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PNB: Restructuring woes - Views on News from Equitymaster
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PNB: Restructuring woes
Jul 27, 2010

Punjab National Bank declared its 1QFY11 results. The bank has reported a 45% YoY and 28% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 16% YoY in 1QFY11 on the back of 21% YoY growth in advances.
  • Net interest margin improves marginally to 3.9% in 1QFY11 due to higher proportion of CASA.
  • Fee income grows by 13% YoY in 1QFY11.
  • Cost to income ratio lower at 40% as against 45% in 1QFY10.
  • CAR comfortable at 13.8% as per Basel II, Net NPA higher at 0.7% of advances (0.2% in 1QFY10).


Rs (m) 1QFY10 1QFY11 Change
Interest Income 51,466 59,919 16.4%
Interest Expense 33,456 33,733 0.8%
Net Interest Income 18,010 26,186 45.4%
NIM (%) 3.2% 3.9%  
Other Income 10,309 8,715 -15.5%
Other Expense 12,626 13,919 10.2%
Provisions and contingencies 3,018 5,341 77.0%
Profit before tax 12,675 15,641 23.4%
Tax 4,355 4,958 13.8%
Profit after tax/ (loss) 8,320 10,683 28.4%
Net profit margin (%) 16.2% 17.8%  
No. of shares (m)   315.3  
Book value per share (Rs)*   548.7  
P/BV (x)   1.9  
* (Book value as on 30th June 2010)

What has driven performance in 1QFY11?
  • Keeping its focus on loan growth in the corporate and agricultural segments, PNB managed 21% YoY growth in advances in 1QFY11. The growth of 17% YoY in deposits was led by higher growth in low cost deposits (CASA) during the past quarter. This checked the gradual reduction in PNBís CASA proportion seen earlier and brought the same to 41% at the end of 1QFY11. The bank also evaded pressure on its net interest margins due to the downward re-pricing of loans. The NIMs in fact improved marginally to 3.9% at the end of 1QFY11.
    Balancing act...
    (Rs m) 1QFY10 % of total 1QFY11 % of total Change
    Advances 1,547,030   1,866,010   20.6%
    Agriculture 235,740 15.2% 302,400 16.2% 28.3%
    Retail 165,550 10.7% 194,420 10.4% 17.4%
    SME 147,070 9.5% 200,900 10.8% 36.6%
    Large corporates 592,260 38.3% 741,460 39.7% 25.2%
    Deposits 2,189,600   2,553,350   16.6%
    CASA 839,480 38.3% 1,043,850 40.9% 24.3%
    Term deposits 1,350,120 61.7% 1,509,500 59.1% 11.8%
    Credit/Deposit 70.7%   73.1%    

  • 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 1.6% in 1QFY10 to 1.8% in 1QFY11 and at the net level from 0.2% to 0.7%. The bank had one of the highest provision coverage ratios (of 93%) in the sector a year back. At 78% of gross NPAs, this coverage is well above the RBIís mandate of 70%. However, the same may not be sustainable if the bankís 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 bankís asset quality in this portfolio due to debt restructuring.

  • The lower growth in other income in FY10 can be primarily attributed to lower treasury gains despite 13% growth in fee income. The proportion of fee to total income was 17% at the end of 1QFY11.

  • PNB had restructured loans to the tune of Rs 130 bn at the end of 1QFY11, of which loans worth Rs 10 bn had slipped into NPAs.

What to expect?
At the current price of Rs 1,039, the stock is attractively valued at 1 time our estimated FY13 adjusted book value ( ResearchPro 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 bankís healthy growth prospects. Also, the bankís healthy CAR is a matter of comfort. Having said that, the low proportion of fee income and agricultural delinquencies are our lingering concerns with regard to the bank. We retain our positive view on the stock.

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