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Punjab & Sind: Costs rise faster than income
Feb 9, 2012

Punjab & Sind Bank declared its results for the third quarter of the financial year 2011-12 (3QFY12). The bank has reported 32% YoY growth in interest income but saw a 32% growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income falls by 3% YoY in 3QFY12 despite a 13% YoY growth in advances, on account of higher interest costs.
  • Net interest margin falls to 2.3% in 9mFY12 from 2.7% previously on account of a higher cost of funds.
  • Other income grows marginally 2% YoY in 3QFY12.
  • Cost to income ratio rises sharply from 51% to 62% in 2QFY12 due to pension and gratuity provisions and a lower income buffer.
  • CAR at 13% as per Basel II norms, Net NPA at 0.9% of advances at the end of 3QFY12.


Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 12,604 16,609 31.8% 35,670 47,684 33.7%
Interest expense 8,741 12,858 47.1% 24,002 36,854 53.5%
Net Interest Income 3,862 3,751 -2.9% 11,668 10,830 -7.2%
Net interest margin (%)       2.7% 2.3%  
Other Income 921 936 1.6% 3,171 2,920 -7.9%
Other Expense 2,462 2,839 15.3% 7,604 8,531 12.2%
Provisions and contingencies 609 281 -53.9% 1,738 781 -55.1%
Profit before tax 1,712 1,567 -8.5% 5,497 4,438 -19.3%
Tax 359 651 81.2% 1,538 1,403 -8.8%
Profit after tax/ (loss) 1,353 916 -32.3% 3,959 3,035 -23.3%
Net profit margin (%) 10.7% 5.5%   11.1% 6.4%  
No. of shares (m)         223.1  
Book value per share (Rs)*         141.3  
P/BV (x)         0.5  
* (Book value as on 31st December 2011)

What has driven performance in 3QFY12?
  • Punjab & Sind Bank (PSB) only managed a 12% YoY growth in advances in 9mFY12, well below the expected sector growth of 16%. Deposits grew by 12.4% YoY during the past 12 months, but CASA (current account, savings account) growth was relatively muted at 4%. The credit/deposit ratio saw a marginal increase from 71.7% previously to 71.9% in 9mFY12. The bank saw its net interest margins (NIM) fall to 2.3% from 2.7% previously.

    Credit and deposits grow in tandem
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 378,060   426,040   12.7%
    Deposits 527,160   592,510   12.4%
    Credit deposit ratio 71.7%   71.9%    

  • 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 70.3% at the end of 9mFY12, from 81.8% at the end of FY11 on a write back of provisioning. The net NPA ratio stood at 0.9%, an increase from 0.4% seen at the end of 9mFY11. The bank had to make provisions as per the RBI's revised guidelines, and for investment depreciation. Asset quality has seen some pressure in light of the weak economic environment. A further deterioration in credit quality is expected going forward.

  • The 12% growth in other expenses in 9mFY12 is primarily attributable to pension and gratuity provisions. While the proportion of cost to income (62%) 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.

  • Profits fall by 23% YoY in 9mFY12 on a fall in net interest income. Thus despite write back of provisioning and lower tax outlay. The quarterly profit was lower by over 32% on a YoY basis.

What to expect?
At the current price of Rs 71, the stock is valued at 0.3 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, slower advance growth and inability to control its cost of funds and asset quality are major concerns. In light of its lackluster performance so far this year and lack of long term visibility in terms of profit sustenance, we would have to revise our estimates for the stock.

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