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Punjab Nat. Bank: Business growth remains strong - Views on News from Equitymaster
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Punjab Nat. Bank: Business growth remains strong
Nov 3, 2011

Punjab National Bank (PNB) declared its results for the second quarter for the financial year 2011-2012 (2QFY12). The bank has reported 39% YoY and 12% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 16% YoY in 2QFY12, on the back of a 19% YoY growth in advances.
  • Capital adequacy ratio currently stands at 12.2% at the end of 2QFY12 from 12.6% at the end of 2QFY11 as per Basel II norms.
  • Net interest margin (NIM) sees a slight decline to 3.9% from 4% in 1QFY11.
  • Net NPA (non-performing assets) to advances comes in higher at 0.8% in 2QFY12 from 0.7% in 2QFY11.
  • Other income improves by 24% YoY in 2QFY12 on higher income from income from forex and bills and remmitance.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 64,554 89,520 38.7% 124,271 172,673 38.9%
Interest expense 34,787 54,994 58.1% 68,520 106,994 56.1%
Net Interest Income 29,767 34,526 16.0% 55,750 65,679 17.8%
Net interest margin (%)       4.0% 3.9%  
Other Income 7,183 8,889 23.8% 16,100 19,725 22.5%
Other Expense 15,949 18,137 13.7% 29,868 35,387 18.5%
Provisions and contingencies 5,160 7,103 37.7% 10,502 16,038 52.7%
Exceptional items   -   - -  
Profit before tax 15,841 18,175 14.7% 31,481 33,979 7.9%
Tax 5,095 6,124 20.2% 10,053 10,878 8.2%
Effective tax rate 32.2% 33.7%   31.9% 32.0%  
Profit after tax/ (loss) 10,746 12,050 12.1% 21,428 23,101 7.8%
Net profit margin (%) 16.6% 13.5%   17.2% 13.4%  
No. of shares (m)         316.8  
Book value per share (Rs)*         667.4  
P/BV (x)         1.5  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • Staying in line with the sector average in terms of growth, PNB kept its focus on loan growth in the corporate and retail segments. The bank managed a 19% YoY growth in advances in 1HFY12, despite a tough credit environment. It also plans to grow slightly higher than the sector average in FY12; however we have assumed a growth in line with the sector average.

  • The growth of 25% 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 1HFY12 from 20% previously. The growth in the CASA (low cost deposit base) came in much slower, at 12%. The proportion of CASA also decreased to 36% from 41% previously. The bank has not yet decided whether to increase its savings bank account rate in response to the recent deregulation.

  • The bank managed to keep its NIMs relatively stable despite, a fall in the low cost deposit base, on account of higher lending yields. The bank expects to sustain its NIMs at around 3.5% going forward. As of now the bank hasn't decided to pass on the past two rate hikes (0.5% cumulatively) and is adopting a wait and watch stance on the savings rate deregulation front. However, NIMs may see some contraction if it is forced to make a move on either of these fronts.

    Healthy growth in large corporates and retail advances
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 2,108,560   2,517,050   19.4%
    Agriculture 322,740 15.3% 350,760 13.9% 8.7%
    Retail 205,700 9.8% 247,320 9.8% 20.2%
    Housing 101,600 4.8% 119,200 4.7% 17.3%
    SME 234,720 11.1% 276,430 11.0% 17.8%
    Large corporate 726,570 34.5% 907,600 36.1% 24.9%
    Deposits 2,733,940   3,417,830   25.0%
    CASA 1,109,830 40.6% 1,240,220 36.3% 11.7%
    Term deposits 1,624,110 59.4% 2,177,610 63.7% 34.1%
    Credit deposit ratio 77.1%   73.6%    

  • Other income in 1HFY12 saw an increase. Income from incidental charges, ATM operations and forex income saw a sharp increase. The company's fee income is set to increase going forward, on account of its acquisition of a 30% stake in MetLife India, an affiliate of US based, MetLife Inc. This is still subject to regulatory approvals. However it should start operations in the coming quarter.

  • 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 1.9% in 1QFY11 to 2.05% in 1HFY12 and at the net level from 0.7% to 0.8%. However, the bank reiterated that it will maintain its asset quality at similar levels for FY12. The bank has 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 75.1% of gross NPAs, this coverage is currently well above the RBI's stipulated mandate of 70%. However, the same may not be sustainable if the bank's asset quality deteriorates further. As of now the bank has migrated 100% of its accounts to the core banking system accounting for the increase in NPA provisions. Its slippages as a percentage of its restructured portfolio stood at 11.2% at the end of 1HFY12.

  • PNB had restructured loans to the tune of Rs 150 bn at the end of 1HFY12, of which loans worth Rs 22 bn had slipped into NPAs. The bank has a 14.4% exposure to the infrastructure space, with around 6.2% coming from the power space. The power sector is definitely one of the stress sectors especially the distribution companies. State electricity boards (SEBs) have been bleeding losses, and the power ministry has come down strictly on banks not to fund their cash losses. PNB has Rs 78 bn of exposure to SEBs or around 3% of its loan book. The company recently restructured Rs 17.5 bn in loans to Tamil Nadu Electricity Board (TNEB), converting a less than 1 year maturity loan to a longer term loan of 5 years. Rather than letting the entity default, it was able to work with the company to come to a more reasonable solution. Other entities in iron and steel and drilling were also pushed into restructuring, with the bank's industrial book seeing a big restructuring jump overall. The possibility of further accounts moving into this category is worrying. Further slippages of these accounts into the NPA category may be an issue.

What to expect?
At the current price of Rs 979, the stock is valued at 0.9 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 bank's 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 in the future, and the bank has increased focus on its fee income vertical. However, agricultural delinquencies and the increase in corporate restructuring are our lingering concerns with regard to the bank. Exposure to the infra sector, especially power is a concern, especially with the big TNEB account moving into restructuring. However the bank has been prudent in attending to this issue in a quick manner versus waiting till it is too late. The company also maintains a sufficient coverage ratio and has comfort on the margin front. We reiterate our positive view on the bank from a long term perspective.

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