PNB: Sitting pretty

PNB reaps benefit of credit growth, rising yields on advances and higher proportion of low cost deposits.

Punjab National Bank (PNB) had a good quarter in June 2006 with its net interest income rising 18.8 per cent y-o-y due to lower interest cost. Interest income grew 15.3 per cent as advances went up 37.4 per cent over Q1 FY06.

The bank was able to manage interest costs better as cost of funds were maintained at the same level as a year ago. With higher yields on advances (up 50 basis points y-o-y) resulted in net interest margin improving by 25 basis points y-o-y to 4.1 per cent. In FY06, the NIM was at 4 per cent.

However, PNB's deposit growth of 15.7 per cent was somewhat disappointing. If it were not for its high proportion of low cost deposits (current and savings accounts), which went up 300 basis points to 48.6 per cent, the bank would not have been able to improve its NIM.

Fee income growth at 52 per cent led to other income rising 11 per cent. Operating expenses were at the same levels as a year ago, owing to a higher base last year and a reduction in staff expenses, which analysts attribute to lower pension charges.

PNB booked a loss of Rs 387 crore as it transferred securities to the held to maturity (HTM) category, which resulted in its operating profit declining 24 per cent y-o-y.

Though PNB's net NPAs increased by 6 basis points over March 2006 to 0.35 per cent, they are among the lowest in the industry. Its HTM securities portfolio has increased from 36 per cent a year ago to 62 per cent in June 2006, which has reduced the risk of its investment book.

Plus, strong credit growth, rising yields on advances and a higher proportion of low cost deposits make PNB one of the better PSU banks. The PNB stock has outperformed the Sensex about two times in the past fortnight, and trades at a multiple of 1.3 times and 1.1 times estimated FY07 and FY08 book value, which is not expensive.

Ashok Leyland: CV demand pays off

Higher average realisations for its vehicles have helped Ashok Leyland (ALL) post a strong revenue growth of 34 per cent y-o-y and an operating profit growth of 41 per cent in June 2006.

However, ALL has ceded market share, losing 330 basis points to competition. Operating profit margin expanded by 40 basis points to 8.5 per cent even as raw materials cost rose 260 basis points because of a huge fall in staff costs and other expenditure.

ALL has cashed in on the strong demand for CVs resulting from the government's ban on overloading which could spill over to the next quarter as well. However, as a result, sales of buses were 40 per cent lower. ALL can make this up since delivery schedules to state undertakings are somewhat flexible.

Looking ahead, infrastructure development""highways and roads""should help sustain demand for CVs and ALL will no doubt be able to post good volumes. But the drop in the market share to 27.8 per cent during Q1, in a growing market, indicates that ALL is not able to take advantage of the demand.

The acquisition of AVIA's trucking business in eastern Europe, which has capacity of 20,000 units will give ALL the much-needed global capacity. ALL is also attempting to increase the share of non-cyclical businesses""sale of spare parts, exports and defence- to turnover.

The stock has outperformed between January and June and trades at 13 times estimated FY07 earnings and 11.5 times FY08 earnings and are not really demanding.

With contribution from Shobhana Subramanian