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Punjab & Sind: Profits tank on higher provisions
Aug 3, 2011

Punjab & Sind Bank declared its results for the first quarter of the financial year 2011-12 (1QFY12). The bank has reported 25% YoY growth in interest income and a 58% fall in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income falls by 11% YoY in 1QFY12 despite a 29% YoY growth in advances, on account of higher interest costs.
  • Net interest margin marginally falls to 2.3% in 1QFY12 from 2.7% previously on account of higher cost of funds.
  • Other income grows 7% YoY in 1QFY12 with a decline in treasury income.
  • Cost to income ratio rises from 46% to 62% in 1QFY12 due to pension and gratuity provisions and a lower income buffer.
  • CAR at 13.3% as per Basel II norms, Net NPA at 0.8% of advances at the end of 1QFY12.

Rs (m) 1QFY11 1QFY12 Change
Interest income 11,291 15,010 32.9%
Interest expense 7,355 11,502 56.4%
Net Interest Income 3,936 3,508 -10.9%
Net interest margin (%) 2.7% 2.3%  
Other Income 876 937 6.9%
Other Expense 2,197 2,772 26.2%
Provisions and contingencies -3 682  
Profit before tax 2,619 991 -62.2%
Tax 1,103 350 -68.3%
Profit after tax/ (loss) 1,515 641 -57.7%
Net profit margin (%) 13.4% 4.3%  
No. of shares (m)   223.1  
Book value per share (Rs)*   130.6  
P/BV (x)   0.7  
*On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Punjab & Sind Bank (PSB) managed a healthy 29% YoY growth in advances in 1QFY12. Deposits grew by 25% YoY during the past 12 months. The credit/deposit ratio thus saw an increase from 70.2% previously to 72.2% in 1QFY12. The bank saw its net interest margins (NIM) fall to 2.3% from 2.7% previously. The bank's management expects to grow its loan book by 22-25% in FY12, and expects its NIMs to be at around 2.7% at the end of the year.
  • Sees strong advance growth
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 335,965   431,700   28.5%
    Deposits 478,757   597,973   24.9%
    Credit deposit ratio 70.2%   72.2%    

  • In line with moves coming from the competition, and post the RBI's monetary policy tightening, the bank changed its base rate from 10.25% to 10.75% and its benchmark prime lending rate (BPLR) from 14.75% to 15.25%.

  • As against the RBI's mandate of provision coverage ratio of 70% for all banking entities by September 2010, PSB had a coverage ratio of 74.2% at the end of 1QFY12, from 81.8% at the end of FY11. The net NPA ratio stood at 0.8%, an increase from 0.3% seen at the end of 1QFY11. The bank had to make provisions as per the RBI's revised guidelines, and for investment depreciation. Asset quality has seen some pressure, however the bank expects net NPAs to sustain at similar levels at the end of FY12.A slight deterioration in credit quality is expected going forward, especially with the current rising interest rate environment.

  • The growth in other expenses in FY11 is primarily attributable to pension and gratuity provisions. While the proportion of cost to income (62%) is certainly high compared to other PSU banks, we expect this to get normalized in the medium term. While the bank was able to maintain a CAR of 13.3% as per Basel II norms, it needs further funding from the government in order to maintain its growth track. It is seeking a capital infusion of Rs 9.9 bn from the government.

What to expect?

At the current price of Rs 89.7, the stock is valued at 0.5 times our estimated FY13 adjusted book value. Sustenance of a healthy current and savings account mix, technological upgradation and ability to sustain its margins are key to the bank's healthy growth prospects. It plans to increase its CASA (current account and savings account) deposit base, as well as focus more on its SME, retail and agricultural advances. The bank plans for healthy loan growth for the year, ahead of the sector average.

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 concerns. In light of its dismal performance in the first quarter, we need to take a relook at our estimates before coming out with an updated view.

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