Stock Review: PUNJAB NATIONAL BANK

Punjab National Bank, the second largest state bank, posted a profit growth of 5.8% in the quarter to March 2011 quarter. What took the market by surprise was the Delhi-based lender's improved asset quality. Thanks to this, the bank's stock vaulted 2.4% on Wednesday in an otherwise weak broader market.

Other income which has been mostly negative over the past six quarters rose 19.5% with the growth being primarily driven by a 41.7% increase in fee income and a strong recovery in loan accounts which have been written off, aggregating . 221 crore.
PNB has consistently outperformed the industry in loan growth. This quarter was no different. Though the banking industry reported a loan growth of 21%, PNB clocked a loan book growth of 30%, outpacing HDFC Bank. The bank has been following a strategy of growing its deposits at a slightly lower pace than the rate at which it grows its loan book throughout the year. At the current level, its credit-deposit ratio is close to 78.3%.
It grew faster than the industry average while keeping its asset quality intact. Net non-performing assets, or NPAs, formed 0.85% of net advances at the end of the March 2011 quarter. PNB has one of the lowest ratios of bad loans among state-run lenders. Its provision coverage was 73.21%. However, restructured loan book is still a high at 8% of net advances. Although net interest margin, or NIMs, fell to 3.91% from 4.13% sequentially, it is still the highest among public sector banks. Like other lenders, it will be tested in the next few quarters, given the backdrop of interest-rate tightening and higher interest rate on savings bank accounts which will erode profitability. That could mean further pressure on NIMs next quarter.

PNB has the second highest ratio of relatively low-cost current and savings bank accounts after State Bank of India. One of the concerns relates to relatively low Tier-I capital, which is now 8.44%. This may have influenced the bank's decision to prune its dividend payout ratio, considering that PNB has had a track-record of paying high dividends. Although the bank has announced a dividend of . 22 a share for the full year, the dividend payout ratio has fallen from 17.5% to 15%. Investors may not warm up to this.