While high proportion of restructured loans is a near-term dampener, strong volume growth and higher margins augur well for the bank.
In light of the slowdown concerns, several banks pruned their lending to preserve asset quality. The economic slump however, did not deter public sector banks like Punjab National Bank (PNB) which made rapid strides to increase market share. In fact, PNB has become the second largest bank in the country, outpacing ICICI Bank which has intentionally curbed its loan book, with total balance sheet size of around rupees four lakh crore as on September 30, 2009. What is impressive is the fact that the growth has come without any deterioration in asset quality, while margins have remained stable. Besides, with high provisioning of around 90 per cent, PNB need not put aside any extra money to increase its provision coverage, as per the recent RBI stipulation. Going ahead, the bank is expected to sustain healthy growth as well as profitability.
Growing book, robust margins
Even as the systemic credit growth slowed in the last five quarters, PNB’s grew at a much faster pace as compared to the industry average partly due to higher lending to the retail and SME segments. On an average in the last five quarters, although its deposit base grew at a slower pace compared to the 32 per cent growth in advances, the growth was healthy at 26 per cent.
What is inspiring is PNBs ability to lend without forgoing margins. PNB’s superior margins are attributable to its lowest cost of funds in the industry. Its cost of deposits in the September quarter dropped 60 basis points to 5.64 per cent on the back of re-pricing of retail deposits and lower bulk-deposit costs. The low-cost CASA deposits might have declined from around 45-48 per cent over FY06-09 to around 38 per cent now, but it is reasonably higher than most of its peers. On the other hand, the yield on loans given to customers, which stood at 10.7 per cent for the quarter, is one of the best amongst public sector banks. These have helped PNB in sustaining robust net interest margins (NIMs). Going ahead, while the proportion of term deposits in the overall deposits has been moving up recently and could put pressure on the cost of funds, expect PNB’s NIMs to be maintained at around 3.5 per cent.
| ON A GROWTH PATH | ||||
| in Rs crore | FY09 | Q2 FY10 | y-o-y (%) | FY10E |
| Net interest income | 7,031 | 2,095 | 22.4 | 8,461 |
| Other income | 2,920 | 669 | 0.9 | 3,085 |
| Operating profit | 5,744 | 1,606 | 17.4 | 6,750 |
| Net profit | 3,091 | 927 | 31.1 | 3,671 |
| P/E (x) | 9.3 | - | - | 7.8 |
| P/BV (x) | 2.2 | - | - | 1.8 |
| E: estimates | ||||
Quality assets
In the September 2009 quarter, PNB’s gross non-performing assets (NPAs) in absolute terms declined by Rs 250 crore as compared to June 2009 quarter, which brought down the gross NPA ratio by 22 basis points to 1.58 per cent. Given PNB’s superior provision coverage of around 90 per cent, the bank is well placed to provide for any slippage in the future. At 90 per cent, it is also above the 70 per cent minimum limit set by RBI’s in end-October; thus, it would not affect PNB’s profitability as is the case with other peers.
However, the concern stems from its restructured loans, which at around 6 per cent of the bank’s loan book is ahead of the industry (of about 3-5 per cent). Of its total restructured loans of Rs 10,046 crore, Rs 5,970 crore has been added in the last two quarters. In terms of industry exposure, around a third of total restructuring is in segments that are perceived as risky including real estate, aviation and textiles. The higher proportion of restructured assets along with gross NPAs ensures that PNB’s overall stressed loan portfolio is one of the highest in the industry. However, a higher provisioning cover of about 90 per cent, extremely low net NPAs of 0.14 per cent and higher capital adequacy provide comfort, and would act as a cushion in case of major slippages.
Conclusion
With PNB’s credit growth expected to be higher than the industry rate at 20-25 per cent (RBI’s non-food credit target is 18 per cent) the bank is well placed to sustain robust growth in its net interest income going ahead. Its branch network, the second largest in the country, would not only aid in business growth but maintain a relatively high CASA ratio of around 40 per cent and hence, help the bank sustain higher NIMs. The technology initiatives have helped PNB rein in costs, leading to a sharp reduction in its cost-to-income ratio over the last five years—from 56 per cent in FY05 to 43 per cent in September 2009 quarter. With an economic recovery in sight, concerns regarding PNBs restructured assets should also lessen.
At Rs 908.25, the stock is available at 1.8 times the bank’s estimated 2009-10 book-value and can be considered on dips.
