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Punjab Nat. Bank: Sees pressure on NIMs - Views on News from Equitymaster

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Punjab Nat. Bank: Sees pressure on NIMs
May 21, 2012

Punjab National Bank (PNB) declared its results for the financial year 2011-2012 (FY12). The bank has reported 35% YoY and 10% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 14% YoY in FY12, on the back of a 22% YoY growth in advances.
  • Capital adequacy ratio currently stands at 12.6% at the end of FY11 from 12.4% at the end of FY11 as per Basel II norms.
  • Net interest margin (NIM) sees a slight contraction to 3.8% from 4.0% in FY11.
  • Net NPA (non-performing assets) to advances comes in significantly higher at 1.5% in FY12 from 0.85% in FY11.
  • Other income improves by 11% YoY in 4QFY12 and by 16% for the full year FY12.
  • The board has recommended a dividend of Rs 22 per share for FY12, working out to a dividend yield of 3%.

Standalone numbers
Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 74,403 96,798 30.1% 269,865 364,280 35.0%
Interest expense 44,113 63,698 44.4% 151,791 230,136 51.6%
Net Interest Income 30,290 33,100 9.3% 118,073 134,144 13.6%
Net interest margin (%)       4.0% 3.8%  
Other Income 11,454 12,760 11.4% 36,126 42,026 16.3%
Other Expense 16,668 16,498 -1.0% 63,642 70,028 10.0%
Provisions and contingencies 7,279 10,273 41.1% 24,920 35,773 43.6%
Profit before tax 17,796 19,089 7.3% 65,637 70,370 7.2%
Tax 5,787 4,848 -16.2% 21,302 21,528 1.1%
Effective tax rate 32.5% 25.4%   32.5% 30.6%  
Profit after tax/ (loss) 12,009 14,241 18.6% 44,335 48,842 10.2%
Net profit margin (%) 16.1% 14.7%   16.4% 13.4%  
No. of shares (m)         339.2  
Book value per share (Rs)*         777.4  
P/BV (x)         0.9  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • Staying ahead of the sector average in terms of growth, PNB kept its focus on loan growth in the SME, agri and retail segments. The bank managed 22% YoY growth in advances in FY12, coming way ahead of the RBI's credit growth indication of 16% for FY12. The growth of 21% 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 at a much slower pace. The bank saw some pressure on its net interest margins due to the increase in cost of funds. The bank decided to revise its base rate from 10.75% to 10.5% and BPLR (benchmark prime lending rate) from 14.25% to 14%. The bank expects to sustain its NIMs at around 3.5% going forward.

  • The growth of 21% YoY in deposits was led by higher growth in term deposits during the past nine months. The growth in the CASA (low cost deposit base) came in much slower, at around 11.5%. The proportion of CASA also decreased to 35% from 38.5% previously. The bank has seen pressure on this front on account of the spread between fixed deposits and savings bank rates.

    Healthy advance growth overall
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 2,439,980   2,978,920   22.1%
    Agriculture 354,620 14.5% 459,170 15.4% 29.5%
    Retail 236,210 9.7% 291,960 9.8% 23.6%
    MSME 268,480 11.0% 323,910 10.9% 20.6%
    Large corporate 872,240 35.7% 957,710 32.1% 9.8%
    Deposits 3,128,990   3,795,880   21.3%
    CASA 1,203,250 38.5% 1,341,290 35.3% 11.5%
    Tem deposits 1,925,740 61.5% 2,454,590 64.7% 27.5%
    Credit deposit ratio 78.0%   78.5%    

  • Other income in FY12 saw a 16% increase on a YoY basis. Income from ATM operations, bills and remittances and forex income saw an increase. The company's fee income on insurance and mutual funds increased post its acquisition of a 30% stake in MetLife India, an affiliate of US based, MetLife Inc. The company saw a big jump on this account, however this was on a small base.

  • The overall delinquency rate for the bank continued to show some signs of stress at the gross and net levels. NPAs went up sharply at the gross level from 1.8% in FY11 to 2.9% in FY12 and at the net level from 0.85% to 1.5%. The bank's provision coverage ratio has been drawn down from 73% earlier to 63% currently. 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. Its slippages as a percentage of its restructured portfolio stood at 8.8% at the end of FY12. The bank saw Rs 153 bn of restructuring during the year with large accounts including Air India and the Rajasthan and UP state electricity boards being restructured.

  • The bank has a 15% 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 78 bn of exposure to SEBs or around 3% of its loan book. Having already restructured a few accounts, it does not see much stress on the SEB front going forward. However, if the economy continues to remain weak there may be further pressure on asset quality.

  • PNB allotted 15.8 m shares of Rs. 10/- each at a premium of Rs 933.69 to the Life Insurance Corp of India during the quarter. It also allotted 6.5 bn shares to the government. The government shareholding in the bank has come down from 58% to 56.1%. The bank's Tier 1 capital stands at 9.3% and overall capital adequacy 12.6% currently.

What to expect?
At the current price of Rs 710.7, the stock is valued at 0.7 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 3.5% as per management expectation. 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 even in a tough environment. It expects to grow ahead of the sector next year as well.

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, where it expects 20% growth. 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. The bank has restructured SEB debt this quarter, but does not expect further stress on this account. While these accounts may not necessarily turn NPA (slippages of the restructured book into NPA remain high), 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 target price for the stock.

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