PNB: Watch out for the thorns

While the loan book captures robust economic growth, asset quality concerns seem to dull the cheer.

The equity market has reacted positively to Punjab National Bank’s (PNB’s) performance for the quarter ended March 2010. The stock closed with a marginal gain of 0.05 per cent at a time when the BSE Bankex declined 0.11 per cent. While most of the factors look rosy, there are a couple of thorns as well. India’s second-largest bank seems to have slipped on the asset quality front for the second quarter in a row since the September 2009 quarter, due to the non-payment of Rs 338 crore by farmers on agricultural advances eligible for debt relief.

Analysts reckon that the drive of the bank to consistently outperform the industry’s loan growth rate has taken toll on the fastest growing public sector bank. The industry average is 16.7 per cent, while PNB recorded a 20.6 per cent growth in FY10. Gross non-performing assets (NPAs) have risen 28 per cent on a year-on-year basis in the March quarter. Sequentially, they are up 2 per cent to Rs 3,214 crore. Also, the bank has significantly reduced its provisioning coverage ratio to 81.2 per cent in the fourth quarter of 2010, as compared to 89 per cent same quarter a year ago and 83 per cent in the December 2010 quarter. However, if the Rs 338-crore lent to farmers is excluded, then the gross NPAs are up only 15 per cent.

On the operations side though, the bank has continued its robust performance. Net interest margins rose 80 basis points to 3.99 per cent and are higher than the average 3 per cent of other public sector banks. This is because the low cost funds in the current and savings account (Casa), which formed 40.85 per cent of total deposits, increased 200 basis points and is higher than the PSU banks’ average of about 35 per cent. Consequently, net profit (excluding an extraordinary income) rose 22 per cent on year to Rs 1,053.6 crore, the reason being better operations management.

Other income (forming 25 per cent of total net income) declined 8 per cent led by lower treasury income, while the core business showed a strong rebound as net interest income jumped 40 per cent in the March quarter compared to a 26 per cent growth during the previous year. Analysts expect the bank to continue its growth with a strong branch network. However on the valuation front, the stock seems to be fairly valued given its significant outperformance over benchmark indices and peers. At Rs 1,048, it trades at 1.8 times and 1.5 times its adjusted book value for FY11 and FY12, respectively, which is on the higher side of its historical band of 0.25-1.58 times. While the growth momentum enables it to get a premium, all eyes are now trained on the asset quality.