A CUT ABOVE THE REST

Punjab National Bank has outperformed its peers on all important parameters including growth, asset quality and margins. Investors should consider it for long-term investment

KAR AN SEHGAL ET I NTELLIGENCE GROU P 

    P Punjab National Bank (PNB) is always counted among the best banks in India. It comes as no surprise given that it is one of the few banks in the country, which have managed to grow consistently at higher than industry rates without letting its asset quality suffer. The performance looks even more commendable, given the turbulent economic environment in the past 12 months, which had severe repercussions on the banking sector in the form of slowdown in growth, shrinking spreads and worsening asset quality. 
BUSINESS: The bank has recently pipped ICICI Bank to become the second largest bank in terms of business size in India. The bank has countrywide presence with 4,615 branches. It has second largest branch network in the country. The bank follows basic tenets of banking like maintaining a high share of low cost deposit, maintaining its spreads, opening more branches and keeping asset quality under check. Its share of low cost deposit, which are current account and savings account (CASA) stood at 38.5% in Sept’09 quarter. Only HDFC Bank and State Bank of India can boast of higher CASA than PNB. Such a high mobilisation of CASA shows that the bank is using its branch network effectively. The direct impact of high CASA is on net interest margin (NIM). NIM is a measure of spread i.e. the difference between cost of deposit and yield on advances. Obviously, if a bank has high CASA, it will have high NIM. 
    The bank has maintained a NIM of more than 3.5% in past ten years of operation. Reaching a NIM of 3% and maintaining it over a period of time is a rare feat in banking industry. Along with HDFC Bank, Punjab National Bank is the only bank to have achieved this feat in India. Last year, interest rates had started rising, and banks had to mobilise deposit at higher costs. Consequently, NIM had shrunk. However, PNB remained largely unscathed, as its NIM were down only 12 bps year-on-year in Sept’09 quarter. 
    Its asset quality is one of the best in its industry. In percentage terms, its net non-performing assets (NPA) forms 0.14% of its net advances – one of the lowest in industry. Moreover, in last six months its net NPA, in absolute terms, have come down by Rs 31 crore. In times, when other banks are grappling with rising NPAs and higher provisioning, PNB has remained heads and shoulders above its peers. 
    The bank has maintained its asset quality despite growing its loan book at higher than industry levels. Its advances growth stood at 25% at Sep’09 end. On the business front too, the bank is unscathed by macro-economic developments, as other bank saw their loan book growth dipping as overall credit off-take growth slowed down. On the back of high credit growth and stable margins, bank posted 22% growth in its net interest income (NII), which is the difference between interest earned and interest expense. This was in complete contrast to other banks, which could not grow NII due to dip in spreads. 
    The bank opened 184 domestic branches in the first half of this fiscal. Given that the bank is growing at high rate, it is imperative for banks to open more branches so that it maintains its share of CASA deposits, which has become hallmark of its strategy. 
VALUATION: The bank’s stock is trading at more than twice of its book value. The stocks of its peers like Bank of India, Bank of Baroda and Union Bank of India are trading at an average 1.6 times their book value. However, it does not mean that the stock is overpriced. Rather, it can be said that the stock market has attached premium in valuations, which is justifiable given the bank’s performance. In terms of price to book value ratio, the stock is trading at near all-time high valuations. We believe that it is a case of re-rating, where experts have realised that it is the only bank, which’s performance remained insulated of the turbulent macro-economic conditions. And its business model of large branch network and high CASA share have become the success mantra for the banking industry. Investors can buy the share for long-term. 
    karan.sehgal@timesgroup.com 

 

 

 

 

 

 

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