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PNB: Margins firm up
Nov 12, 2010

Punjab National Bank declared its 2QFY11 results. The bank has reported a 49% YoY and 16% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 47% YoY in 1HFY11 on the back of 28% YoY growth in advances.
  • Net interest margin improves marginally to 4% in 1HFY11 from 3.5% in 1HFY10 due to higher proportion of CASA.
  • Other income falls by 11% YoY in 1HFY11 despite 16% YoY growth in fees.
  • Cost to income ratio lower at 42% as against 43% in 1HFY10.
  • CAR at 12.6% as per Basel II, Net NPA at 0.7% of advances at the end of 1HFY11.


Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest Income ††† 53,045 64,554 21.7% †† 104,486 † 124,270 18.9%
Interest Expense ††† 33,123 34,787 5.0% 66,579 68,520 2.9%
Net Interest Income ††† 19,922 29,767 49.4% 37,907 55,750 47.1%
NIM (%)       3.5% 4.0%  
Other Income †7,713 ††7,183 -6.9% 18,047 16,099 -10.8%
Other Expense ††† 11,572 15,948 37.8% 24,199 29,867 23.4%
Provisions and contingencies †2,159 ††5,160 139.0% 5,177 10,502 102.9%
Profit before tax ††† 13,904 15,842 13.9% 26,578 31,480 18.4%
Tax †4,634 ††5,095 9.9% 8,989 10,053 11.8%
Profit after tax/ (loss) †9,270 10,747 15.9% 17,589 21,427 21.8%
Net profit margin (%) 17.5% 16.6%   16.8% 17.2%  
No. of shares (m)         315.3  
Book value per share (Rs)*         582.7  
P/BV (x)         2.3  
* (Book value as on 30th September 2010)

What has driven performance in 2QFY11?
  • Staying ahead of the sector average in terms of growth, PNB kept its focus on loan growth in the SME and large corporate segments. The bank managed 28% YoY growth in advances in 1HFY11. The growth of 18% YoY in deposits was led by higher growth in low cost deposits (CASA) during the past two quarters. This checked the gradual reduction in PNBís CASA proportion seen earlier and brought the same to 41% at the end of 1HFY11. The bank also improved its net interest margins due to the upward re-pricing of loans. The NIMs in fact improved to 4% at the end of 1HFY11; being one of the highest in the sector.

    SME focus drives asset growth...
    (Rs m) 1HFY10 % of total 1HFY11 % of total Change
    Advances † 1,635,590   ††† 2,087,640   27.6%
    Agriculture †††† 250,090 15.3% †††††† 322,740 15.5% 29.0%
    Retail †††† 170,330 10.4% †††††† 225,960 10.8% 32.7%
    SME †††† 160,900 9.8% †††††† 234,720 11.2% 45.9%
    Large corporates †††† 587,890 35.9% †††††† 726,570 34.8% 23.6%
    Deposits † 2,308,230   ††† 2,733,940   18.4%
    CASA †††† 888,260 38.5% ††† 1,109,830 40.6% 24.9%
    Term deposits † 1,419,970 61.5% ††† 1,624,110 59.4% 14.4%
    Credit/Deposit 70.9%   76.4%    

  • 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 1.6% in 1HFY10 to 1.9% in 1HFY11 and at the net level from 0.2% to 0.7%. The bank had one of the highest provision coverage ratios (of 93%) in the sector a year back. At 77% of gross NPAs, this coverage is currently well above the RBIís mandate of 70%. However, the same may not be sustainable if the bankís asset quality deteriorates further. PNB has one of the largest proportions of agricultural debt due to its presence in the Gangetic belt. This impacted the bankís asset quality in this portfolio due to debt restructuring.

  • The lower growth in other income in 1HFY11 can be primarily attributed to lower treasury gains despite 16% growth in fee income. The proportion of fee to total income was 18% at the end of 1HFY11.

  • PNB had restructured loans to the tune of Rs 135 bn at the end of 1HFY11, of which loans worth Rs 12 bn had slipped into NPAs.

What to expect?
At the current price of Rs 1,333, the stock is attractively valued at 1.3 times our estimated FY13 adjusted book value ResearchPro subscribers can view latest updates here. Sustenance of a healthy current and savings account mix, technological upgradation and ability to sustain attractive margins are key to the bankís healthy growth prospects. The bank may need to dilute equity to strengthen its capital base in the medium term. Having said that, the low proportion of fee income and agricultural delinquencies are our lingering concerns with regard to the bank. Although our long term view on the bank remains positive, most of the near term upsides are already priced in.

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