PNB

Investors can consider fresh investments in the stock of Punjab National Bank (PNB).

A likely beneficiary of the recent stimulus measures, PNB’s cost of funds may ease on the back of recent CRR cuts totalling 400 basis points. The bank has strong advances and earnings growth, higher margins (3.78 per cent), a large proportion of low-cost deposits and a diversified advances book.

Earnings growth may be driven by advances and backed by low-cost deposits, though margins and asset quality may take a slight dip in the coming quarters. At the current market price of Rs 531, the stock trades at an attractive valuation of 7.2 times its trailing earnings and 1.4 times its September book value.

PNB’s advances have grown at 26 per cent annually for the last five years, with the momentum sustained this fiscal (28 per cent growth). A high proportion of corporate advances (32.6 per cent) and low slippages here, helps the quality of the loan book. PNB may be well placed to expand its balance sheet on the back of strong credit growth. The bank has acted ahead of its peers to pass on rate cuts to its customers and has the lowest PLR among banks. This move may weigh on profitability in the short term , but can help gain market share.

The net profit increased by 26 per cent in the first half due to higher advances growth and better Net Interest Margins (3.78 per cent). Non-Interest income of Rs 1,119 crore also aided profits. Moderate operating costs (8 per cent growth); improved cost-income ratio (45 per cent) helped the operating profit, even as provisions weighed on net profits. The bank’s provision coverage of 82 per cent brought down the Net NPA/Advances to 0.42 per cent. Going forward, as interest rates fall further, the bank’s profits may be shored up by treasury gains and write backs of provisions. Though margins may be under pressure for a few quarters, as high cost deposits were raised until December, this may be offset by treasury gains.

New provisioning norms may slow down asset quality deterioration, while capital adequacy may improve on the back of the Government’s re-capitalisation plan for PSU banks. However, PNB’s capital adequacy is at present comfortable at 13.64 per cent.

In terms of risks, PNB does have a higher proportion of bulk deposits, which tends to add to cost of funds. Any delinquencies from priority sector lending and non-fund exposures to exports may expose the bank to risks.