Stock Review: Punjab National Bank

Punjab National Bank's stock seems to be cheaper compared to its larger peer. Long-term investors may consider the stock

 

   WITH a market capitalisation of around 38,000 crore, Punjab National Bank (PNB) is the second-largest public sector bank in the country. On the back of higher loan book growth and margins, the bank, which had come out with an initial public offering in 2002, has reported a robust financial performance for the past three quarters.

BUSINESS:

PNB, which was nationalised with other banks in 1980, has a strong presence in the northern parts of the country. It has also taken initiatives to expand its network in the country and will add 350 branches by the end of this fiscal to its existing 5,000. PNB has a history of growing through the inorganic route. It was the first bank to acquire a nationalised bank in 1993. It also acquired Kerala-based Nedungadi Bank in 2003. This was the seventh merger of the bank in its history of over 115 years. Not many public sector banks have shown a similar aggression.

FINANCIALS:

The bank has outgrown its industry in terms of loan book growth. In the past three quarters, advances have grown on an average 27% year-on-year as against the industry's 19%. This has resulted in a net interest income growth of 45% in the same time. Net interest income is the difference between interest earned and interest expended by the bank.

   Its operating profit before provisions and contingencies has grown in excess of 30%. But higher provisioning costs have limited the bank's bottom line growth. The bank's provisioning costs have almost doubled every quarter for the past two quarters.

GROWTH STRATEGIES:

The management has net interest margin target in excess of 3.5%, which it has achieved for the past five quarters. One factor that has helped the bank in maintaining this is its higher share of low-cost deposits. Current and savings account balances form 41% of its total deposits. When interest rates are rising, this helps the bank in constricting the rise in its overall costs of borrowing. The bank also changes its strategies as per the business environment. For instance, during the economic turmoil, PNB took the high cost bulk deposits at around 9% and lent it at around 13%, thereby maintaining its margins.

   At the same time, the bank has realised that its income through the core operations of lending and borrowing has to be complimented by its income through other sources. It has started offering correspondent banking services to banks that do not have such a wide network. This means that PNB offers services to other banks' clients and in turn charges a fee from those banks. It has also floated a subsidiary, which is dedicated to merchant banking and loan syndication activities.

VALUATION:

The bank's stock is trading at 2.1 times its book value, cheaper compared to its larger peer State Bank of India, which trades at 2.4-times the book value. At the same time, the stock's beta, which indicates its correlation with the broad-based market, stands at 0.8, lower than its peer's 1.1. This shows that the bank's stock is both cheap and less risky compared to its larger peer.

   Moreover, the stock has a good dividend paying history. The bank has given a payout of around a fifth of its earnings for the past four years. Investors lost confidence in the stock as one of the bank's employees was named in the housing loan scandal. However, the bank has most of its fundamentals in place. As such, it would be a good time for investing in the stock. Investors with medium to long-term perspective can consider the stock.

CONCERNS:

For the past two quarters, the bank's asset quality has deteriorated. Net nonperforming assets averaged 0.7% as against 0.2% in the same period a year ago. Higher bad loans affect a bank's profitability, as higher proportion of the earnings needs to keep aside for the provisioning purposes. If not for this, the bank's profit growth would have been higher. But, even at this level, the bank's asset quality is much better than its peer SBI, which has reported 1.7% net non-performing assets.