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PNB: Enduring waiver pains - Views on News from Equitymaster
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PNB: Enduring waiver pains
Jul 30, 2008

Performance summary
  • Interest income grows by 23.1% YoY in 1QFY09 on the back of 19.6% YoY growth in advances.

  • Farm loan waiver to the tune of Rs 11 bn.

  • Lower growth in fee income (grows 17.5% YoY) coupled with higher provisioning cripples bottomline growth.

  • Net interest margin drops to 3.3% in 1QFY09; cost to income ratio remains stagnant at 48.3%.

  • NPA reduces sequentially (QoQ) at the gross as well as net level.



Rs (m) 1QFY08 1QFY09 Change
Interest income 33,632 41,385 23.1%
Interest Expense 19,850 26,937 35.7%
Net Interest Income 13,782 14,448 4.8%
Net interest margin (%) 3.6% 3.3%  
Other Income 4,319 4,561 5.6%
Other Expense 8,770 9,185 4.7%
Provisions and contingencies (1,905) 2,105  
Loss on transfer to HTM 4,977 -  
Profit before tax 6,259 7,719 23.3%
Tax 2,009 2,595 29.2%
Profit after tax / (loss) 4,250 5,124 20.6%
Net profit margin (%) 12.6% 12.4%  
No. of shares (m) 315.3 315.3  
Book value per share (Rs)*   342.0  
P/BV (x)   1.4  
* Book value as on 31st March 2008

What has driven performance in 1QFY09?
  • PNB managed 19.6% YoY growth in advances in 1QFY09 despite writing off assets to the tune of Rs 11 bn on account of the agri-debt waiver scheme. The same is, however, in line with the bank’s full year target of 22% growth in advances and our estimate of 19% YoY growth. PNB has one of the largest proportions of agricultural debt due to its presence in the Gangetic belt. The growth of 21% YoY in deposits was also without commensurate growth in low cost deposits (CASA) during 1QFY09. Further, PNB was not able to sustain its net interest margins (3.3% in 1QFY09) above the industry average due to lower lending rates and swift depletion of CASA.

    Going slow on retail…
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 956,400   1,144,300   19.6%
    Retail 161,590 16.9% 188,930 16.5% 16.9%
    Corporate 794,810 83.1% 955,370 83.5% 20.2%
    Deposits 1,426,090   1,730,740   21.4%
    CASA 656,001 46.0% 744,218 43.0% 13.4%
    Term deposits 770,089 54.0% 986,522 57.0% 28.1%
    Credit deposit ratio 67.1%   66.1%    

  • The overall delinquency rate for the bank having increased at the gross and net levels in the early part of FY08 has dropped at the gross level from 3.8% to 2.8% and at the net level from 1% to 0.6%. The NPA coverage ratio had stood at 77.3% at the end of FY08.

  • The inferior growth in other income in 1QFY09 can be primarily attributed to the provisioning on transfer of investments to the HTM basket (86% in FY08) as well as lower growth in fee income this quarter. The fee income, which constituted 23% of total income in 1QFY09 grew by 17.5% YoY. The bank earned 10% of the fee-based income by transacting the government business. The bank is a principal banker for Ministry of Corporate Affairs, Ministry of Finance, Ministry of Personnel, Public Grievances and Pension and Ministry of Civil Aviation and Tourism.

What to expect?
At the current price of Rs 468, the stock is valued at 1.1 times our estimated FY11 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. Also, the bank’s CAR as per Basel II improved to 12.9% even after providing for additional capital towards starting the bank’s subsidiary in London and compliance with revised AS-15 (Rs 9,280 m). Having said that, inability to maintain a balance between growth and quality and grow its fee income base at a quicker pace are our lingering concerns with regard to the bank.

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