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PNB: Write-backs save the day
Jul 27, 2007

Performance summary
  • Interest income grows by 28% YoY on the back of 23% YoY growth in advances.

  • Other income grows 48% YoY due to higher fee income contribution.

  • Net interest margins stable at 4.0% in 1QFY08.

  • Treasury losses up 29% YoY.

  • Net profit up 16% YoY in 1QFY08 but on a like-to-like basis down 32% YoY without considering the provisioning write-backs.

Rs (m) 1QFY07 1QFY08 Change
Interest income 26,304 33,632 27.9%
Interest Expense 13,476 19,850 47.3%
Net Interest Income 12,828 13,782 7.4%
Net interest margin (%) 4.0% 4.0%  
Other Income 2,927 4,318 47.5%
Other Expense 6,968 8,769 25.8%
Provisions and contingencies (215) (1,905) 786.0%
Loss on transfer to HTM 3,867 4,977 28.7%
Profit before tax 5,135 6,259 21.9%
Tax 1,460 2,008 37.5%
Profit after tax / (loss) 3,675 4,251 15.7%
Net profit margin (%) 14.0% 12.6%  
No. of shares (m) 315.3 315.3  
Book value per share (Rs)*   322  
P/BV (x)   1.6  
* Book value as on 30th June 2007

Company background
Punjab National Bank is the fourth largest banking entity in the country (in terms of asset size) with 4.2% share of the total credit disbursals at the end of FY07. Given its geographic concentration in the northern regions, the bank was a laggard in terms of credit growth until FY04, which led to it barely sustaining its share of non-food credit at 4.5%. However, not able to keep up with its private sector peers in incremental credit disbursements and low retail credit exposure resulted in a loss of market share (from 4.5% in FY04 to 4% in FY06). Nevertheless, an operating overhaul in terms of asset quality and retention of high margins has helped the bank position itself favourably amongst its peers and marginally enhance its share in FY07. Adequate capital, high NPA coverage and interest rate insulation pegs the bank amongst the frontrunners in the public sector banking space.

What has driven performance in 1QFY08?
Advances feel the pinch: In line with our estimates, PNB has started the fiscal on a muted note registering a slower 23% YoY growth in advances (also in line with the sector average) and 22% YoY growth in deposits. The reason as to why we had a conservative stance on the bank’s asset growth estimates was due to its non-aggressive approach.

After several quarters of restricted growth, the bank picked up pace in the latter part of FY07 and had been steadily growing its asset book thereon. Backed by a comfortable CAR position, the bank was also able to sustain its net interest margins above the industry average so far. Also, despite the slower offtakes in this quarter, the bank has been able to safeguard its NIMs primarily by reducing the bulk and term deposit rates ahead of its peers.

PNB has historically maintained one of the highest proportions of low cost current and savings account deposits in the PSU banking sector (last 5-year average is 47%), which has partially hedged its net interest margins (NIMs). This has been due to its diversified presence in the rural and semi urban areas. The bank has set for itself a target of sustaining the CASA at 46% of total deposits, which is expected to hedge its NIMs.

High interest impact on assets…
(Rs m) 1QFY07 % of total 1QFY08 % of total Change
Advances 775,460 956,400 23.3%
Retail 181,720 23.4% 220,350 23.0% 21.3%
Corporate 593,740 76.6% 736,050 77.0% 24.0%
Deposits 1,171,730 1,426,090 21.7%
Credit deposit ratio 66.2% 67.1%

Other income – Fee cushion: PNB has taken a hit on account of HTM (held to maturity) transfers of Rs 4.9 bn in 1QFY08 to shift another 16% of its investments to the HTM basket. The mark to market loss was 29% higher over last year. Around 88% of the bank’s investment book is now in the HTM basket, while the AFS (available for sale) basket has duration of 3.2 years.

Although the bank has not divulged details with regard to the growth in fee income, the 48% growth in other income can be primarily attributed to higher contribution from fee income. After remaining stagnant at 12.5% of total income for four fiscals, PNB’s fee income improved to 14.8% of total income in FY07. While the investment book of the bank is no more a concern, a drop in the fee income will endanger the sustainability of net margins, as the core banking business gets commoditised and more competitive private sector and foreign players cannibalise on its market share.

The bank’s loan loss provisions stood at 9% of total income in FY07. Although the overall coverage ratio (provision to gross NPAs) is above 78%, given the past experiences, with an aggressive stance on mortgage loans (grew 18% YoY), the possibility of high slippages remains a concern. More so, with the bank writing back its provisions to cushion the bottomline. The overall delinquency rate for the bank has increased with gross and net NPAs having increased from 3.5% and 0.8% of advances in 1QFY07 to 3.8% and 1.0% respectively in 1QFY08.

Costs on the rise: While most PSU banks are paring their operational overheads by franchise and employee rationalisation, PNB has witnessed a spurt in its cost to income ratio from 44% in 1QFY07 to 48% in 1QFY08.

PNB has clarified that it has been providing for pension related expenses on actuarial basis, thus taking care of future liabilities in its books. The bank made an additional provision of Rs 3 bn in FY07 for AS-15 (pension provisions) and expects the additional impact of AS-15 to be minimal going forward. Further, in the next 5 years, around 1,500 employees of the bank will be retiring per year, thus considerably lightening its wage burden (as most of these employees are in the high salary bracket). While the bank does not intend to refill the vacancies as it is rationalising its franchise and employee base, it will be recruiting only technical staff, at relatively lower salary levels as compared to the retirees. We expect this cost advantage to rationalise the bank’s cost efficiency and bring down its cost to income ratio at par with that of its peers in the sector.

What to expect?
At the current price of Rs 503, the stock is attractively valued at 1.0 time our estimated FY10 adjusted book value. Sustenance of a healthy current and savings account mix and little deterioration in asset quality also reiterates the operating efficiency of the bank. Going forward, with technological upgradation and aggressive growth strategies, the growth prospects of the bank appear enthusing. Having said that, excessive reliance on treasury income and inability to grow its fee income base are our lingering concerns with regard to the bank. We maintain our positive view on the stock.

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