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PNB: Moving at a scorching pace
Jul 30, 2009

Performance summary
  • Interest income grows by 26% YoY in 1QFY10 on the back of a strong 38% YoY growth in advances.
  • Net interest margins move up from 3.3% in 1QFY09 to 3.4% in 1QFY10 despite lower proportion of CASA; cost to income ratio comes down to 45% in 1QFY10 from 48% in 1QFY09.
  • Higher growth in other income boosts bottomline performance.
  • Capital adequacy ratio (CAR) comfortable at 14.5% as per Basel II NPA reduces (YoY) at the gross as well as net level.


Rs (m) 1QFY09 1QFY10 Change
Interest income 41,385 52,074 25.8%
Interest Expense 26,937 33,456 24.2%
Net Interest Income 14,448 18,618 28.9%
NIM (%) 3.3% 3.4%  
Other Income 4,561 9,702 112.7%
Other Expense 9,185 12,626 37.5%
Provisions and contingencies 2,105 3,108 47.6%
Profit before tax 7,719 12,586 63.1%
Tax 2,595 4,355 67.8%
Profit after tax / (loss) 5,124 8,231 60.6%
Net profit margin (%) 12.4% 15.8%  
No. of shares (m)   315.3  
Book value per share (Rs)*   443.0  
P/BV (x)   1.7  
* (Book value as on 30th June 2009)

What has driven performance in 1QFY10?
  • Although it may enthuse investors to note that PNB continued to grow at one of the fastest rates amongst Indian banks despite the economic slowdown in 1QFY10, the same seems to have been at the cost of pricing power and margins. At a time when not just the Indian but the global banking sector has been reeling under shortage of liquidity and poor credit demand, PNB managed to grow its loan book by 38% YoY, well above the sector average rate. The bank has attributed this to its ability to garner a larger share of accounts by way of financial inclusion in the under-banked areas. However this affected the bank’s pricing power which failed to improve the bank’s NIMs despite lower cost of funds.

    The growth of 27% YoY in deposits was, nevertheless, without commensurate growth in low cost deposits (CASA) during 1QFY10. During the first quarter, the bank largely relied on growth in term deposits. Although, PNB has managed to marginally improve its net interest margins, the swift depletion of CASA may soon lead the bank to give up its status of having the best NIM amongst PSU banks.

      1QFY09 % of total 1QFY10 % of total Change
    Advances 1,144,299   1,579,794   38.1%
    Large corporates 263,189 23.0% 300,161 19.0% 14.0%
    Retail 711,210 62.2% 1,031,233 65.3% 45.0%
    SME 169,900 14.8% 248,400 15.7% 46.2%
               
    Deposits 1,730,738   2,189,597   26.5%
    CASA 796,139 46.0% 853,943 39.0% 7.3%
    Term deposits 934,599 54.0% 1,335,654 61.0% 42.9%

  • The overall delinquency rate for the bank has reduced in 1QFY10 in percentage as well as absolute terms. While the gross NPAs dropped from 2.8% in 1QFY09 to 1.8% in 1QFY10, the net NPAs dropped from 0.6% to 0.2%. The NPA coverage ratio was 89.6%.

  • The higher growth in other income in 1QFY10 can be primarily attributed to the growth in treasury income due to the drop in interest rates. PNB has nevertheless made some progress in growing its fee income that comprised 47% of other income and 16% of total income in 1QFY10. The bank earned 10% of the fee-based income by transacting the government business. It 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.

  • The bank has put in place a comprehensive roadmap in its Vision 2013 document, wherein business and profit goals to be achieved by 2013 have been detailed. The Bank targets to achieve total business of Rs 10 trillion by 2013. PNB has also launched a ‘Project Namaskar’ under which one lakh touch points will be established in unbanked villages to extend bank’s outreach and create a large customer base of 150 m by 2013.

What to expect?
At the current price of Rs 700, the stock is fairly valued at 1.4 times our estimated FY11 adjusted book value. Although the current rate of growth in balance sheet may be unsustainable, technological upgradation and ability to sustain attractive margins are key to the bank’s healthy growth prospects. Also, the bank’s healthy CAR as per Basel II even after providing for additional capital towards starting the bank’s subsidiary in London and good asset quality are matters of comfort. We would recommend investors to exercise caution at the current valuations.

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