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Punjab & Sind Bank: Below par growth - Views on News from Equitymaster

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Punjab & Sind Bank: Below par growth
May 22, 2012

Punjab & Sind Bank (PSB) declared its FY12 (financial year 2012) results. The bank has reported 31 % YoY growth in interest income and a 14% YoY fall net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 31% YoY in FY12 on the back of an 8% YoY growth in advances.
  • Net interest margin falls to 2.2% in FY12 from 2.6% in FY11 on higher cost of funds.
  • Other income falls 4.5% YoY in FY12, however increases by 4.5% in 4QFY12.
  • Cost to income ratio rises from 49% in FY11 to 60% in FY12 due to pension and gratuity provisions and a lower income buffer.
  • Capital adequacy ratio (CAR) at 13.3% as per Basel II, Net NPA at 1.2% of advances at the end of FY12.
  • The board recommends a dividend of Rs 2 per equity share (dividend yield 3%).


Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 13,655 17,061 24.9% 49,325 64,745 31.3%
Interest expense 9,719 12,880 32.5% 33,721 49,734 47.5%
Net Interest Income 3,936 4,181 6.2% 15,605 15,011 -3.8%
Net interest margin (%)       2.6% 2.2%  
Other Income 1,200 1,255 4.5% 4,371 4,175 -4.5%
Other Expense 2,237 3,054 36.5% 9,840 11,585 17.7%
Provisions and contingencies 701 676 -3.5% 2,439 1,457 -40.2%
Profit before tax 2,199 1,705 -22.5% 7,696 6,143 -20.2%
Tax 897 227 -74.7% 2,435 1,630 -33.1%
Profit after tax/ (loss) 1,303 1,478 13.5% 5,262 4,513 -14.2%
Net profit margin (%) 9.5% 8.7%   10.7% 7.0%  
No. of shares (m)         234.2  
Book value per share (Rs)*         141.7  
P/BV (x)         0.4  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • Staying well below the sector average in terms of loan growth, Punjab & Sind Bank (PSB) was underperformed on account of the tough economic environment and high interest rates. The bank managed a weak 8% YoY growth in advances in FY12, almost half the sector average of 16%. This came in much lower our estimates as well. The growth of 6% YoY in deposits was led equally by growth in low cost deposits (CASA) and term deposits. The bank's net interest margins (NIM) came sharply off on account of a spike in cost of funds.

  • The bank expects a 20% growth in deposits and a 23% growth in advances for FY13. However, we believe that this may be difficult for PSB to achieve.

    Sees subdued growth on all fronts
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 428,330   463,690   8.3%
    Deposits 597,230   631,240   5.7%
    CASA 143,040 24.0% 151,030 23.9% 5.6%
    Tem deposits 454,190 76.0% 480,210 76.1% 5.7%
    Credit deposit ratio 71.7%   73.5%    

  • In line with moves coming from the competition and the RBI's monetary easing the bank changed its base rate from 10.75% to 10.5% and its benchmark prime lending rate (BPLR) from 15.25%.

  • As against the Reserve Bank of India (RBI) mandate of provision coverage ratio of 70% for all banking entities by September 2010, PSB had a coverage ratio of 64.2% at the end of FY12, from 81.8% at the end of FY11 due to write back of provisioning. The net NPA ratio stood at 1.2%, an increase from 0.6% seen at the end of FY11. The bank had to make provisions as per the RBI's revised guidelines, and for investment depreciation. Asset quality has seen some pressure in light of the weak economic environment. A further deterioration in credit quality is expected going forward.

  • The growth in other expenses in FY12 is primarily attributable to pension and gratuity provisions. While the proportion of cost to income (60%) is certainly high compared to other PSU banks we expect this to get normalized in the medium term. Irrespective, profit growth, which was below par for FY12, falling 14% YoY, came in line with our conservative estimates.

What to expect?
At the current price of Rs 63, the stock is attractively valued at 0.4 times our estimated FY14 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 retail and priority sector advances. However, with the bank seeing growth well below the sector in FY12, we believe that its FY13's ambitious targets of 23% advance growth and 20% deposit growth may be tough to achieve unless there is a marked change in overall economic environment.

The bank needs 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. However, higher provisioning, slower advance growth and inability to control its cost of funds and asset quality are major concerns. . In light of its lackluster performance and limited visibility in terms of profit sustenance our target price for the stock to Rs 132 per share for FY14, however we still need to factor in the actual performance for FY12.

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