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PNB: Non fund support

May 15, 2008

Performance summary
  • Interest income grows by 24% YoY in FY08 on the back of commensurate growth in advances.
  • Superior growth in fee income (grows 92% YoY) coupled with lower operating expenses and provision write-backs buoys the bottomline growth.

  • Cost to income ratio moves down to 47% of total income from 51% in FY07.

  • The bank’s premises capitalized until March 2006 have been revalued in FY08 and the resultant appreciation of Rs 12.6 bn has been credited to the Revaluation Reserve account.

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

  • Board recommends dividend of Rs 13 per share (dividend yield 2.4%).

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 31,944 38,798 21.5% 115,375 142,650 23.6%
Interest Expense 17,714 23,625 33.4% 60,229 87,309 45.0%
Net Interest Income 14,230 15,173 6.6% 55,146 55,341 0.4%
Net interest margin (%)       3.8% 3.6%  
Other Income 5,184 5,372 3.6% 10,423 19,976 91.7%
Other Expense 10,591 8,277 -21.8% 33,262 35,255 6.0%
Provisions and contingencies 6,127 1,677 -72.6% 10,615 7,103 -33.1%
Profit before tax 2,696 10,591 292.8% 21,692 32,959 51.9%
Tax 320 5,154 1510.6% 6,291 12,472 98.3%
Profit after tax / (loss) 2,376 5,437 128.8% 15,401 20,487 33.0%
Net profit margin (%) 7.4% 14.0%   13.3% 14.4%  
No. of shares (m)       315.3 315.3  
Book value per share (Rs)*         342  
P/BV (x)         1.6  
* Book value as on 31st March 2008

What has driven performance in FY08?
  • Although at the cost of lower spreads, PNB managed 24% YoY growth in advances and 19% YoY growth in deposits during FY08. The same is higher than the bank’s full year target of 22% growth in advances and our estimate of 20% YoY growth. It may be noted that we had 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 in the retail segment 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. The bank’s CASA (low cost deposits) has also been reducing sequentially.

    Going slow on retail…
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 965,970   1,195,020   23.7%
    Retail 158,883 16.4% 188,340 15.8% 18.5%
    Corporate 807,087 83.6% 1,006,680 84.2% 24.7%
    Deposits 1,398,600   1,664,570   19.0%
    CASA 643,356 46.0% 715,599 43.0% 11.2%
    Term deposits 755,244 54.0% 948,971 57.0% 25.7%
    Credit deposit ratio 69.1%   71.8%    

  • The overall delinquency rate for the bank having increased at the gross and net levels in the early part of FY08(from 3.5% and 0.8% of advances in 1HFY07 to 4.6% and 1.9% respectively in 1HFY08), the bank re-worked its NPA management. This has helped reduce the NPA levels sequentially over the previous two quarters (gross and net NPA 2.7% and 0.6% of advances respectively in FY08). The NPA coverage ratio stood at 77.3% at the end of FY08.

  • The superior growth in other income in FY08 can be primarily attributed to the low base effect due to the provisioning on transfer of investments to the HTM basket (86% in FY08) last fiscal as well as higher growth in fee income this year. The fee income, which constituted 15% of total income in FY08 grew by 15% YoY. The bank earned 10% of the fee based by transacting the government business. The bank 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.

  • In line with most PSU banks that are paring their operational overheads by franchise and employee rationalisation, PNB has improved its cost to income ratio from 47.9% in FY07 to 46.8% in FY08.

What to expect?
At the current price of Rs 532, the stock is valued at 1.1 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. Further the return on equity improved to 19.0% from 15.2% in FY07. Also, the bank’s CAR as per Basel II improved o 13% even after providing for additional capital during the year towards starting the bank’s subsidiary in London and compliance with revised AS-15 (Rs 9,280 m). Having said that, inability to maintain a balance between growth and quality and grow its fee income base at a quicker pace are our lingering concerns with regard to the bank. We shall revisit our estimates for the bank after the analyst meet scheduled next week.

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