Stock Review: PUNJAB National Bank (PNB)

PUNJAB National Bank (PNB) reported a higher proportion of bad loans in the September 2010 quarter, the second time in the current fiscal. Its net non-performing asset (NPA) formed 0.7% of net advances, a jump of 55 basis points (bps) from the year-ago levels. The scrip of the bank witnessed selling pressure on Thursday on concerns over falling asset quality. The stock fell by nearly 2.2% post results. A high proportion of bad loans typically leads to high provisioning for bad loans, which reduces profitability. In the case of PNB, provisions and contingencies rose almost 1.3 times year-on-year (y-o-y). To add to this, tight conditions in the bond market restricted the possibility of making trading gains. As such, the net profit growth at 16% was quite less on a yearly basis compared with the previous two quarters. Bad loans might have affected the bank's bottomline, but it did not influence the bank's lending ability. The bank outpaced its industry in terms of loan book growth. Its advances grew 28% y-o-y in the September quarter. While there are concerns of moderating credit growth, the management has indicated that it intends to outgrow the industry going forward, too.

   The bank reported a high net interest margin (NIM) – the interest rate differential between the lending and borrowing costs. What is commendable is the fact that even after the hikes in interest rates by the banking regulator, PNB managed to grow its NIM by 49 bps compared with the year-ago levels.

   This could be because the bank has a high share of low-cost deposits, which helps the bank keep the overall borrowing costs low. Higher NIMs have also increased the bank's net interest income (NII) – the difference in the interest earned and interest expended by the bank, which grew 1.5 times in September.

   While the bank has shown buoyancy in its core operations of lending, there could be further negative surprises in its asset quality. As per a research report by Proactive Universal Group, the banking regulator has asked most banks to shift to a system-based NPA recognition process from the current branch-level one by the end of FY 2011. While this may cause concern to some, investors can draw solace from the fact that the bank has made adequate provisions. As such, this might not affect the bank's long-term growth prospects.