Higher Cost of Deposits, Increase in Bad Loans to Put Pressure on Bank

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Calculus

Interpreting Numbers & Trends PNB may have clocked its highest growth in 7 quarters but consistent decline in NII shows the lender is having trouble managing higher cost of funds

PUNJAB NATIONAL BANK 

The 19% profit growth which Punjab National Bank, or PNB, posted during the quarter to March 2012 period was the highest in seven quarters. But the consistent decline in growth in net interest income (NII) is a reflection of the fact that the Delhi-based lender has been having trouble managing higher cost of funds. Moreover, the 35% increase in NPAs since the December 2011 quarter indicates it will take a couple of quarters before its asset quality can significantly improve, considering its exposure to infrastructure sectors. Growth in NII, or the difference between interest earned and interest paid, has been consistently declining over the past seven quarters. It has fallen from 49% in the September 2010 quarter to 9% now, which reflects that the cost of funds has been rising disproportionately to the rise in interest earned. 

Considering that PNB's cost of funds is rising faster than the yield on advances, its net interest margin (NIM) — the difference between the yield on advances and the cost of funds — declined by 40 basis points to 3.5% from 3.9% last year. According to the management, its NIM is not likely to fall below the current level of 3.5%, but this may be hard to achieve unless it is able to stave off pressure on higher cost of deposits. Both advances and deposits during the quarter grew 21%. Saving deposits increased 13% while current deposits rose 6.1%, taking the Current and Savings Account, or CASA, ratio to 36.2%. As a result of this growth, PNB's market share in deposits and advances grew from 5.28% last year to 5.43%. Over the next fiscal, the bank plans to grow advances by 16%, slightly higher than the industry average of 16%. 

Total income was 28% higher at . 10,955.64 crore while net profit was 19% higher at . 1,423.97 crore. Its book value per share increased from . 667 to . 777.42, which gives it a price to book value multiple of 0.98, the cheapest amongst state-run banks. 

KEY POINTS 

PNB's net interest income has declined from 49% in the September 2010 quarter to 9% now 

Consistent fall in NII reflects 

that the cost of funds has been rising disproportionately to the rise in interest earned 

Lender's NIM declined 40 bps 

to 3.5% from 3.9% last fiscal