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PNB: Rivaling private peers - Views on News from Equitymaster
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PNB: Rivaling private peers
Nov 21, 2006

Performance summary
Punjab National Bank (PNB) recently announced results for the second quarter and half year ended September 2006. Displaying a healthy traction in growth across parameters, the bank sustained one of the best profitability margins and efficiency ratios, thus giving its private sector peers a run for their money. But for the provisioning made for de-risking the investment portfolio and to meet pension contingencies, the profit growth would have been higher for the half-year period. A noticeable improvement in asset quality also adds to our comfort.

Rs (m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Income from operations 23,705 27,643 16.6% 46,605 54,048 16.0%
Other Income 3,123 2,840 -9.1% 5,651 5,653 0.0%
Interest Expense 11,797 14,015 18.8% 23,813 27,491 15.4%
Net Interest Income 11,908 13,628 14.4% 22,792 26,557 16.5%
NIM (%)       4.0% 4.2%  
Other Expense 8,195 7,580 -7.5% 15,162 14,548 -4.0%
Provisions and contingencies 94 1,018 984.2% 1,255 4,656 271.0%
Profit before tax 6,742 7,870 16.7% 12,026 13,006 8.2%
Tax 2,522 2,820 11.8% 4,224 4,280 1.3%
Profit after tax/ (loss) 4,220 5,050 19.7% 7,802 8,726 11.8%
Net profit margin (%) 15.3% 21.3%   14.4% 18.7%  
No. of shares (m) 315.3 315.3   315.3 315.3  
Diluted earnings per share (Rs)* 53.5 64.1   49.5 55.4  
P/E (x)         9.6  
* (12 months trailing)

Enjoying premium to peers
Punjab National Bank is the fourth largest banking entity in the country (in terms of asset size) with 5% share of the total credit disbursals at the end of FY06. The bank has the largest franchise amongst nationalized banks with 4,520 branches in 1HFY07. Despite being a PSU entity, the bank has outdone its private sector peers in terms of net interest margins over the last couple of quarters, primarily on the back of a large base of low cost deposits. Adequate capital (CAR 12.7% in 1HFY07), high NPA coverage and hedge against interest rate risks peg the bank amongst the frontrunners in the public sector banking space.

What has driven performance in 2QFY07?
Asset growth – Taking calculated risks: Broadly in line with the sector average, PNB registered a 29% YoY growth in advances in 1HFY07, with the retail book (24% of total advances) spiraling at a rate of 48% YoY. The bank has a substantial market share in farm credit that grew by 33% YoY. Also, the priority sector advances stood at 44% of the total credit, thus surpassing the mandated limit of 40%. The deposit growth of 17% YoY is commensurate with its advance growth and has brought the CD ratio to a manageable 64%. While most of its peers are struggling to sustain their net interest margins in the 2.5% to 3.5% range due to the pressure on cost of funds, PNB has been enjoying a 70 basis points premium in NIMs (4.2% in 1HFY07) due to the low cost deposit base that comprises nearly 50% of its deposit portfolio. While the yield on advances improved by 60 basis points, the cost of deposits dropped by 5 basis points over the corresponding quarter of last year. The bank is targeting advance growth of 20% YoY for FY07, which we believe will be well within its reach.

Cautious growth…
  1HFY06 % of total 1HFY07 % of total Change
Advances 638,680   823,400   28.9%
Retail 134,030 21.0% 197,940 24.0% 47.7%
Corporate 504,650 79.0% 625,460 76.0% 23.9%
Deposits 1,094,140   1,284,150   17.4%
CASA 492,363 45.0% 625,381 48.7% 27.0%
Term deposits 601,777 55.0% 658,769 51.3% 9.5%
Credit deposit ratio 58.4%   64.1%    

Other income – Reasonably hedged: Fee income (comprising 14% of the total income in 1HFY07, against 12% in 1H06) grew by 33% YoY and was the main driver of the bank’s other income growth during the quarter. The bank is also making an impressive foray in cash management services and derived income of Rs 130 m from the stream in 2QFY07. The provisioning of Rs 3.9 bn made for transfer of securities to the HTM basket in 1QFY07, however, capped the other income growth for the half-year period. PNB currently has 61% of its investments in the HTM (held-to-maturity) basket with the AFS (available for sale) portfolio having an average duration of 3.5 years.

Costs to even out: The bank’s cost to income ratio, which had escalated to 57% in 1HFY06 due to the wage arrear liabilities, has come down to 51% in 1HFY07. This is expected to further marginalize going forward. Also, while the bank has been sufficiently providing for other liabilities, the additional provisioning for complying with AS-15 (pertaining to pension) is estimated to be to the tune of Rs 4 bn to Rs 5 bn. Of this, the bank has already provided Rs 1.5 bn during 1HFY07 to meet contingencies arising from the same. While the accounting guidelines for the same are yet to be divulged by the RBI, this expenditure is expected to be deferred over a period of time.

NPAs – Well arrested: The bank, however, saw no negative surprises emanating on the NPAs side with both gross and net NPAs reducing to 3.7% and 0.2% of advances respectively in 1HFY07, from 5.1% and 0.3% respectively in 1HFY06. Despite the high gross NPAs, the lower incremental delinquencies, higher recoveries and an adequate coverage ratio of 95% for NPAs, dilute concerns on the delinquency front.

What to expect?
At the current price of Rs 544, the stock is richly valued at 1.9 times its 1HFY07-adjusted book value. Provisioning has had a strong bearing on the bank’s bottomline. Given the conservative provisioning, PNB is well placed to accommodate contingencies on the expenditure or delinquency front. It would, however, not be able to smoothen its profits using floating provisions, if need arises, because of the RBI guidelines expressly prohibiting any such act. The floating provisions currently to the tune of Rs 9,800 m, which are 56% of the FY07E bottomline of the bank - can be gainfully utilized only in case of extraordinary circumstances. The bank’s CAR of 12.7% positions it comfortably to comply with the Basel II norms.

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