Punjab and Sind Bank

Modest valuations, superior asset quality and high return on net worth make a good case for investment in the initial public offer of Punjab and Sind Bank (PSB). At the upper end of the price band of Rs 113-120, the offer price would discount the bank's annualised first half-year earnings (April-September 2010) by about 4.8 times on a post-issue equity base.



The price-to-book value, post-dilution, works out to 1.12 as on September 30, 2010. The issue is priced at a discount to peers such as Dena Bank, Bank of Maharashtra and United Bank as also to slightly bigger banks such as Vijaya Bank.

The PSB is raising about Rs 480 crore to boost capital adequacy which is necessary to fund future loan book growth. The capital adequacy of the bank, as on September 30, 2010, stood at 13.04 per cent (Basel II). After the issue, the government's stake will fall to 82 per cent.

This, being well above the mandatory 51 per cent, leaves ample room for the bank to raise further capital from time to time.

Advantage: Asset quality

PSB has a concentration in the northern region of the country (especially Punjab) with about 70 per cent of its 926 branches spread there. Driven by the CAGR of 38 per cent in advances over 2006-10, the total business (deposits and advances) for the first half of 2011 stood at Rs 88,800 crore.

A scoring point for the bank is that the robust growth in advances has not been marred by slippages in asset quality. The gross NPA ratio has shown a decrease during this period. As on September 30, it stood at 0.92 per cent, much better than peers whose GNPA ratios were between 2.25 per cent and 3.5 per cent.

Provision coverage, at 87 per cent for the first half year, is much above the RBI mandated norm of 70 per cent, implying that unlike several other banks, earnings may not take a hit due to higher provisioning in the quarters ahead.

At 0.44 per cent for the April-September 2010 period, the net NPA ratio of the bank is also better than the average of nationalised banks.

Besides, as a result of conservative provisioning, the bank recovers a portion of its technically written–off accounts, which directly contribute to profits. The recovery has ranged between Rs 100 and Rs 200 crore in each of the last three years.

Other positives for the bank include a healthy credit-deposit ratio of about 68 per cent, a reasonable cost to income ratio of 48 per cent and a high return on net worth of 13.5 per cent (not annualised) for the half year ended September 2010. Restructured loans constitute only 2.7 per cent of total loan assets.

Low CASA, a handicap

An area in which the PSB is at a disadvantage is with regard to access to low-cost deposits. Despite wide spread presence in rural and semi-urban centres which are catchment areas for low-cost deposits, the CASA ratio for the bank stands at a modest 25 per cent, compared to between 35-40 per cent for peers.

This partly reflects in the bank's cost of funds being higher than the average cost for nationalised banks. Net interest margins (NIMs) have also been lower at 2.67 for FY-10 and 1.50 (not annualised) for the April-September 2010 period.

Given that the days of lower cost of deposits for banks have ended and that several bigger banks are hiking deposit rates, NIMs are likely to be pressured from now on. Apart from this, the bank has a high investment-to-deposit ratio.

A higher ratio here implies that earnings may be impacted by volatility in treasury income and profits. From 36.5 per cent in FY-10, the investment-to-deposit ratio has since come down to 32 per cent in the first half of FY-11.

A rising interest rate scenario merits watchfulness on the bank's performance on these two parameters. It is recommended that only investors with an appetite for some risk and who have a medium-to-long term perspective can subscribe. It is open from Dec13 -16