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  • Nov 4, 2011 - Punjab & Sind: Provisioning write back aids profits

Punjab & Sind: Provisioning write back aids profits

Nov 4, 2011

Punjab & Sind Bank declared its results for the second quarter of the financial year 2011-12 (1QFY12). The bank has reported 36% YoY growth in interest income and a 36% growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income falls by 8% YoY in 2QFY12 despite a 18% YoY growth in advances, on account of higher interest costs.
  • Net interest margin marginally falls to 2.3% in 1HFY12 from 2.7% previously on account of a higher cost of funds.
  • Other income falls by 24% YoY in 2QFY12 with a decline in treasury income.
  • Cost to income ratio rises from 56% to 63% in 2QFY12 due to pension and gratuity provisions and a lower income buffer.
  • CAR at 13.3% as per Basel II norms, Net NPA at 0.7% of advances at the end of 2QFY12.

Consolidated financial performance snapshot
Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 11,775 16,065 36.4% 23,066 31,075 34.7%
Interest expense 7,905 12,495 58.1% 15,260 23,997 57.2%
Net Interest Income 3,870 3,571 -7.7% 7,806 7,079 -9.3%
Net interest margin (%)       2.7% 2.3%  
Other Income 1,373 1,047 -23.7% 2,250 1,984 -11.8%
Other Expense 2,944 2,920 -0.8% 5,141 5,692 10.7%
Provisions and contingencies 1,133 -182   1,129 500  
Profit before tax 1,167 1,880 61.1% 3,785 2,871 -24.2%
Tax 76 402 429.6% 1,179 752 -36.2%
Profit after tax/ (loss) 1,091 1,478 35.5% 2,606 2,119 -18.7%
Net profit margin (%) 9.3% 9.2%   11.3% 6.8%  
No. of shares (m)         223.1  
Book value per share (Rs)*         137.2  
P/BV (x)         0.6  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • Punjab & Sind Bank (PSB) managed a 18% YoY growth in advances in 1HFY12, slightly below the sector average of 19%. Deposits grew by 14.5% YoY during the past 12 months. The credit/deposit ratio saw an increase from 67.8% previously to 69.8% in 1HFY12. The bank saw its net interest margins (NIM) fall to 2.3% from 2.7% previously.
  • Credit deposit ratio improves
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 358,960   423,475   18.0%
    Deposits 529,451   606,354   14.5%
    Credit deposit ratio 67.8%   69.8%    

  • 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 75% at the end of 1HFY12, from 81.8% at the end of FY11. The net NPA ratio stood at 0.7%, an increase from 0.4% seen at the end of 1HFY11. 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 economic environment and slower credit offtake in the country.

  • The 11% growth in other expenses in 1HFY12 is primarily attributable to pension and gratuity provisions. While the proportion of cost to income (63%) 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 may need further funding from the government in order to maintain its growth track.

What to expect?
At the current price of Rs 76, the stock is valued at 0.4 times our estimated FY14 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 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 reasonable valuations, we reiterate our positive view on the stock from 2 to 3 year perspective. Investors should, however, keep their exposure to a single stock limited for the midcap portfolio.

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