates to some extent.

  • PNB allotted 1.5 m shares of Rs 10/- each at a premium of Rs 1208.8 to the government, during the quarter. The total amount received by the bank on this account amounted to Rs 1.8 bn. The promoter's shareholding as a result increased from 57.8% to 58%.

What to expect?
At the current price of Rs 1119, the stock is valued at 1.1 times our estimated FY13 adjusted book value. (Research Pro subscribers can view latest updates here). 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 also plans to increase its overseas presence and branch network going forward adding to its reach. Having said that, the low proportion of fee income and agricultural delinquencies are our lingering concerns with regard to the bank. Irrespective we reiterate our positive view on the bank from a long term perspective.

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