IPO Review: Punjab & Sind Bank

Punjab & Sind Bank's stock is available at relatively cheaper valuations. Investors with a long-term perspective can consider the stock

IPO details

Company Name: Punjab & Sind Bank
Issue Size: 450-480crore
Price Band: 113-120
Issue Date: Date 13 to 16- 2010


   PUNJAB & SIND Bank is raising funds through an initial public offer to improve its capital adequacy. An augmented capital base would help the bank achieve its growth targets. The primary issue of shares would result in a dilution of the government holding by 18%. But this is not part of the government divestment plan since the proceeds would be used for internal purposes.

BUSINESS:

Set up in 1908, the bank is primarily concentrated in northern India. It has a network of 926 branches and plans to add another 100 by March 2010. It plans to further strengthen its base in the North as 30% of the new branches will be set up in the northern region. The bank caters to the requirements of public sector enterprises, which comprise 28% of the loan portfolio. Borrowers from sectors such as infrastructure and real estate have helped the bank grow its loan book at a high rate. According to the management, retail and medium and small enterprises would be driving growth in future.

FINANCIALS:

The bank has grown its loan book at a compounded annual growth rate of 38% since FY06. But the net interest income — the difference between interest earned and interest expended — has grown at a lesser pace of 17%.

   This could be because the bank took bulk deposits to keep pace with its loan book growth. Bulk deposits are high cost in nature and as such net profit has risen by 15% only.

   Despite lower growth in interest income, the bank's asset quality has improved. Net non-performing assets formed 0.4% of net advances for the first half of the current fiscal as against 8.1% in FY05. The bank has not shifted bad loans to system based recognition. As such, there could be negative surprises in the asset quality. The impact will be limited, as the bank has provided for 87% of the bad loans.

   Net interest margin, which is the interest rate differential between borrowing and lending costs, stood at 3% for the first half of FY11. Most

   public sector banks with similar margins collect 30% of deposits from low-cost current and savings accounts. For Punjab & Sind Bank, the proportion is lower at 25%. Its margins are likely to expand as low-cost deposits increase faster than other deposits.

VALUATION:

At the upper end of the price band, the bank's stock would trade at a price-book value of around one. This is lower compared to its peers such as Andhra Bank and Bank of Maharashtra, which are trading at around 1.2. Retail investors would get a 5% discount on the final issue price. This would bring down the valuations further. Investors with a longterm perspective can consider the stock.

CONCERNS:

The bank's share of lowcost deposit has fallen from a 36% in FY08 to 25% of its total deposit base. When interest rates are rising, this will put greater pressure on the bank's net interest margins compared to its peers, Bank of Maharashtra and Andhra Bank, which have an average of 36%. To counter the impact, the bank has taken steps to increase the proportion of lowcost deposits. Low-modernisation rate is another concern. The bank has so far centralised only 30% of its operations unlike its peers. This is because the bank had a contract with erstwhile Satyam Computer Services and an accounting scandal at Satyam jeopardized its contract.

   The bank has now chosen Wipro for its technology operations. The bank plans to centralise nearly half of its operations by the year-end.