Punjab & Sind Bank: Steep targets, poor execution

Punjab & Sind Bank (PSB) declared its results for the first quarter of the financial year 2012-13 (1QFY13). The bank has reported 17% YoY growth in interest income and a 63% fall in net profits. Here is our analysis of the results.

Performance summary

• Net interest income increases by 5% YoY in 1QFY13 with a 10% YoY growth in advances, on account of higher interest costs.
• Other income falls 8% YoY in 1QFY13.
• Cost to income ratio falls from 62% to 61% in 1QFY13 due to pension and gratuity provisions.
• While the bank’s NIMs stood at 2.2% in 4QFY12, it has deteriorated further in the June quarter. PSB has not divulged the NIMs at the end of the June 2012 quarter.
• CAR at 13.1% as per Basel II norms, Net NPA at 1.2% of advances at the end of 1QFY13.

Rs (m)	1QFY12	1QFY13	Change
Interest income	15,010	17,583	17.1%
Interest expense	11,502	13,894	20.8%
Net Interest Income	3,508	3,689	5.2%
Other Income	937	859	-8.3%
Other Expense	2,772	2,776	0.1%
Provisions and contingencies	682	855	25.4%
Profit before tax	991	916	-7.5%
Tax	350	676	93.1%
Profit after tax/ (loss)	641	240	-62.5%
Net profit margin (%)	4.3%	1.4%
No. of shares (m)		234.2
Book value per share (Rs)*		142.7
P/BV (x)		0.4

What has driven performance in 1QFY13?

• Punjab & Sind Bank (PSB) managed 10% YoY growth in advances in 1QFY13, well below the sector average. Deposits grew by 8% YoY during the period. The credit/deposit ratio thus saw an increase from 72% previously to 74% in 1QFY13.

• The bank expects a 20% growth in deposits and a 23% growth in advances for FY13. However, we believe that this may be difficult for PSB to achieve.
  Sees growth below sector average

  (Rs m)	1QFY12	% of total	1QFY13	% of total	Change
  Advances	431,700		475,820		10.2%
  Deposits	597,970		643,860		7.7%
  Credit deposit ratio	72.2%		73.9%

• The net NPA ratio stood at 1.2%, an increase from 0.8% seen at the end of 1QFY12. The bank had to make provisions on its NPAs. A further deterioration in credit quality is expected going forward, especially with the current rising economic environment.

• While the proportion of cost to income (61%) is certainly high compared to other PSU banks we expect this to get normalized in the medium term. The bank was able to maintain a CAR of 13.1% as per Basel II norms.

What to expect?

At the current price of Rs 63.4, the stock is valued at 0.4 times its trailing twelve months book value. The bank has performed well below the sector average so far this year. In the current tough economic conditions we believe that it will be tough for the bank to sustain growth going forward.

The bank however needs to dilute equity to strengthen its capital base over the next 1-2 years. Although its historical return on equity is comparable to that of the best managed banks, PSB is currently priced at a considerable discount to its PSU peers. However, higher provisioning and inability to control its cost of funds and asset quality are major concerns. Unfortunately the bank’s management has so far not shown inclination to throw light on the future prospects of the entity. In light of its lackluster performance and limited visibility in terms of profit sustenance, we need to review our estimates for the stock.