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PNB: Losing the margin advantage - Views on News from Equitymaster

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PNB: Losing the margin advantage

Nov 3, 2008

Performance summary
  • Interest income grows by 30% YoY in 1HFY09 on the back of 29% YoY growth in advances.

  • Farm loan waiver to the tune of Rs 11 bn, debt relief Rs 2.7 bn.

  • Lower growth in other income coupled with higher provisioning impairs bottomline growth.

  • Net interest margin remains stable at 3.5% despite lower proportion of CASA; cost to income ratio comes down to 45%.

  • CAR comfortable at 13.6% as per Basel II, NPA reduces (YoY) at the gross as well as net level.



Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 34,631 46,504 34.3% 67,491 87,889 30.2%
Interest Expense 21,716 29,382 35.3% 41,566 56,319 35.5%
Net Interest Income 12,915 17,122 32.6% 25,925 31,570 21.8%
Net interest margin (%)       3.5% 3.5%  
Other Income 4,678 6,628 41.7% 9,769 11,189 14.5%
Other Expense 9,043 10,072 11.4% 17,813 19,256 8.1%
Provisions and contingencies 779 3,177 307.8% 3,851 5,283 37.2%
Profit before tax 7,771 10,501 35.1% 14,030 18,220 29.9%
Tax 2,386 3,430 43.8% 4,395 6,025 37.1%
Profit after tax / (loss) 5,385 7,071 31.3% 9,635 12,195 26.6%
Net profit margin (%) 15.5% 15.2%   14.3% 13.9%  
No. of shares (m)       315.3 315.3  
Book value per share (Rs)*         380.7  
P/BV (x)         1.2  
* Book value as on 30th September 2008

What has driven performance in 2QFY09?
  • PNB managed 29% YoY growth in advances in 1HFY09 despite writing off assets to the tune of Rs 11 bn on account of the agri-debt waiver scheme. The same is, however, in higher 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 24% YoY in deposits was also without commensurate growth in low cost deposits (CASA) during 1HFY09. Although, PNB has managed to keep its net interest margins stable in the last quarter with re-pricing of loans, the higher growth in lending rates coupled with swift depletion of CASA may soon lead the bank to give up its status of having the best NIM amongst PSU banks. We have estimated the bank’s NIM at 3.1% for full year FY09. The reimbursement of 30% of the farm loan waiver by 3QFY09 may to an extent relieve the cost pressures for the bank.

    Going slow on retail…
    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 1,014,940   1,304,320   28.5%
    Retail 160,530 15.8% 191,820 14.7% 19.5%
    Corporate 854,410 84.2% 1,112,500 85.3% 30.2%
    Deposits 1,499,800   1,863,150   24.2%
    CASA 689,908 46.0% 722,902 38.8% 4.8%
    Term deposits 809,892 54.0% 1,140,248 57.0% 40.8%
    Credit deposit ratio 67.7%   70.0%    

  • 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 4.6% in 1HFY08 to 2.4% in 1HFY09 and at the net level from 1.9% to 0.4%.

  • The inferior growth in other income in 1HFY09 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 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 455, the stock is valued at 0.9 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 healthy CAR as per Basel II even after providing for additional capital towards starting the bank’s subsidiary in London and compliance with revised AS-15 (Rs 9,280 m) is a matter of comfort. 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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