With a slowdown and deteriorating asset quality, banks have been treading cautiously by adhering to prudent lending practices and enhancing their risk management systems. Punjab National Bank (PNB) has taken advantage of the situation and is increasing its market share with a focus on maintaining asset quality.
With one of the lowest non-performing assets’ (NPAs) in the sector, PNB is well positioned to capitalise on its dominant presence in the growing Indo-gangetic region and maintain its superior margins. Focus on technology and a wide branch network would ensure efficiency in operations and robust business volumes.
Strong advances
The second largest public sector bank (PSB), PNB has seen its advances (loan portfolio) grow by an average 25 per cent in the last four years. Strong demand and the bank’s willingness to lend has enabled advances to grow at 28.5 per cent in H1 FY09, and at a scorching 40 per cent in Q3 FY09.
This along with higher interest rates has enabled interest income to grow by around 45 per cent. However, the management has maintained that the advances growth in Q3 was extraordinary, which would taper to 30 per cent in FY09 and further to around 20-22 per cent in FY10, which is also healthy.
To its credit, PNB has been prudent in terms of lending to certain sectors. It has slowed lending to retail (grew by only 15 per cent in Q3), which has led to its share in the overall loan book fall from 23 per cent in FY08 to 19 per cent now. However, going forward, PNB would be focusing on educational and home loans (less than Rs 30 lakh) in the retail space, agriculture, corporates and SME among others.
Matching deposits
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Deposits have grown at a healthy pace of 17 per cent (average) during FY05-FY08. With increasing risk aversion and the tide turning in favour of safer havens, deposit growth of PSB (29 per cent) have outpaced those of private banks (16 per cent) in Q3. For PNB, its deposit base, too, grew fast beating past averages (up 24 per cent in H1 FY09 and 29 per cent in Q3).
The higher interest rate scenario also meant that depositors preferred term deposits over low-yielding deposits like savings account (CASA; current account and savings account). Not surprisingly, term deposits have grown impressively at 43 per cent outpacing lower-cost deposits (grew by 12 per cent).
| ON A GROWTH TRAJECTORY | |||
| in Rs crore | FY08 | FY09E | FY10E |
| Net Interest income | 5,534.0 | 7,037.0 | 8,046.0 |
| Non-interest income | 1,998.0 | 2,678.0 | 2,779.0 |
| Operating profit | 4,006.0 | 5,600.0 | 6,142.0 |
| Net profit | 2,049.0 | 2,822.0 | 3,139.0 |
| EPS (Rs) | 65.0 | 89.5 | 99.6 |
| P/E (x) | 6.1 | 4.4 | 4.0 |
| P/BV (x) | 1.0 | 0.9 | 0.8 |
| E: estimates | |||
This trend has seen the share of PNB’s CASA deposits gradually falling to 37.4 per cent in Q3 from 43 per cent in Q3 FY08. However, at 37-38 per cent levels, it is the highest among PSBs. Overall, the management expects deposit growth of 25-26 per cent in FY09.
Higher margins
Even as the share of low-cost deposits has fallen, the overall net interest margins (NIM) of PNB have been on the rise in the last few quarters (see Key Ratios). While the cut in CRR and SLR ratios have provided some cushion, advances to high-yield customers (and better pricing power) are responsible for the robust margins.
The bank’s strategy to mobilise bulk deposits (around 36 per cent of term deposits are bulk deposits), allows PNB to re-price these deposits much faster, thus would cushion margins in a declining interest rate scenario. Recent cuts in term deposit rates are a positive, the effect of which would be felt with a lag. Overall, the bank expects to maintain NIMs of around 3.5 per cent going ahead.
Technology edge
PNB has a wide branch network of about 4,600 branches (second largest in the country), which has enabled it to maintain higher CASA deposits. Importantly, all its branches and extension counters are fully automated and networked. The technology processes are in place to take care of 50,000 villages, 100,000 terminals and 150 million customers, and future demand.
The growing usage of technology has improved productivity over the years, demonstrated in the improvement in cost-to-income ratio from 58 per cent in FY05 to 38 per cent in Q3 FY09.
The technology usage not only reduces the operating costs, it also helps strengthen internal risk management practices. For example, information pertaining to any weakening of a loan account (more than Rs 50 lakh) is promptly passed on to higher levels and action is taken to recover the money.
This transparency at every level is enabled by the centralised technology platform, thus ensuring a tab on NPAs. Strong risk management systems and prudent provisioning norms (83 per cent coverage) has helped PNB keep NPAs at very low levels (0.4 per cent in Q3).
Investment rationale
Apart from robust growth in fund-based income, the bank’s other income (which includes more stable fee-based income) has grown at a healthy pace. In Q3 it almost doubled on the back of a 155 per cent rise in treasury income, which is unlikely to be sustained in Q4 as bond yields are up. Nevertheless, expect other income growth to be stable, driven by strong growth in fee-based income.
While an extensive branch network should continue to aid PNB to deliver robust business growth, the relatively high CASA ratio should ensure better NIMs, compared to its peers. The technology initiatives along with prudent lending practices would also help towards keeping costs under check and maintain asset quality.
While PNB also holds 74 per cent in PNB Gilts and 30 per cent in Principal PNB Mutual Fund, any progress over the IPO of UTI AMC (PNB holds 25 per cent stake) could rub off positively on the stock. At Rs 399, the stock is available at a P/BV of 0.8 and can deliver 18-21 per cent in a year’s time.