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Punjab Nat. Bank: Profits take provn. hit - Views on News from Equitymaster
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Punjab Nat. Bank: Profits take provn. hit
Jul 30, 2011

Punjab National Bank (PNB) declared its results for the first quarter for the financial year 2011-2012 (1QFY12). The bank has reported 39% YoY and 3% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 20% YoY in 1QFY12, on the back of a 24% YoY growth in advances.
  • Capital adequacy ratio currently stands at 12.4% at the end of 1QFY12 from 13.7% at the end of 1QFY11 as per Basel II norms.
  • Net interest margin (NIM) sees a slight decline to 3.8% from 3.9% in 1QFY11.
  • Net NPA (non-performing assets) to advances comes in higher at 0.9% in 1QFY12 from 0.7% in 1QFY11.
  • Other income improves by 22% YoY in 1QFY12 on higher income from bank charges and ATM operations.

Rs (m) 1QFY11 1QFY12 Change
Interest income 59,716 83,152 39.2%
Interest expense 33,733 52,000 54.2%
Net Interest Income 25,984 31,153 19.9%
Net interest margin (%) 3.9% 3.8%  
Other Income 8,917 10,837 21.5%
Other Expense 13,919 17,250 23.9%
Provisions and contingencies 5,341 8,935 67.3%
Exceptional items - -  
Profit before tax 15,640 15,804 1.0%
Tax 4,958 4,753 -4.1%
Effective tax rate 31.7% 30.1%  
Profit after tax/ (loss) 10,683 11,051 3.4%
Net profit margin (%) 17.9% 13.3%  
No. of shares (m)   316.8  
Book value per share (Rs)*   667.4  
P/BV (x)   1.7  
* (Book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • Staying ahead of the sector average in terms of growth, PNB kept its focus on loan growth in the SME and retail segments. The bank managed 24% YoY growth in advances in 1QFY12. It also plans to grow slightly higher than the sector average at over 20% in FY12. However we have assumed a growth in line with the sector average. The bank has a 32% exposure to the infrastructure space, with around 15% coming from the power space. However, the bank has not seen any coal linkage issues with the projects it has funded, and none of its projects are seeing any stress so far. The growth of 27% YoY in deposits was led by higher growth in term deposits during the past quarter. The proportion of bulk deposits (deposits in excess of Rs 10 m, parked by corporates having surplus funds) has increased to 24% in 1QFY12 from 19% previously. The growth in the CASA (low cost deposit base) came in much slower, at 16%. The proportion of CASA also decreased to 37% from 41% previously.

  • The bank managed to keep its NIMs relatively stable despite a fall in the low cost deposit base, on account of higher lending yields. In line with moves from competition, and to offset further increase in cost of funds, the bank decided to raise its base rate and BPLR (benchmark prime lending rate) by 0.75% to 10.75% and 14.25% respectively. The bank expects to sustain its NIMs at around 3.5% going forward.
  • Healthy growth in SME and retail advances
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 1,986,540   2,452,590   23.5%
    Agriculture 302,400 15.2% 341,530 13.9% 12.9%
    Retail 194,370 9.8% 241,540 9.8% 24.3%
    Housing 97,380 4.9% 118,350 4.8% 21.5%
    SME 200,900 10.1% 273,360 11.1% 36.1%
    Large corporate 741,460 37.3% 875,760 35.7% 18.1%
    Deposits 2,553,350   3,240,970   26.9%
    CASA 1,043,850 40.9% 1,212,600 37.4% 16.2%
    Tem deposits 1,509,500 59.1% 2,028,370 62.6% 34.4%
    Credit deposit ratio 77.8%   75.7%    

  • Other income in 1QFY12 saw an increase on account of an increase in fee income. Income from incidental charges and ATM operations saw a sharp increase. The companyís fee income is said to increase, on account of its acquisition of a 30% stake in MetLife India, an affiliate of US based, MetLife Inc. PNB will thus become a joint venture partner in the life insurance company. Post regulatory approval and the closing of the transaction, the joint venture will rebrand as PNB MetLife. The bank is expected to substantially increase its income from insurance, and the mutual fund business on account of this venture. The financial details of the deal have not been disclosed yet, as it is still subject to regulatory approvals.

  • 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 1.8% in 1QFY11 to 2% in 1QFY12 and at the net level from 0.7% to 0.9%. However, the bank reiterated that it will maintain its asset quality at similar levels for FY12. PNB had one of the highest provision coverage ratios (of 81%) in the sector a year back. However, it has now come down from those levels. At 74% of gross NPAs, this coverage is currently well above the RBIís stipulated mandate of 70%.

  • Having said that, the NPA ratios may not be sustainable if the bankís asset quality deteriorates further. The bank still needs to migrate its accounts below Rs 1 m to the system, which may lead to some more pressure. Irrespective, on account of the RBIís revised provisioning guidelines, the bank made additional provisions to the tune of Rs 3.9 bn. 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. Its slippages as a percentage of its restructured portfolio stood at 12.7% at the end of 1QFY12. PNB had restructured loans to the tune of Rs 155 bn at the end of 1QFY12, of which loans worth Rs 20 bn had slipped into NPAs, which is definitely a worrying sign.

What to expect?

At the current price of Rs 1124, the stock is valued at 1.0 times our estimated FY14 adjusted book value. 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. It also plans to increase its overseas presence and branch network going forward adding to its reach. Its new insurance venture with MetLife will also help reap dividends, and the bank has increased focus on its fee income vertical. However, agricultural delinquencies are our lingering concerns with regard to the bank. Exposure to the infrastructure sector, especially power is a concern, however the company has not reported any stress so far on this account. Irrespective we reiterate our positive view on the bank from a long term perspective.

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