Stock Review: Punjab National Bank (PNB)

A sudden spike in the provisioning of bad loans tarnished an otherwise good show by Punjab National Bank (PNB) in the first quarter of the current financial year. Asset quality remains a concern, but investors can draw solace from the fact that the bank has sustained its interest margins and also witnessed a sharp uptick in core fee income.
PNB, the second-largest PSU bank in the country, has grown its loan book by almost 26% over FY07-11. This quarter, too, despite a challenging macro environment, the bank maintained its loan growth at 23%, much above the industry average.

Furthermore, PNB has one of the best liability franchises with its low-cost current and saving account forming almost 37% of the total deposits. This has helped the bank maintain its interest margin in a rising interest rate regime. At a 3.84% net interest margin (NIM), PNB has a relatively high NIM among public sector banks.

Another positive for the bank was the strong 33% growth in its core fee income. This, along with a 20% growth in its net interest income (NII), which is the difference between interest earned and interest expense, helped PNB post a 3.8% growth in net profits despite a sharp rise in its provisioning (other than tax and employee cost), primarily because of current year's liabilities related to employee benefits. One major concern for the bank is its asset quality which is deteriorating due to increasing slippages. The quarter witnessed a growth in the gross nonperforming asset (NPA) by 20 basis points as incremental delinquencies remained high at 2% due to . 1,177 crore of fresh slippages. System-based NPAs are the main reason for the sharp rise in slippages. Theses slippages are expected to remain high in FY12 as per street experts.

The June 2011 quarter may not be as good for PNB as the previous ones. However, PNB has shown resilience. This is a good sign for investors. PNB is also buying a 30% stake in insurance provider MetLife India which may boost its third-party income (fee income), going forward. Still, investors are advised to keep a sharp eye on its asset quality for the next few quarters.