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Punjab Nat. Bank: NPAs see a spike - Views on News from Equitymaster

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Punjab Nat. Bank: NPAs see a spike
Jul 28, 2012

Punjab National Bank (PNB) declared its results for the first quarter for the financial year 2012-2013 (1QFY13). The bank has reported 27% YoY and 13% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 19% YoY in 1QFY12, on the back of a 21% YoY growth in advances.
  • Capital adequacy ratio currently stands at 12.6% at the end of 1QFY13 from 12.4% at the end of 1QFY12 as per Basel II norms.
  • Net interest margin (NIM) sees a 0.2% decline to 3.6% from 3.8% in 1QFY12.
  • Net NPA (non-performing assets) to advances comes in significantly higher at 1.7% in 1QFY13 from 0.9% in 1QFY12, and from 1.5% at the end of FY12.
  • Other income improves by 8% YoY in 1QFY13 on higher fee income.

Rs (m) 1QFY12 1QFY13 Change
Interest income 83,152 105,450 26.8%
Interest expense 52,000 68,498 31.7%
Net Interest Income 31,153 36,951 18.6%
Net interest margin (%) 3.8% 3.6%  
Other Income 10,837 11,660 7.6%
Other Expense 17,250 20,203 17.1%
Provisions and contingencies 8,935 10,325 15.6%
Profit before tax 15,804 18,084 14.4%
Tax 4,753 5,627 18.4%
Effective tax rate 30.1% 31.1%  
Profit after tax/ (loss) 11,051 12,457 12.7%
Net profit margin (%) 13.3% 11.8%  
No. of shares (m)   339.2  
Book value per share (Rs)*   814.1  
P/BV (x)   0.9  
* (Book value as on 30th June 2012)

What has driven performance in 1QFY13?
  • PNB kept its focus on loan growth in the agri and retail segments. Overseas advances saw a sharp increase of 80% on a YoY basis, but this was mainly on account of rupee depreciation. The bank managed 21% YoY growth in advances in 1QFY13. The growth of 19% YoY in deposits was led by higher growth in term deposits during the past quarter. The proportion of bulk deposits (usually deposits in excess of Rs 10 m, parked by corporates having surplus funds) decreased to 22% in 1QFY13 from 24% previously. The bank plans to bring this down to 15% by end of March 2013 as per RBI's directive. Shedding these high cost deposits will help the bank improve its profitability and return ratios.

  • The growth in the CASA (low cost deposit base) came in much slower, at 10% YoY. The proportion of CASA also decreased from 37% to 35% in 1QFY13. The bank's NIMs reduced to 3.6% on account of a fall in the low cost deposit base, despite higher lending yields. However, with a plan in place to reduce bulk deposits, this should improve going forward. The bank expects to sustain its NIMs at around 3.5% going forward.

    Healthy growth in agri and retail advances
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 2,429,080   2,944,680   21.2%
    Agriculture 341,530 14.1% 445,910 15.1% 30.6%
    Retail 241,110 9.9% 292,800 9.9% 21.4%
    Housing 118,350 4.9% 140,620 4.8% 18.8%
    MSME 273,360 11.3% 309,600 10.5% 13.3%
    Large corporate 875,760 36.1% 925,580 31.4% 5.7%
    Deposits 3,240,970   3,853,550   18.9%
    CASA 1,212,600 37.4% 1,331,490 34.6% 9.8%
    Tem deposits 1,250,410 38.6% 1,668,160 43.3% 33.4%
    Bulk deposits 777,960 24.0% 853,900 22.2% 9.8%
    Credit deposit ratio 74.9%   76.4%    

  • Other income in 1QFY13 saw an increase on account of an increase in fee income. Income from bills and remittances and Income from insurance & mutual funds saw a sharp increase. The 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 signs of stress at the gross and net levels. NPAs went up at the gross level from 2% in 1QFY12 to 3.3% in 1QFY13 and at the net level from 0.9% to 1.7%. However, the bank expects some further stress on the asset quality front. The bank has one of the highest provision coverage ratios (of 81%) in the sector 1-2 years back. However, it has now come down from those levels to 62.8% of gross NPAs. The bank saw Rs 25 bn in fresh slippages during the quarter, out of which there was no real sector concentration. However some stress was seen in accounts in the jewelry, ferro alloys, and pharma space.

  • The bank has a 15.6% 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 over Rs 80 bn of exposure to SEBs or around 3% of its loan book. It has already restructured a few accounts in this space and is expecting some dispensation from the RBI on the same. If the economy continues to remain weak there may be further pressure on asset quality. The bank also has Rs 180 bn in crop loans which may be affected on account of the weak monsoons so far this year, however the RBI has some special dispensations for the same incase of crop failure.

  • PNB saw fresh restructuring of Rs 12 bn during the quarter. Its slippages as a percentage of its restructured portfolio stood at 8.7% at the end of 1QFY13. Total restructured loans are in excess of Rs 255 bn. Plus there is some further restructuring in the pipeline on account of the continued stress in the economy. If RBI's working group recommendations on further provisioning on restructured assets are taken forward then on present outstanding about Rs 3 bn will be taken in the next year and another Rs 3 bn in the year after that.

What to expect?
At the current price of Rs 713.5, the stock is valued at 0.9 times its trailing twelve months 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. PNB has, however seen stress on the NIM front this quarter, and accretion to the CASA base remains a concern. The bank plans to reduce bulk deposits, which will help in improving profitability.

However, the increase in corporate restructuring is our lingering concern with regard to the bank, especially since the stress is still not over. Exposure to the infra sector, especially power is a concern. PNB has restructured most of its SEB debt last year, and expects further restructuring going forward on some other accounts. While these restructured accounts may not necessarily turn NPA (slippages of the restructured book into NPA remain high), they attract higher provisioning, thus impacting profits. Eepecially if the new RBI recommendations for further provisioning on restructured accounts are taken forward. However the bank has been prudent in addressing this issue in a quick manner and has been focusing on recoveries and up-gradation. The overall stress in the economy has contributed to the slippage in asset quality, and it is being seen across the board. The weak monsoons may also contribute to further stress in the farm credit portfolio. The bank, however, maintains a sufficient coverage ratio and has comfort on the margin front. We reiterate our BUY view on PNB from a long term perspective, provided exposure to it is less than 2 to 3% of one's overall portfolio. Also one needs keep track of the bank's quarterly performance on the asset quality front.

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